AAT LEVEL 3 ADVANCED BOOKKEEPING ACCRUALS AND PREPAYMENTS - HELP PLEASE!!

N4T

SALES Margins is based on selling price. So Sales becomes 100%. If sales margin is 20%.

100%.....£100.....Sales
80%.......(£80)......COS
20%.......£20..........Gross Profit


MARK UP is a % increase on cost. So COS becomes 100%. If Mark up is 20%

120%.......£120.....Sales
100%......(£100)......COS
20%..........£20........Gross Profit


The example you have given is very basic so purchases is the cos in this case. Remember the above and you can't go wrong. I am using COS as this must be a warm-up question. At L3 you find this in incomplete records. i.e work out COS and work out either missing purchases or a mssing inventory figure.

Just remember SALES MARGIN is SALES = 100%

Therefore Mark up must be COS = 100%.

cbuttery1991

So say if I had a figure of sales at 65000
And a mark up of 25 percent. And am asked what is he cost of goods sold. So sales is 65000.. would you divide by 125x100? Is there an easier way to do this?

And if we used the same figures but it has a MARGIN of 25 percent it would be 65000 x 0.25 = 16250. 65000-16250??

N4T

125%......£65,000.....Sales
100%......£52,000.....COS.....(£65000/125)x100 or £65000x (100/125).
25%........£13,000.....GP

divide £65000/125.......means £520 per 1%
You have 100% in COS so x £520 by 100 to find out what that 100% equates.

Does this make sense?

cbuttery1991

Yes could you show me the same for margin please?

N4T

So with the same figures but sales margin of 25%......Sales is 100% (GP is always the % given 25%, the difference between mark up and sales margin is where the 100% sits)

100%.....£65000.....Sales
75%.......£48750......COS (£65000/100)x75 or £65000x (75/100)
25%....£16250.....GP

Sales of £65000 is made up of 100% to find out what 75% equates to divide by 100 to find what 1% is. In this case £650 then times by 75 to get what 75% equates to in £

cbuttery1991

Thank you so much, glad I was on the right lines just think I overcomplivated that first example as it was so simple!! AAT and their questions hey!!

cbuttery1991

Hi there I have a question re VAT

I HAVE THE FOLLOWING QUESTION

A business has recorded a credit bore from a supplier showing VAT of £96 when it should have been £69. Currently the business vat account shows output Tax of £5499 Abd input tax of £1349.
When the error is corrected which will be correct

Input tax 1313
Input tax 1367
Output tax 5463
Output tax 5517

Which one would you put and why?!?

N4T

Hello again.

You have typos. Output tax is £5490 and Input tax £1340. I was scratching my head for a while.

Supplier invoices (purchases) are input tax. So the answer can only be top too.

Credit note means the input tax was (incorrectly) reduced by £96 to show £5499. So add back £96 then deduct the correct £69.

£1340 + £96 - £69 = £1367

N4T

Correction....

Credit note means the input tax was (incorrectly) reduced by £96 to show £1340. So add back £96 then deduct the correct £69.

cbuttery1991

Oh my word I am so sorry!

This makes perfect sense now! So so sorry about that! I was deducting it from the input as I just assumed it was decreasing the input as there was a credit.

N4T

You okay with why we are adding back the £96?

cbuttery1991

I have tried to put it in to a T account and now I have confused myself even more. I was deducting it and had the answer of 1313 because I was assuming that if we received a credit note, that would reduce the amount. But I understand how we have to take the credit note out for the wrong amount off and put back the correct amount.

cbuttery1991

Is it basically because at some point you have claimed the input tax back and now because you have a credit note you now owe the tax man back as in effect you've reclaimed too much?

N4T

Yes that's correct.

T accounts can be confusing although it's a good practice, specially if you have to work out the carry down balance or how much to pay HMRC.

In this case it was just easier to deduct the credit note from the invoice. It was posted incorrectly so the £96 should be added back and then the correct credit note amount of £69 deducted.

cbuttery1991

Would you mind just writing the calculation out for me and why we are doing it. I don't know why but I seem to begetting a complete mind blank with this.

If you're looking at a T accoubnt would the left side have originally been PDB OF 1436 less 96 credit notes = 1340? And then we just add the difference of £27? I am struggling to understand the theory of WHY relationg to the effect it would have on hmrc? Sorry I am being thick!!

N4T

Don't worry too much about that the T account for the moment because it is only asking about the balance after adjusting the account.

I think you are over complicating the question because you are thinking about VAT. This question hasn't asked you for the HMRC liability - only what the input tax balance should be.

1) You have established that it is input tax. This is the most important point, now you need to focus on £1340.

2) There was a misposting of credit note £96 instead of £69. You know that a credit note is to reduce the amount so £96 was deducted and the result was £1340.

3) This error need correction. You can do a £27 adjustment but I usually reverse the original error and then post correct value so it is clear what happened.

4) To reverse the error add back £96. £1340+£96 = £1436. This £1436 is the balance before the misposting.

5) Now post credit note of £69 as it should have been correctly done in the first place £1436-£69= £1367.

cbuttery1991

Thank you so much! You're right I am over complicating! That makes perfect sense.

I then had the question

A vat regd business receives credit note from a supplier. The document shows a VAT amount of 6.70. What effect will this have on the amount due to HMRC by this business.

I got the answer correct of "it will increase by 6.70". Is this because you would have reclaimed the vat originally on the purchase but now you will have to in effect pay that VAT back because if the credit note which will increase the VAT owed??

N4T

Yes that is the result however I would take care when using the terms "reclaim" and "paying back".

A business will "reclaim" the difference from HMRC if the VAT paid out in a period is more than the VAT charged to customers.

Usually input tax is used to offsets output tax reducing the amount owed to HMRC. So a decrease in input tax of £6.70 (due to credit note) will increase balance due to HMRC by that same amount.

I wouldn't say you are wrong but I won't say your explanation is 100% correct either. You have got the right idea so I don't want to confuse you further because my own explanation may not be very clear

cbuttery1991

So today I passed my IDTAX exam! Thank you for all your help! Next, is final accounts prep in two weeks!

N4T

Congratulations. You are whizzing through L3.

cbuttery1991

Gosh it's hard work!! I take my hat off to accountants! I was surprised how much material was actually given to you! I almost get like I was cheating! Exceeded on the vat return which I'm very pleased about!