Study tips: Budgeting using standard costing – labour variance analysis

Posted by & filed under Professional Diploma, Students.

Budgeting with Standard Costing Series (AAT Professional Diploma)

Standard costing is used by lots of manufacturing organisations to calculate the expected costs of products. It’s distinct from general budget setting because it focuses on cost units. In other words, it focuses on the cost of what the business produces, as opposed to the costs of the business’s sections or departments. Standard costing is used in all stages of the budgetary process; planning, decision making, monitoring and control.

In previous articles we’ve considered how it can be used to help plan production when resources are limited. And in an upcoming article we’ll look at how material price and usage variances are used to monitor actual costs against budgeted costs.

In this article for the AAT Professional Diploma students, we’re going to review the monitoring and control phase, and look at how labour variances can be analysed to see how the actual cost differs from the expected cost that was budgeted, using standard costing.

How a budget accountant uses standard costing

Let’s resume the role of the budget accountant for a company that manufactures specialist windscreen wipers. Standard costing is used alongside budgeting because the components for its products are identical and the manufacturing process is repetitive. 

The company makes a range of products including one coded DM0211. The standard cost card for this product show that each unit requires 40 minutes of labour, which is paid at a standard hourly rate of £20. The operating statement shows tht the cost of direct labour was £82,500 in quarter 2. The direct labour hours worked were 4,000, and 6,500 units were made and sold.

You are preparing the monthly performance indicators, based on standard costing data, which includes some labour cost variance analysis, plus the actual labour time per unit and actual labour rate. 

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Carrying out variance analysis

The variance analysis starts with the overall labour cost variance. This is the difference between the actual cost and the budgeted cost, usually after it has been flexed. We already know the actual cost was £82,500 but need to calculate the flexed budgeted cost before we can calculate the variance.

What we’re calculating is how much we expected the labour cost to be, given the standard time allowed for the number of units made. Therefore, the calculation is:

  • 40 mins x 6,500 units ÷ 60 mins x £20 per hour = £86,666.66

This can be rounded to whole £’s and the labour cost variance calculation is then simply:

  • £82,500 – £86,667 = -£4,167

Despite the calculation resulting in a negative figure, the variance is analysed as being favourable. This is because the actual cost paid for labour was less than expected, based on the standard cost for the actual level of production:

Standard costing allows us to analyse this overall variance, and understand how much of it is the result of paying a different rate to the standard and how much is due to more or less units being produced than expected. This is done by calculating the rate and efficiency variances.

Calculating the direct labour rate variance

The direct labour rate variance looks at different labour costs, standard and actual, and calculates figures that are comparable as both relate to the actual number of labour hours worked. It is calculated as:

Standard cost of actual hours used

less

Actual cost of actual hours used

In this case:

  • £20 x 4,000 hours – £82,500 = -£2,500

The calculation tells us that the standard cost of the labour hours used should have been £80,000. However, the actual cost was £82,500 so the variance is analysed as adverse, as the cost is higher than expected due to the rate paid.

We can verify this by calculating the actual rate paid:

  • £82,500 ÷ 4,000 hours = £20.625

And sanity check our figures by reconciling the variance, because the £0.625 extra paid per hour in comparison to the standard rate of £20, accounts for the difference:

  • £0.625 x 4,000 hours = £2,500

These figures can now be added into the table:

Calculating the direct labour efficiency variance

The direct labour efficiency variance looks at different numbers of hours, again standard and actual, and converts them both into standard values, using the standard labour rate, so they can be compared like for like. It’s calculated as:

Standard number of labour hours for actual production at standard rate

(ie. flexed budget/standard cost)

less

Actual number of labour hours at standard rate

In this case:

  • £86,667 – 4,000 hours x £20 = £6,667

We’ve already flexed the budget and know that the standard number of hours for production are 4,333 (40 mins x 6,500 units ÷ 60 mins) and the expected the labour cost is £86,667*. However, actual hours used were only 4,000 and therefore the cost of labour at standard rates for the actual hours worked is £80,000, which results in a difference of £6,667.

The variance is analysed as favourable as it cost less to make the 6,500 units than allowed as standard because production took 333 hours less than expected. In other words, the workers worked at a quicker rate and were more efficient than expected and that resulted in a cost saving.

Confirming a cost saving

We can verify this by calculating the actual minutes per unit:

  • 4,000 hours x 60 minutes ÷ 6,500 units = 36.92 minutes

The standard cost card allows 40 minutes per unit but in reality each unit was made roughly 3 minutes more quickly than expected.

These figures can now be added into the table:

Finally, the cost variance percentage can be calculated as a percentage of the flexed budget figure:

  • 4,167 ÷ £86,667 x 100 = 4.80805

In Summary

The labour cost variance is explained by the combination of the rate and efficiency variances. The overall favourable variance of £4,167 is due to the fact that the actual labour rate paid was higher than standard, but that the actual number of units produced were made in less time than expected which resulted in an efficiency saving. The figures are reconciled as:

  • £6,667 – £2,500 = £4,167

Read part 2 of this series now, where we’ll look at a material variance analysis.

