Study tips: applying the Level 2 Certificate in Accounting to a business scenario (part 1)

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This is the first in a series of articles in which we will explore some of the trickiest areas at AAT level 2. 

Study tips: Applying the AAT Level 2 Certificate to a business scenario series

We’re going to work through a business scenario to illustrate how the AAT Level 2 Certificate in Accounting can be applied, in practice, to the typical day-to-day tasks of an accounts assistant.Let’s join Zairah at 9am on a Tuesday. She has just arrived at the accounts office where she works as a member of the finance team for JDB Supplies. The company works in a four-week cycle to match their financial periods. Zairah has to plan her work to include a number of set tasks each day. These can occur on a daily, weekly or monthly basis. She also has to accommodate non-routine tasks, her attendance at College and lunch breaks.The team member who normally completes the cash book was ill yesterday so Zairah was asked to do it instead. The deadline is 10am today. She didn’t have enough time to accommodate it yesterday but was able to schedule it to start at 9am this morning so that it will be completed by 10am as required.Zairah’s colleague is still ill but his work needs to be completed. Zairah has been asked if she could accommodate an hour of processing invoices that needs to be done by 2pm.Looking at her plan for today she can easily see that she has a spare hour. However, the invoices need to be processed by 2pm, so the available slot between 3pm and 4pm is too late. Therefore Zairah needs to see if any time can be made earlier in the day without affect her other deadlines.
  • She already knows that the cash book task can’t be moved.
  • The cheques need to be in the post by 11am so there’s no flexibility there either.
  • She will finish reconciling the statements by 12 noon though and the deadline isn’t until 1pm. However, her lunch break is fixed so if she processes the invoices instead of reconciling the statements, she will have missed the statements’ deadline when she gets back from lunch.
  • Cost coding is Zairah’s last task and unlike all her other tasks for today, it is a monthly one. The schedule shows it has to be done on Tuesdays and that it takes two hours, but it doesn’t have a time deadline.
Therefore, if Zairah moves the code coding to between 2pm and 4pm then she’ll be able to start processing the invoices at 1pm and have the task complete by the 2pm deadline.Now that her day is set, Zairah starts updating the cash book, which is analysed and treated as part of the company’s double entry system i.e. integrated.

Updating the cash book

JDB Supplies are VAT registered and deal with both cash and credit transactions. When Zairah looks at the cash book she finds that all the credit transactions have been posted, as shown below, and that only the cash sales and purchases are outstanding.There is a cash purchases to enter for £231.12 which was paid to Sunil Ltd. The invoice is marked as VAT inclusive and was paid directly out of the bank.Zairah needs to ask herself a number of questions to help her ensure she enters the figures correctly into the cash book:
  • Is the transaction increasing or decreasing the cash book balance?
    • Decreasing as it is a payment so it needs to be entered into the credit side.
  • What was the method of payment?
    • It was paid directly out of the bank so the Bank column should be used.
  • Was it a cash or credit transaction?
    • It was a cash transaction, which means it’s the first time it has entered the accounting system and needs to be separated into the Net value of the purchase and the VAT.
VAT terms have always confused Zairah, so she checks with another member of the finance team, who tells her:
  • VAT inclusive means the figure includes the VAT, in other words it is the Total amount and is sometimes refer to as the Gross.
  • VAT exclusive means the figure excludes the VAT. This is also known as the Net amount.
Zairah knows it’s really important that she understands these terms so she can correctly identify which type of figure she is working with because the calculation for each is different.As this is a VAT inclusive figure, the calculation she needs is:
  •                 Inclusive amount ÷ 120 x 100 = Net amount         £231.12 ÷ 120 x 100 = £192.60
  •                 Inclusive amount – Net amount = VAT                     £231.12 – £192.60 = £38.52
Now she has the figures, she just needs to ask one more question:
  • How should the transaction be analysed?
    • As this is a cash purchase it needs to be analysed to both the VAT and cash purchases columns.
Here is the cash book after the posting has been made. The analysis columns have been highlighted.

In summary

Zairah has a busy day ahead and in this first hour she has dealt with some of the areas many of us struggle with at Foundation level.More detailed articles are available on how to calculate VAT as well as understanding the cash book and how to correctly post cash books.In the next article of this series we’ll see what Zairah needs to do to reconcile JDB Supplies’ sales ledger control account to the sales ledger and write an appropriate email to her manager.Dive into more AAT Level 2 topics here;

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

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