* Note there is a £7 round discrepancy if the standard number of hours for production is rounded to 4,333 part way through the calculation.  Therefore the cost is based on the unrounded figure.

Browse the full range of AAT study support resources here

Government begins review of IR35 scheme in the private sector

Posted by & filed under IR35, Tax.

The Government has followed through on its election pledge to review the implementation of IR35 in the private sector.

The rules govern off-payroll working and are due to be extended to private employers in April, with the aim of collecting up to £3bn in extra taxes.

However, IR35 has had a controversial history in the public sector, where it has been linked to higher costs, staff shortages and confusion.

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Scope of the review

Hopes that the Government review could mean changes – or a delay – to the scheme seem unfounded.

The wording of the announcement suggests a quick examination of the way the scheme will be brought in, rather than whether it needs to be changed.

A Treasury statement says: “The review will determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms, which are due to come into force in April 2020.”

AAT reaction

Brian Palmer, AAT tax policy expert for AAT, said:

“Given all that has happened on the Brexit front during the last twelve months, it is a more than a little disappointing that the Government has not taken the opportunity to press pause on the introduction of IR35 to the private sector, in order to ease the ever-increasing compliance burden born by UK businesses at this very challenging time.

“AAT has consistently observed IR35 should only be rolled out to the private sector after allowing businesses sufficient time to adequately prepare for such a change and to ensure that software companies also have time to build the required handling changes into their payroll/contractor payment processing products. Given the problems faced over IR35 in the public sector, our message remains not to rush this in.”

 “However, it doesn’t come as a complete shock that the projected £3bn boost to the public purse in extra tax revenue over a four year period has proved too big a temptation to the Government, who seem determined to carry on regardless.

What business should do

While it is unclear what could come out of the review, one strong possibility is a publicity campaign to raise awareness, backed by training and resources.

It is also possible there could be a ‘soft-landing’ period as for the introduction of Making Tax Digital for VAT, during which time HMRC could be less stringent. However, some experts have told AAT they don’t expect this and that it would be a dangerous outcome to rely on.

The best advice to businesses and agents is therefore to continue preparations for the scheme’s introduction, including reviewing all arrangements for all off-payroll workers on an individual basis.

More guidance on IR35 is available from HMRC here.

AAT resources

Read more about IR35 here:

AAT – ACA – the path to practice accounting

Posted by & filed under Career-boost.

Becoming a chartered accountant is an important career goal for many accountants. Having such a well-respected qualification shows clients and employers than you have the highest level of ethical and professional commitment.

It also enhances the options in your career and gives you the flexibility to pursue a number of different paths and roles. So what is the route from your initial qualification with AAT to becoming chartered with ACA?

Why become chartered with ACA?

AAT is a fast-track route to chartered accountancy. You can use your AAT qualification as a basis to continue your studies with another chartered accountancy body.

If you choose this route, you’ll receive exemptions from the UK’s chartered accountancy bodies and a fast-track route to chartered status, so you could achieve it more quickly than by following the university path. You can also receive a discount on your AAT full or fellow membership fee while you study. 

Making the most of the Fast Track option

The AAT-ACA Fast Track builds on the fundamental knowledge gained through the AAT qualification, and gives you the opportunity to qualify as an ICAEW Chartered Accountant in as little as two years. There are up to five exam credits available for AAT-ACA Fast Track students (depending on which AAT units you have completed).

If you are working for an ICAEW authorised training employer or principal, you may be eligible to apply for credit for prior work experience. This means you may be able to claim up to 12 months of the practical work experience you have gained while working towards your AAT Level 4 Diploma in Accounting.

Don’t forget: If you go on to study for chartered accountancy as a full or fellow member, you can apply for a reduced annual subscription and receive a discount on your AAT membership fees while you study. As an AAT full or fellow member, you’ll also receive generous exemptions.

Key points:

  • Becoming chartered is a way to enhance your professional knowledge and make yourself more marketable to employers and clients.
  • It opens the door to a range of exciting and well-paid roles in practice and industry.
  • There are real advantages in remaining with AAT and/or sustaining dual membership.
  • Your AAT qualification is the gateway to Power up your accountancy career, especially if you choose the Fast Track option for AAT-ACA students.

Case study: Carl Reader

Carl left school at 15 but thanks to AAT and his own hard work and dedication he has built a hugely successful career and business in accountancy. He is chair of D&T Chartered Accountants in Swindon, having been the firm’s owner and manager until last year, and is a business expert, qualified accountant and the founder of the #BeYourOwnBoss movement.

“I began in accountancy and did AAT because although I had returned to school to do GCSEs, I didn’t have any A levels. At that time, I left school to start a job, but now the option is an apprenticeship through AAT.

“I studied via evening classes and my initial AAT qualification took a couple of years. Then when I was qualified, I changed jobs and started training business owners on computerising their own accounts. Sage was up and coming and I helped people understand how to use it in their business. Then I picked up my studies again a few years later and gained the ACCA qualification which took a couple of years.”

Why did you take the AAT-ACA route?

“I chose ACA/ICAEW rather than CIMA or CIFPA as the former was for management accounting and the latter was public finance and I wanted to progress my career in practice accounting. It was important to get the qualification for practice accounting and it gave me the option of a number of different career paths. It was a good grounding and gave me a lot of skills which I still use every day.”

At this time, Carl had been working at Dennis & Turnbull, a firm where he would become a partner in 2010 and then buy-out and rename as D&T Chartered Accountants in 2014.

What did the qualification entail?

“This involved preparation of a case study and accumulating evidence. One of the motivations to do this was that when I bought out D&T, over 50 per cent of the company had to be chartered accountants rather than certified. My certification was not sufficient to keep that designation, so I had to get the qualification under ICAEW firm regulation rules.”

While he still owns the firm and acts as joint chairman and sits in board meetings, Carl has branched out to be a business expert and keynote speaker. He is also the author of two books on business.

“My accountancy qualification has underpinned everything I have done since, from the basis of AAT, which gives a real vision of how a business works, to my further qualifications. I came to understand that if a business has not got its finances in order then it won’t work – you can’t pay the mortgage on promises.”

How has taking this route benefited you?

He says his AAT and ICAEW certifications have given him credibility in terms of accountancy and general business advice.

“The theory gave me a really powerful base of knowledge and I was able to hone this when I worked with businesses and developed my commercial awareness.”

He says the changes that are coming to accountancy mean it is a great career that has many opportunities.

Employers of the future will be looking to what you can bring to the table from a personality point of view. “A lot of the maths is done by software now and employers are much more looking for personality, drive and attitude. It can still be a job for life and it is now a vibrant career to go into. It has given me the platform to pursue my passions rather than being told what to do.”

Advantages of dual AAT-ACA membership

If you go on to study towards chartered accountancy, there are important advantages to maintaining your AAT full or fellow member status.

  • Keep using your internationally recognised designatory letters, which recognise MAATs as accountants.
  • You can apply for a reduced rate subscription on your AAT membership while you study.
  • Retain access to exclusive user-friendly AAT technical resources and support services.
  • If you hold MAAT status, dual membership also means you can continue to work towards gaining your FMAAT status, the mark of senior technical knowledge and skill.

In summary

Further study can open up your options to a wide range of careers both in and outside of accountancy. There are flexible ways to study, including the Fast Track option, and ACA is a great option if you’re looking to specialise in practice accounting. Click on the links below to read more on other options.

Further reading:

VAT- annual accounting and flat rate schemes part 2

Posted by & filed under Advanced Diploma, Students.

VAT series 

In part one of this article on VAT schemes we illustrated the changing role of accountants from being predominantly reactive and compliance based, to proactively adding value to clients by offering business advice. Often when VAT schemes are discussed we launch into the details of the special ones and omit an initial explanation of the standard scheme. However, our accounting technician gave a brief overview of the standard scheme so the client will be able to make an informed decision about the special schemes in relation to the standard one. Here is the end of the role play which explains both the annual accounting and flat rate schemes:

Accountant: Before we carry on are there any questions you want to ask me about the standard or cash accounting schemes?

Client: I think I’m okay so far and happy that cash accounting would be better for me so that I’m not paying VAT to HMRC before I even get it.

Accountant: Yes absolutely. Let me tell you about the annual accounting scheme next as you can use it alongside cash accounting. It has the advantage that you make regular set payments which helps when planning cash flow.

Client: Sounds good, but how are the payments worked out as I’m not registered at the moment?

Accountant: You can join the scheme when you register and the payments are calculated on an estimated annual VAT liability for the first year. After that it would be based on the previous year’s payment. Either, 90% of the liability would be split into nine equal monthly instalments or you’d make three interim payments of 25%. In both cases there would be a balancing payment or refund two months after the end of the VAT year.

Client: What only one?

Accountant: Yes. A great benefit of the annual scheme is that it’s only one return rather than the standard four. All schemes these days require electronic submissions and the new Making Tax Digital requirements will also apply but we can talk about that another day.

Client: It all sounds great. What’s the catch?

Accountant: Like I said with cash accounting, as you make standard rated supplies you’re not going to be regularly reclaiming VAT so the main disadvantage with the annual scheme, which is only getting any refund due at the end of the year as a single receipt, isn’t applicable. However, you should be aware, that once your payments are set they can’t be changed until the end of the VAT year.

Client: Okay. You said there are three special schemes, what’s the last one?

Accountant: It’s the flat rate schemes and it’s completely different to any of the others. You don’t owe HMRC the actually amount of VAT collected on your sales and you don’t off set the actually amount of VAT you’ve paid on purchases. Instead a set percentage is applied to your VAT inclusive sales figure to calculate the VAT owed.

Client: Hmm that sounds complicated.

Accountant: I know it sounds complicated but in reality it’s quite simple. I’ve looked up the percentage that would apply to your business and it’s 15%. Last month your sales turnover was £10,864 so if you were registered it would have been £13,036 once the VAT was added. The VAT due on that would be £1,955 as it is 15% of the VAT inclusive turnover.

Client: Right but what about the VAT I pay on purchases?

Accountant: That’s not off set as it is in the other schemes so doesn’t come into the calculation. The typical level of VAT on purchases is estimate for different industries and taken into consideration when the percentage is set for each business type.

Client: So would I add 15% to my sales invoices?

Accountant: No, that’s the flat rate that we’d use to calculate the VAT due to HMRC. You’d have to add 20% to your sales and issue VAT invoices as with all the schemes. The difference is that you won’t need to record VAT on every single transaction, however, you do still need VAT records.

Client: So, if I sell something for £100 plus VAT, I send a VAT invoice for £120 but only pay £18 to HMRC, keeping £102. But I cannot claim back any VAT paid for my purchases?

Accountant: That’s right, You pay less VAT to HMRC than you charge, but the difference compensates you for not reclaiming VAT on your purchases. That’s why different types of organisations have different flat rate percentages. Are you planning any capital purchases?

Client: Not at the moment. Why?

Accountant: You can reclaim the VAT when you purchase new assets but it needs to be both recorded and included on the VAT return separately. When you sell them in the future you’ll charge VAT and owe it to HMRC at that point.

Client: There’s a lot to take in. I’m going to need some time to think all this through.

Accountant: Of course, let me just finish by saying, you get a 1% discount off the flat rate in the first year of registration and in my experience, clients who use this scheme find it easier than the others as they don’t have to work out what VAT is reclaimable on purchases as what isn’t. With regard to disadvantages, again if you made zero rated supplies or were likely to receive regular refunds it wouldn’t be appropriate but that isn’t the case.

Client: Great. Where do we go from here then?

Accountant: Well I would definitely recommend registering for at least one of the special schemes. You can combine the annual scheme with either cash accounting or flat rate but not both. Cash accounting and the flat rate scheme can’t be used together. If you let me know your thoughts I can compile some figures that would give an indication of what your liability would be.

In an advisory role you are likely to refer the client to further information. However, if you are currently studying for an assessment, my advice is to double check the facts about the standard and cash accounting schemes. Read more study tips from AAT Comment:

UCAS deadline day looms – what advice did AAT members give school leavers hoping to be future accountants?

Posted by & filed under Students.

This Wednesday (15 January) is the deadline for sixth formers throughout the country to submit their UCAS applications – which will help determine their route to the workplace once they have finished their formal schooling.

While the UCAS website offers a helpful section on apprenticeships, internships and gap years, there’s no doubt that the default option promoted is university. A record 34% of 18-year-olds, almost 250,000 of them, opted for higher education in 2019. This in spite of graduates facing record debts and many employers increasingly stressing the need to recruit from a wide range of backgrounds, not just those with a degree.

But is it essential to have a degree to enter the accounting industry?

According to our latest survey, many of the 2,000 British adults we spoke to seem to think so. Accountancy ranks behind only solicitor and teacher in the jobs that would be ‘challenging’ to enter without having first gone to university.

Fortunately, AAT members and students know differently. Just 1% of respondents to AAT’s Green Room portal believed accountancy was only open to those with a university degree, and only 2% that it is only accessible by those from a higher class background.

In contrast, over half (54%) of AAT members and three in five (62%) students believe accountancy is open to all, regardless of their background. However, a significant number of members and students (43% and 36% respectively) did warn that they felt some accountancy firms remain ‘elitist’ when it comes to people who are trying to enter the profession.

See Mark Farrar comment on the survey findings in this short video.

University is still a popular route

“Going to university after completing school education remains a popular route – and there is no doubt that for many, putting down various university options remains their best route to take,” said Mark Farrar, AAT’s Chief Executive.

“But there’s other ways of accessing the accountancy profession, as many of our members and students will be well aware, such as through vocational route like an apprenticeship. This won’t saddle you with debt, nor would it cost several thousand pounds of your own money.

“And AAT qualifications are open to all – meaning you can become a professional accountant irrespective of your background, class or ethnicity. Despite common misconceptions, accountancy isn’t a profession dominated by men from higher-income backgrounds – two-thirds of AAT members and student members are female, while many thousands of our students are from lower income backgrounds and taking their first steps in an exciting career in finance.”

Advice for future accountants – your views

Here’s a selection of the thoughts and views we received:

  • “Accountancy is a good career with lots of prospect. Study hard, and take advice from everyone you can.”
  • “Understand double entry – it’s worth spending the time on it.”
  • “Get experience as soon as you can. You’ll struggle to get an accountancy job with qualifications alone.”
  • “Ask clients more questions if you don’t understand their explanations. Lack of understanding could be due to inexperience, but it could be that the explanation just doesn’t make sense.”
  • “Accountancy is like a puzzle. Sometimes when you study it cannot make sense until you can see the whole picture.”
  • “Think logically, and not mechanically.”

AAT has published a white paper outlining the survey findings, including details of which factors are considered barriers to progression in accountancy and other sectors, which is available in full here.

Further reading:

Supercharge your career specialising as a MAAT

Posted by & filed under Career-boost.

Becoming a full AAT member (MAAT) sets you apart from others in the finance and accounting world.

It shows that you have a high level of qualifications and that you’re committed to your own professional development. 

But once you are a full member, the opportunity to further impress employers needn’t stop there. If the Chartered route isn’t for you, you can still supercharge your career by specialising in a particular area. 

Why specialise? 

Concentrating on a specific area of expertise is a great way to get out of a career rut. 

You’ll learn additional skills 

Continuous development is so important if you want to progress in your role. Gaining a deeper level of understanding in particular areas will help you overall. 

You’ll become the expert in your field 

You’ll have a higher than average level of knowledge in your subject and gain respect from your peers. 

It’s affordable 

Specialising is a more cost-effective route and less intense than following the Chartered path. 

You’ll demonstrate the key traits of a specialist 

Becoming a specialist shows that you have focus, commitment and that you’re prepared to work hard. All fundamental attributes that employers are looking for in recruitment and for promotion.  

It will open up your options

Having special expertise doesn’t narrow down options, it creates more opportunities. And you’ll still have the full flexibility to continue to specialise in other areas if you want to.

What could I specialise in? 

Areas that you could specialise in include: 

  • Tax
  • Pensions
  • Payroll
  • Data analysis

All of these specialisms are professionally underpinned by the AAT. 

Tax

Tax is a complex subject and is ever-changing. Undoubtedly people that dedicate time to learning about tax and tax relief can provide enormous value to employers and clients. 

Where to start? 

Pensions 

In an ageing population, choosing and reviewing the best retirement and pension plans are crucial for both employees and employers. Even within pensions, you could specialise in pension consultancy, particular types of pensions or pension transfers. 

Where to start? 

Payroll 

Experts in payroll have to be good at creating processes and understanding procedures. They will need to use, review, advise on and implement payroll systems and software. 

Where to start? 

Data analysis

With the amount of data now available to businesses, the people who can analyse it to spot future trends and more effective and efficient ways to grow will be in great demand. Even if you work for a small company who doesn’t have much of their own data, you can research external sources that will affect the business to draw conclusions, help with decision-making and make suggestions about how they should be capturing and using data for themselves. 

Where to start? 

Key takeaways 

  • Being a MAAT full member will differentiate you in a crowded market place. 
  • By learning additional skills you can build on your career foundations and become a respected expert in your field. 
  • By specialising in areas like tax, payroll, pensions or data analysis you can demonstrate how you’ll bring tangible value to an employer or clients. 

Summary 

The best way to progress your career is with continued professional development. Not only are the extra skills you learn valuable but your commitment to learning in itself will show an employer that you have special traits. By focusing on a specific area of know-how you can really set yourself apart from the masses.

Further reading:

How to cope with the January tax deadline and extra workload

Posted by & filed under In business.

It’s that time of year – despite accountants’ best efforts to encourage clients to file their tax returns early, many still leave it until the last minute.

With the scramble to get returns sorted and filed for the end of January, it can mean that the first few weeks of the new year are extremely busy.

So how can accountants manage the January workflow as everyone sends in their tax forms at the last minute? How can you maintain relationships with late-filing clients? Do incentives to file early work? We look at the issues and suggest some ideas to help you get through this busy month.

Keep the communication going

When it comes to managing your workflow, Joanne Harris, Senior Commercial Manager for Nixon Williams, says setting clients’ expectations at an early stage is crucial.

“Minimising last-minute returns is key to success,” she says. “You should remind clients of their obligations early on and provide them with access to online declarations so they can send the necessary information as quickly and easily.” It is also helpful to set a specific deadline for the submission of this information.

Timescales should be agreed

While ongoing communication throughout the year is key, it becomes even more essential in January. For this reason, you should confirm the receipt of the accounting information and take time to review it and advise if anything is missing. Timescales should also be discussed early on and repeated throughout the process.

“A lack of communication can be very frustrating, and nobody likes to be told that crucial information is missing at the last minute,” she says. “Early preparation with clients will help to minimise these situations.”

Unfortunately, incentives to file early only have limited success.

Mike Parkes, Technical Director at GoSimpleTax, a self-assessment tax software, says: “From experience it is the prospect of the account charging a higher fee to clients that send them their records after an agreed deadline that is a better incentive.” 

Put some boundaries in place

Dan Stopp, the UK Accounting Manager the Swedish AI-based accounting tool, Bokio studied at BPP University and has an AAT qualification. Bokio provides support for a wide range of administrative tasks including invoicing, employee expenses, reporting and VAT returns.

He says there is no harm in setting an earlier deadline to ensure the paperwork is in order.  

“Accountants can set their clients a separate and earlier deadline and inform them that if they do not send their records by a certain date, such as 1st December, there is no guarantee of the deadline being met,” he says.

“People have almost ten months to provide their accountants with their records for Self Assessment, which is a long time, so I think they should be encouraged to provide records as soon as the fiscal year ends.”

He also recommends you book a meeting with late-filing clients to explain why the return was filed late.

Use the power of automation​

Steve Cox, chief evangelist at IRIS Software Group, says Christmas used to be a time for accountants to be in the office frantically filing tax returns. 

“The gift of automation can give accountants a break over the festive time,” he says. “Rather than constant email and telephone reminders to clients, accountants can reach their whole client base with a click of a button and send automated alerts and advice well in advance of the tax deadline.”

You can also track who has or hasn’t responded, making it simple to assess the best way to reach and engage with clients. 

Dan Stopp of Bokio says going paperless is a great way for accountants to ease the workload in the run up to the January deadline rush.

“Something accountants dread is receiving lots of records in no order just before a deadline,” he says. “There are now great ways of storing records within accounting software where you can attach documents to each transaction. There are also tools that use AI to recognise the amount and date on receipts to speed up the process and increase accuracy.”

Finding ways to cope with the extra stress and long hours

Joanne Harris says she incorporates “lots of coffee, listening to music and regular breaks” to keep her stamina going.

“I’d recommend keeping team spirits up with the promise of a social event and having a countdown calendar to February – it helps!”

Mike Parkes says you don’t have to accommodate clients who repeatedly file late, and it is OK to give yourself a break.

“By planning your tax return submission program from April you can help minimise the extra demands in January,” he says. “Some clients want to file early, some do not realise they can file early. Even if deadlines are imposed, there will always be a client with exceptional circumstances where you want to submit the return on time. Make sure that you leave space in your diary for this special case​.

In summary

Whilst it can be difficult, don’t be afraid to lose a client or ask them to find an alternative accountant if they repeatedly miss deadlines, push the boundaries or have unrealistic expectations from you as their accountant.

Further reading:

Accruals and prepayments – Level 3 study tips

Posted by & filed under Advanced Diploma, Students, Study tips.

The accruals (also known as matching) concept of accounts states that the figures shown on the final accounts of a business must accurately represent the financial period they are from. 

So the statement of profit or loss must show the income and expenses which were incurred in a period, not necessarily the same as the receipt (income) or payment (expense) made from the business bank accounts in that period. 

This makes sense if considered logically. Let’s say that 3 years rent is paid up front for a property. Does this mean there’s no rent incurred in years 2 and 3? The answer is no, we still incur the expense it just means we have already paid for it. 

By making adjustments for accruals and prepayments we ensure that the profit/loss figure is representative of the time period in question.

What are accruals and prepayments?

  • Accrual: A balance for an expense or income that will be paid/received in the current financial period but was actually incurred in the previous period
  • Prepayment: A payment for an expense or income that was paid/received in a previous financial period but relates to an expense/income incurred in the current financial period

What do the general ledger accounts look like?

The following are a series of scenarios looking accruals and prepayments for both an expense and income account. In order to make the figures as simple to follow as possible, there are a few assumptions made:

  • Electricity expense is a flat rate of £1,000 per month and will therefore always be £12,000 on the statement of profit or loss for the full year
  • Rental income is a flat rate of £1,200 per month and will therefore always be £14,400 on the statement of profit or loss
  • Bank payments will be made on 31st December (the end of the financial year)
  • There are no opening accruals/prepayments in the current financial year.

Scenario one – Accrued balances for Electricity expense and Rental income

The first case study has the following information:

  • £10,000 is paid for electricity at the end of 20X5, the remaining balance for the year is not billed until January 20X6 and therefore not paid yet. An accrual of £2,000 therefore exists at the end of the year representing an unpaid expense incurred in the year. An adjustment for this outstanding debt must be made in the ledger account and therefore displayed accurately on the financial statements
  • £7,200 is received from the occupant of the rental property at the end of the financial year. It has been agreed that the other £7,200 will be paid in the following February. The occupant has lived in the property all year and therefore the £7,200 accrual will need to be taken into account when producing the financial statements

The ledger accounts

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The final accounts

  • The electricity expense shown on the statement of P/L will be £12,000 (despite only £10,000 being paid from the bank account)
  • The rent received figure shown on the statement of P/L will be £14,400 (despite only £7,200 being received at the end of the year)
  • The £2,000 accrual from the electricity account will be shown as a current liability on the statement of financial position because it is a debt which the business owes at the end of the year
  • The £7,200 accrual from the rent received account will be shown as a current asset on the statement of financial position because it is a revenue which the occupant of the property owes us at the end of the year, it is therefore an asset just like any other receivable

Scenario two – Prepaid balances for Electricity expense and Rental income

The second case study has the following information:

  • At the end of the year, the business pays £15,000 from the bank account, only £12,000 of this is for the current period, the rest is an advance payment for the following year. An adjustment for this advanced payment must be made in the ledger account and therefore displayed accurately on the financial statements
  • The occupant of the rental property has paid £18,000 rent at the end of the year. This payment includes a prepayment for the first 3 months of the following year. The account must be adjusted in the general ledger to accurately represent 20X5 on the statement of P/L

The ledger accounts

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The final accounts

  • The electricity expense shown on the statement of P/L will be £12,000 (despite £15,000 being paid from the bank account)
  • The rent received figure shown on the statement of P/L will be £14,400 (despite £18,000 being received at the end of the year)
  • The £3,000 prepayment from the electricity account will be shown as a current asset on the statement of financial position because it is a payment we have already made and therefore treat in a similar manner to a positive bank balance
  • The £3,600 prepayment from the rent received account will be shown as a current liability on the statement of financial position because it is a revenue which the occupant of the property has already paid us, it is therefore a liability because we technically ‘owe’ the occupant this payment at the start of 20X6

In summary

This article has hopefully illustrated the importance of accruals and prepayments as adjustments in the general ledger. Both scenarios have resulted in the same figures on the statements P/L for electricity and rent received regardless of the actual bank payments/receipts in the period.

The skills in this article transfer to AAT assessments and also just as importantly the workplace.

The following table may help summarise the key aspects of accruals and prepayments in the general ledger and the financial statements.

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Study tips: how to apply active verbs

Posted by & filed under Foundation Certificate, Students.

Accountancy is at the centre of any business. Therefore, when we work in the sector, we need to be able to communicate information clearly and appropriately with a range of audiences.

Often people are attracted to accountancy because they like working with numbers, and good numeracy skills are undeniably essential to our role, however, a good standard of English is fundamental too.

Imagine you’d spent weeks working on a project for a client, which involved lots of intricate calculations and resulted in suggestions that will save significant amounts of money. When you present the client with the proposal though, you run the risk of them rejecting it because the figures are too complicated, unless you can explain your calculations in a way that they understand.

In other words, your communication skills have to do your numerical skills the justice they deserve.

What are you being asked to do?

In order to improve our written communication skills, we first need a good understanding of what we’re being asked to do. In any written exam question, there will be an active verb, and understanding what’s required by this verb is crucial to being able to provide the information the examiner wants.

At foundation level the most common active verbs are:

  • identify
  • describe
  • and explain

But what exactly do they mean?

Identify

Select, name or otherwise characterise something

For example:

You may be asked to look at your weekly work schedule and identify on which day or days you have spare time, in order to cover for a colleague who’s on holiday.

Describe

Give the main characteristics, details and qualities of something.

For example:

You could be asked to describe a fixed cost, and in that case, you’d need to state what it is, by giving its main characteristics, details and qualities. Your answer could be:

A fixed cost varies over time as opposed to varying with production levels. Fixed costs are also classified as indirect costs and are commonly referred to as overheads.

Explain

Give the purpose or reason for something; describe how and why

For example:

You might be required to explain variable costs. Now you’d need to state what they are by giving their main characteristics, details and qualities, as if you were describing them, but you need to expand your answer to also include why. Your answer could be:

A variable cost is one that changes in relation to output levels. This is because these costs are ones that can be avoided if nothing is produced such as direct materials, unlike fixed costs such as rent, which will be incurred regardless of whether there is a high level of production or none at all.

Do everything that is being asked

Being clear about what we’re being asked to do is the first step to good communication. The second step is making sure we do everything that’s being asked of us.

Often our reading skills let us down here as we don’t read the full question. And if we do, we forget half of it or answer ‘a’ question instead of ‘the’ question.

The other month I was out with some friends and I was chatting to Jenny, who is a Geography teacher. She uses a technique called BUG to help her students RTFQ (read the full question).

Jenny gets her learners to:

  • Box the active verb
  • Underline the key points
  • Glance back over the question to ensure nothing is missed or misinterpreted

Let’s look at a question:

Explain what a semi-variable cost is and identify which of the elements that make up a semi-variable cost, would not change if the production levels increased. Use an example to illustrate your answer.

It’s quite long, has two active verbs and is asking for an example. Note that the explain verb is asking for an explanation of what a semi-variable cost is, rather than an explanation of how to calculate one.

Now, let’s apply BUG:

Having boxed the verbs and underlined the key points, glance back over the question to ensure you read it all and understood it correctly. It includes a negative, the ‘not’, which if missed, completely changes the question.

Your answer should be along the line of:

A semi-variable cost is one that includes both a fixed element and a variable element. An example of a semi-variable cost would be the wages of a production worker who was paid a basic minimum weekly wage and then an additional piece rate per unit as well. The basic minimum element would be fixed regardless of how many units the worker produces. The piece rate element would vary from week to week depending on the number of units produced. If the production levels were to increase, then the fixed element of the semi-variable cost would not change.

A quick glance back over the answer in comparison to the question is a sensible check to ensure we’ve answered the question asked and included all the elements required.

In summary

Verbal communication is a two way process as it’s a combination of what is said and what is heard.

Written communication is the same. In order to produce a good answer, you need to have read and understood the question properly. Being familiar with active verbs and applying BUG to questions will put you in a good position to communicate information clearly, accurately and fully.

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IR35: working examples of how the regime works

Posted by & filed under IR35, Tax.

In this article, tax lecturer and expert Tim Palmer shares his advice for dealing with IR35.

IR35 rules governing off-payroll workers and disguised remuneration will soon be coming to the private sector. But the scheme itself is not new. It was introduced to the public sector on 6 April 2017.

From 1 April, private sector employers will need to understand how the scheme operates and will require good advice.

Here’s an explainer of how it will work, looking situations from the public sector.

IR35: are you ready?

Preparing for IR35 in the private sector is a practical half-day AAT course in February to help accountants prepare for IR35 in the private sector.

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IR35 changed within the public sector from 6/4/2017. Suddenly, the NHS, the Police, the fire brigade and universities (amongst others) in the public sector, were having to decide whether or not to deduct PAYE and NIC from a personal service company’s (or partnership’s) fees.

Fred is a human rights specialist. He regularly supplies his services to the police via his personal service company, Fred Ltd.

The police has to decide… if he didn’t have his company i.e. he worked directly as an individual for the police, would he be a employee?

To avoid IR35, Fred would have to prove, without the protection of his company, he would be self-employed with regard to his engagement with the police.

After careful consideration, the police decide that if they engaged him directly (without his company), he would be an employee.

The four main factors that the police took into account were

1. Control

There must be no control or absolutely minimal control over him by the police, which was the case.

2. No mutuality of obligations

There must be no ongoing and regular obligation for the police to have to give Fred work and Fred also must have no obligation to accept it.

To be self-employed you must be able to show that you can turn work down!

HMRC conveniently try to ignore mutuality of obligations. Indeed it was not featured whatsoever on the first version of CEST. This is unfair!

The judges in court do not ignore mutuality of obligations! It has regularly been an important and deciding factor in many cases over the years both in the past and more recently!

To be self-employed, you must win both of these first two i.e. no or minimal control and no mutuality of obligations.

3. Substitute

Has Fred got the right to provide a substitute for himself to provide the service to the police?

The key question here is, who has control. Does Fred have the right to approve, choose and engage the substitute Alan?

Or is the the responsibility shared or the right of the police?

4. Insurance

Does Fred Ltd pay the relevant insurance i.e. professional indemnity insurance?

This is an important factor, but HMRC will try and dismiss this! They should not! Employees themselves will not pay this type of insurance!

The Consequences

Say Fred Ltd bills the police £20,000.

The police would have to put this £20,000 fee through their payroll as if they were employing Fred. They have to deduct PAYE and NIC Class 1. The police would also have to pay 13.8% employer’s NIC on the fees.

The net fee, after PAYE and NIC would be paid to Fred Ltd. Fred would then have to extract this net fee from his company as either tax free salary or dividend. A complex and time consuming exercise!

The Private Sector

The ‘public sector’ IR35 rules effectively come into the private sector from 6/4/2020.

If the private sector engager is medium sized or large, they are responsible for the decision: ‘Is the engagement caught to IR35?’

A medium or large sized engager is one who meets two or more out of the following three tests:

  1. Turnover more than £10.2 million
  2. Assets more than £5.1 million
  3. More than 50 employees

This engager will deduct PAYE and NIC in a similar fashion to the police in the example above.

There are a lot of other factors to consider such as the role of agencies, appeal procedures, the corporation tax position etc., etc.

Tim will cover the remaining areas in detail, with the aid of practical case studies on his AAT half day course on 21st February 2020.

Further reading on IR35: