Study Tips: Final accounts preparation – appropriation accounts

Posted by & filed under Advanced Diploma, Students.

Final accounts preparation series

In a previous article I wrote about those who aspire to be self-employed and why it’s important for sole traders, and the accounting technicians who compile their accounts, to understand the concept of capital. 

In that article, we discussed the fundamental accounting concepts that underpin our understanding of what capital is, in other words, the money a business owes its owner, or owners, at any given time. We also focussed on sole traders as opposed to partnerships, even though the definition and concepts apply to both. Therefore, we’re now going to consider what happens at year-end, once a profit or loss has been calculated and the owner(s) capital account(s) need updating as a result.

Updating the capital account at year-end

Let’s start with a sole trader and assume they’ve made a profit in the year. As the business only has one owner, all the profit is added to their opening capital, and their drawings deducted, to calculate their closing capital. This takes place in the capital account, which is credited to increase it for the profit and debited to decrease it for the drawings. In the process, the drawings and profit accounts are in effect cleared, ready to start the new financial year with nil balances.

However, if there’s more than one owner, then there’s more than one person who wants a share of any profits, and this is where things get a little more complicated.

Dealing with two capital accounts

Firstly, whereas a sole trader has a single capital account, in a partnership this account is split into two capital accounts. One is still known as the capital account, and is used to record a partner’s long term investment in the partnership. The other is called the current account and it records a partner’s short-term capital. In other words, the amount that the business owes the partner, but that fluctuates over financial years.

To make matters even more complex, each partner will have both of these types of capital accounts. So, three people in partnership would mean three capital accounts and three current accounts, a pair for each partner!

So what’s the role of the capital account?

Let’s try and simplify things by clarifying the role of the capital account. This is where each partners’ initial investment is recorded.

It’s only increased if they add a significant capital injection or decreased if they permanently withdraw some or all of their investment from the business. The capital account is used when there are significant changes in the ownership of a partnership, such as partners leaving or joining.

It’s because the capital account is only used when there are significant changes, that there is a need for the current account. It’s role, therefore, is to record the routine changes that come about in the normal course of business.

Example partnership

Imagine you and I are in partnership. When we started our business, you invested £30,000 and I invested £20,000. We also sensibly drew up an agreement, although it is useful to note that a partnership agreement is not a legal requirement and that not all partnerships have one. Our agreement sets out how we’ll share the profits and losses of the business at the end of each year. 

In effect, it states the items that impact our short-term capital:

  • I receive a £6,000 annual salary
  • 5% commission is paid on sales
  • No interest is paid on capital balances
  • 2% interest is charged on drawings
  • Profit ratio, you:me is 2:1

Let’s say we’re now at the end of our third year of trading and the partnership had been operating nicely, with me working full time and you part time. However, this year business was slow. There have been no significant changes since the business’s conception and this year’s net profit was £30,000.

We both want a share of the profit and our agreement gives us the rules to divide it between us. We know that as we’re in a partnership, the value of our short term capital is the balance on our current accounts but are unsure how the figures get there. The answer is that an appropriation account is used.

Introducing the appropriation account

When the profit is appropriated, it is shared. The process is similar to allocating and apportioning overheads in management accounting.

Firstly, we allocate the items in the agreement that have ring fenced some of the profit. In our agreement, that’s the salary and sales commission*.  It would have also included interest on capital balances, if we’d included a provision for that.

As these items allocate some of the profit to us, they are deducted from it:

The interest on drawings* is also an allocated item but is, in effect, added back to the profit figure as it is interest paid not received. It therefore decreases the amount of profit allocated to us both:

Now that we’ve allocated all the items in the agreement, we can see what’s left over to appropriate, share or apportion:

Unfortunately, this year the net profit is insufficient to cover all the allocated items and has turned into a small loss.

Be careful not to confuse this with the business making a loss because it didn’t! The £30,000 net profit still remains, it’s simply that our agreement has allocated all of it between us and there is none left over at the end of that stage to share any further.

Completing the appropriation process

That said, we still need to complete the appropriation process, it’s just that we now have a loss to share. That’s done by using the profit sharing ratio:

Once the appropriation account is complete, the figures can be posted to the current accounts and we’ll discuss how to do that in part 2 of this series: current accounts.

* Note: these figures have been made up for illustrative purposes.

When business is a bit too quiet…

Posted by & filed under Run your business.

There only ever seems to be two settings when running your own business; too busy or too quiet! Sometimes it flits between the two over the course of one day.

The ability to cope well with this rollercoaster ride defines you as adaptable and resilient. But even the most seasoned self-employed professional can start getting twitchy when business is a little slow.

If you find yourself in a bit of a slump when you don’t have plenty of client work to keep you busy, it’s important to stay productive and try to make the most of the downtime.

Don’t give in to self-doubt

Think about how far you’ve come in your work, the successes you’ve had and the challenges you’ve already conquered. Everyone has quiet periods so try not to panic. Take positive action to quash any anxiousness.

Conduct a business review 

This is the perfect time to step back and take stock of where you’re at in your business. Ask yourself who you really want to be working with.

What are you best at? What are your career goals? What is your niche?

Which prospective clients fit into this niche?

Business review checklist:

  1. Assess your list of current clients and clients who have dropped off.
  2. Conduct a competitor check.
  3. Define your niche and who your ideal prospects are.
  4. Update your website content, work on its SEO and write some blogs.
  5. Review your social media channels and create content plans.

Ask for work

When you’ve identified past clients that you worked well with and your ideal prospects, get (back) in touch with them. Ask current clients if they have other things that you could help them with (make some suggestions) and reach out to people in your network who might want to outsource work to you. 

Give yourself a break

Take some time off. Remember that one of the main benefits of being self-employed is the flexibility it can afford you, and quiet periods are the best time to take a break.

If you don’t feel like your bank balance is up to booking a last-minute holiday then have a long weekend away, or just take a day or afternoon to yourself to do whatever you want to (that’s non-work-related!)

It will inevitably bring you inspiration and make you feel more motivated for work again.

10 ideas for taking some time out from work:

  1. Read a book
  2. Work on your own project
  3. Go for a long walk
  4. Take a trip to the seaside
  5. Sign up for a short course
  6. Visit an exhibition
  7. Have a spa day
  8. Go to the cinema
  9. Tick something off your bucket list
  10. Play a sport

Prevention not cure

Hindsight is a wonderful thing, so put things in place to reduce the likelihood of another quiet period.

Gaining new clients can be very long lead so plan to do small things often in terms of building connections and relationships. Even when you’re busy, make sure you’re putting some security in place for the longer-term; saving for a rainy day, growing your database of contacts and making regular communications.

By keeping your website up to date with a regular blog and doing some work on its SEO, it should be working away for you in the background, generating interest and enquiries.

In summary

Procrastination and deliberation will likely lead to worry when work is quiet. Put some decisive plans in place to ride out less busy times. Just don’t try to do too much and make sure you don’t start lots of things that you can’t finish or continue to commit to when work gets busier again. Choose one priority task that you’d like to achieve in a day and then give yourself time for a break and don’t feel guilty about it.

Prepare yourself for slower times that you know are inevitable, like August when lots of people are on holiday, and have contingency plans in place. Think about the advice you’d give someone else who found themselves with a decreased workload; are you practising what you preach?

Further reading on running your business:

Should you make a speculative job application?

Posted by & filed under Career.

Is it worth your while to approach would-be employers even if you don’t know if there are any suitable vacancies? And how do you make sure your speculative approach hits its intended target?

A speculative approach is when you contact a company or organisation to ask if there is a suitable vacancy for you without any such role being advertised.

How not to do it

The wrong way to do it is to print off loads of copies of your CV and send them to lots of different companies or organisations willy-nilly. Equally, emailing your CV to lots of HR departments is a waste of time. You need to treat a speculative approach seriously or not at all.

Key takeaway: A scattergun approach is not worthwhile. Target your speculation

Is speculative job seeking worth it?

John Lees, Career Coach and author of Get Ahead in your New Job says: “What you are looking for when you’re looking for a job is the best return on your time. A speculative, direct approach is OK – it’s not the best but it’s not the worst either.

It’s certainly better than randomly signing up to lots of job sites. But it’s not as good as a personal approach such as speaking to someone at a networking event or similar. Face to face meetings allow you to convert personal approaches into opportunities”.

Lee Owen, Director at Hays Accountancy & Finance adds: “Speculative job applications can offer a quicker and more direct way to landing a role but this type of application needs to be done with the right approach in order to be worthwhile”.

Speculative job seeking: who to approach?

If you haven’t got a particular company or organisation in mind, then make a list of those which might interest you. A bit of internet research will be invaluable. Do check that the companies you’ve identified to make approaches to have not actually got any advertised vacancies that would suit you before you send off speculative letters. There’s more advice here.

Do your homework

Sending off a CV to an HR department isn’t worth it. You need to find the right person to aim it at – usually the head of the appropriate section or department.

In your approach, you also need to show your knowledge about the company or organisation, not just general comments about your interest in their sector. What is the company doing at the moment? Does it have expansion plans? Keep abreast of its social media output.

Then, apply that knowledge to your application. Lees says: “You should show that you have done your homework. So, for example, you might say something like ‘I’ve seen that you are doing such and such a project’ or ‘I notice you are using x software’ and say that you’d welcome the opportunity to talk to them about how you could help them with that”.

Key takeaway: Find out who to approach and research the company or organisation you’re trying to get a job with.

Have a goal

Think about why you’re making a speculative approach: what do you want to get out of it? You’re not going to get a job offer just on the back of one. Instead, says Lees: “What you want is a face to face meeting. This is your aim, the ideal outcome. Always keep your mind on getting that face to face meeting: once you’ve got that, it’s over to you to make an impression”.

And even if you don’t succeed in getting an interview, then think positively: there might really not be any vacancies at the current time but that’s not to say there won’t be any in the near future. If your approach was good and properly targeted then you could be remembered when something does come up.

Key takeaway: Remember your aim is to get a face to face interview and focus on that.

CV preparation: what should you write?

Don’t send a lengthy CV and accompanying letter – how many GCSEs you have won’t matter in an initial approach. But do share your AAT qualifications as they will be directly relevant for the role you are seeking.  “Keep it short – six bullet points on why you are making the approach and why the recipient should meet you,” says Lees.

What you are trying to get across in simple terms is what you are looking for and what skills and experience you can offer. Think always of what you can do for the organisation, not what they can do for you. Make sure it doesn’t come across as if you are begging for work. And don’t be too pushy either. Avoid starting every sentence with “I” too.

Key takeaway: Keep it short, targeted and concentrate on what you have to offer the company, not the other way around

Do you need help?

If you want to make speculative approaches but don’t know where to start, an expert could help you. Owen says: “Knowledge of the employment landscape is central to the role of a recruitment consultant, so enlisting their help will avoid targeting employers with no availability or plans to hire.

They will also be able to draw on their established network of clients so you know your application will go to the right person to be properly considered. Furthermore, they see countless CVs and cover letters each day so are well-positioned to advise on how to best tailor your application”.

Social media

Lees says: “The first thing someone will do when they get a speculative email from you is to look at your LinkedIn profile – so make sure it is up to date. That is crucial”. It also makes sense to clear up your Facebook profile and any other social media. You don’t want to spoil the favourable impression you’ve made on your speculative approach.

Key takeaway: Don’t ignore your social media profile

How long should you wait?

“If you don’t hear back in a reasonable length of time, then a polite follow up is appropriate – perhaps by telephone” adds Lees. And even if your approach falls on stony ground, it doesn’t mean future ones won’t be successful. 

And Owen adds: “While a speculative application can be a way of landing a one-off opportunity, job seekers need to take the right approach for it to really be worthwhile. Drawing on the support of a recruitment consultant usually results in a smoother and more time-efficient hiring process.”

Key takeaway: Follow up approaches. And remember while speculative approaches can work, traditional methods might have a higher strike rate.

Summary

Speculative approaches can work, but you need to treat them as seriously as any other job application or you’re wasting your time. Do your research; don’t send out a CV with a long covering letter and remember always that your aim is to get a face to face meeting. Then it’s all over to you and your great interview skills!

Further reading

10 must-read articles for Management Accountants

Posted by & filed under Accountancy resources, Members.

We’ve pulled together our 10 essential articles for Management Accountants.

1. Career profile: management accountant

What do management accountants typically do in their day-to-day? Does it still align with your career goals, or have you veered off-course?

Read more

2. What I wish I’d known before I became a management accountant

We hear from current and former management accountants on the best and worst aspects of their role.

Read more

3. The challenges of Big Data for management accountants

The management accountant role has traditionally been one of turning raw data into useful information. But what about when the amount of data is inconceivable? This is a major challenge; how can you tackle it?

Read more

4. How management accountants lead their organisation towards success

Focussing in on the strategic approaches of sales, we look at how an AAT qualified management accountant can adapt to the 4 main approaches companies may use.

Read more

5. How to apply management accounting knowledge in the real world

From risk management to negotiation, and even project management, we explore the real real world skills that are already in your arsenal.

Read more

6. Quality assurance – an accountant’s greatest asset to a business

From the creation of traditional variance reports, to producing detailed linked-budgeting and cost analysis, we look at the range of responsibilities you could take on in your role to make more impact at your company.

Read more

7. “Accountants must choose a more central role,” Mark Farrar

Mark Farrar, AAT Chief Executive outlines how the role is evolving, and most important for management accountants, how it’s time to look beyond business as usual, and choose to become more integral to your company.

Read more

8. 10 quick ways to communicate better

Communication is essential for a management accountant. A key part of your role is analysing data and communicating pertinent insights to decision-makers within your company.

Read more

9. Data analytics – part 5 – communicating insights and making a difference

Part 5 in our series on data analytics is an essential read for management accountants. Communicating your insights from data analytics effectively could see you make the biggest impact in your organisation.

Read more

10. Growth and leadership – what are your personal goals?

And finally, it’s time to review your goals. After reading through our essential management accountant articles, what’s your gut telling you; are you on the right path?

Read more

Further reading on developing your role, or perhaps choosing a new one;

Meet the people behind the AAT branch network

Posted by & filed under Branches, Networking.

AAT students and members get lots of professional benefits; one of these is the opportunity to attend and take part in free events in your local area. We met with AAT committee members to hear what’s going on.

These AAT branch events are a great way to meet other people in the industry, make professional contacts and new friends, and hear about the latest developments.

Some AAT members have found new jobs or hired new associates through the branch network, or simply expanded their client portfolio.

The branch network brings members together in their local area; this is the heart of the AAT community.

How the AAT branch network works

The AAT branch network is here to support you throughout your career in accounting and finance. Our 49 AAT branches and counting, as well as one international branch in Botswana, are run by over 300 volunteer members.

Each branch runs events in all areas of accounting throughout the year, usually during evenings and weekends. They’re all free to attend, and you can go to as many as you like.

Subjects include tax and VAT, business skills, blockchain, cybersecurity and changes to the Finance Act. Some events are more technical, such as a detailed presentation on accounting for vehicles, while others deal with the softer skills like career development and running your own practice.

There’s something for everyone.

Why should I attend?

Attending local branch events is a great way to meet AAT members in your area and network with accounting professionals. You’ll get to exchange views and information with like-minded people, and find local business opportunities.

Aside from the benefits of networking, you can also use the events to gain CPD in relevant areas of finance, share ideas and best practice, and gain advice on career development.

The AAT branches are run by the AAT members themselves, who volunteer their time to make sure they’re bringing you the very latest speakers and essential CPD. The people behind the branches are a friendly lot, and are keen to see their local AAT communities grow and develop.

We met with committee members from 3 branches to get a peek behind the scenes.

What’s on offer at branch events?

As every branch is run by local AAT members, each one has it’s own unique flavour.

Julian Yates FMAAT is treasurer of AAT Manchester branch and runs his own practice, Belgrave Accounts in Sale. He’s been a committee member for five years and has found his involvement with the branch both professionally and personally rewarding.

“We like to split the presentations between general skills which include anti-money laundering, cyber security, and how Companies House works, with more technical issues like VAT and Making Tax Digital,” he says.

“It can be very rewarding to be part of the branch as it gives you an opportunity to connect with the wider AAT community. It also gives you opportunities to develop your own skills and enhance your career.”

At the Manchester branch, this year’s events have included:

  • an update on the effects of Brexit
  • details of the new legislation to be enacted in the Finance Act,
  • student events
  • a technical session on accounting for vehicles
  • a presentation on property income and IR35
  • a VAT update
  • and a discussion on cybersecurity and the implications for accountancy practices.

Develop professionally through your branch

Jonathan Kendall FMAAT is chair of the Exeter branch, which was shortlisted for branch of the year at the AAT Professional Member Awards 2019.

“Attending branch meetings and becoming a committee member have really helped my professional confidence,” he says. He is now involved in chairing meetings, introducing speakers, and co-ordinating events.

He qualified as an accountant in 2006 and now works as a financial manager for a small group of companies in Newton Abbot. Alongside this he joined the branch committee ten years ago.

“I have held the office of secretary for two years and I’m now in my third year of being branch chair.”

He says that the beauty of the branch events is that they’re all clearly visible on the AAT website, so you can browse and see which one you’d like to attend.

“You aren’t restricted to branches where you live either, so if you see a neighbouring branch with an event you’re interested in, then you’re more than welcome to attend that,” he explains.

“Come along and see what we have to offer – we’re always pleased to see new people and very happy to hear from people who would like to volunteer and get involved with the committee.”

It’s a great way to get connected to your local AAT community, especially for self-employed members who may not get to talk shop very often. Plus, most branch events will count towards your CPD requirements, whilst you pick up new skills or develop existing ones.

Build your career

Rosie Berridge FMAAT and Becky Dwyer MAAT work at Accountability, a practice in Edinburgh. They blazed a trail for the AAT community in Scotland by setting up the Edinburgh AAT branch themselves, after spotting a gap for accountants.

“I met Becky at an AAT Connect event and we got talking about the lack of branch events in our area of Scotland. We decided to set one up and now we run events on MTD, the Future of Finance including Blockchain, crypto, and machine learning, motivating yourself in your accounting career, setting up in practice and GDPR.”

A recent focus at the Edinburgh branch is events for students, and Rosie and Becky have set up a bi-monthly student networking event at a local hotel.

“We felt there was something missing for students,” Becky explains. “At an AAT event, a student could potentially meet their next employer, so it could be pivotal to their career.”

Rosie brought Becky onboard at her own practice, and took on another new employee via the AAT branch network too.

“As a potential employer it’s brilliant for me,” she says. “I’ve had new business referrals for people in practice and attending the branch events enables you to make those connections.”

In summary

You can be part of AAT in a wide variety of ways. We have distance-learning students studying at home, students in colleges, people studying alongside a full-time job, and members at various stages of their careers. But you’re all a part of the AAT Community.

The branch network is a way for you to connect to others within AAT to learn, grow, and develop further. Get started today by finding your local branch with the links below and checking out some upcoming events. And who knows, maybe you’ll be running things in a few years!

More information:

Read more on the AAT branch network;

Aynsley Damery: Empowering accountants to scale up their advisory services

Posted by & filed under Inspiring stories.

Aynsley Damery spent the bulk of his career working in award-winning small practices. With Clarity, he’s taking that service to the world.

Aynsley Damery is the co-founder of Clarity – an online platform that aims to connect small businesses around the world with accountants that can then provide detailed, data-led advisory services.

Scaling up advisory services

It’s about empowering small accountants to scale up their advisory services, he says, as much as it is helping small enterprises. The platform uses numerous, much talked about technologies such as big data, blockchain and machine learning so that small businesses and accountants can review financial information based on a set of criteria. 

How does the online platform work?

Clarity links in with both Xero and QuickBooks online, so accountants can help clients gain a clear understanding of their numbers and how to make them better. They can develop step-by-step action and business development plans to build a better business, and, through the use of our structured online data room, small businesses can access the cash, funding and investment they need to grow and scale profitably. 

Is there a particular framework that you’ve used?

We have built the “data room” around seven business assets: Brand and Culture, Finance, Tangible Fixed Assets, Legal & Governance, Product/Service, Systems, and Team.

By using this framework, advisors can work through a structured process, encouraging their small business clients to put in place all the elements a successful business needs to have, not only to get access to cash and funding but also to grow and become a more profitable business. 

How has the business grown?

We are utilising the most up-to-date technologies to drive the platform forward and leverage the power of big data, which enables us to provide better insights to accountants and small business owners. Blockchain is just one element of that, together with artificial intelligence and machine learning.  

How do you use blockchain?

Clearly blockchain has a big part to play in the future of technology. It can add, and does add, a lot of value and efficiency to multiple industries worldwide, not just accounting and finance. We have only just started to discover the use cases for blockchain technology, and are nowhere near full understanding of its transformation possibilities.  

We use blockchain to provide a clear audit trail for the documentation stored within the “data room”. While the data is kept secure and private on AWS, we have created smart contracts around the signature process, so that Clarity holds the single source of truth for our small business owner’s data.

When they start looking for funding, the cost of due diligence should be reduced significantly, because their data has already been verified within our “data room”. 

What is next for Clarity?

We want Clarity to become the global platform for small business owners. We want to make sure that an accounting firm can give every single business owner some level of business advisory, that is appropriate for both their size and the fee involved, making business advisory accessible. 

For more inspiring stories:

The banker who sold his soul for bling

Posted by & filed under Leadership.

And the forensic accountant who brought him down. Bribery, corruption, money laundering; Geoff Mesher has seen it all as a Forensic Accountant, and gives us the inside scoop on his role in the infamous HBOS case.

The Forensic Accountant

Geoff Mesher trained and qualified as an accountant in the mid-1990s while working for KPMG. He was working as an Auditor, when he was exposed to the discipline of forensic accounting.

These two areas are very different. Whilst audits are forcibly imposed by regulations, forensic accounting can actually help organisations deal with problems and achieve better financial results.

Geoff found that his forensic work was more highly valued and actually sought after by clients, so he soon left audits in the dust.

“I really enjoyed the analysis work, and explaining accounting terms and concepts to non-accounting people like the judge and jury,” says Geoff. The variety of the work was a big plus too; at one point he was engaged to work as part of a team on the Volker Commission.

Read more on how you can become a forensic accountant.

The Volker Commission

This was a big case that took place at the turn of the century, focussed around locating and identifying assets belonging to victims of the Holocaust. These were then to be returned to as many of the victim’s families as possible.

The work involved investigating the records of a number of Swiss banks. Unfortunately Geoff didn’t discover any long-lost paintings by Rembrandt or Van Gogh, but he did get the chance to rummage through the attics of various bank branches. He was looking for old handwritten ledgers and transferring the information onto a database.

Though the passage more than 50 years made this difficult, it was a significant case for ethical reasons; it was the right thing to do. It put the past to rest and helped to achieve a measure of social justice.

It was Geoff’s involvement in this and similar cases that led him to be invited to work on the HBOS case in late 2016.

The Expert Witness

The case involved Mr Scourfield, a former senior manager of HBOS, who was in charge of the Distressed Lending department in Reading. This department was set up to support businesses that were in financial difficulties.

He often introduced his colleague, Mr Mills, to HBOS clients as a ‘Turnaround’ Consultant. But it was this particular relationship that needed investigation.

Through scrutinising bank statements and following the movement of funds, Geoff was able to uncover certain transactions that couldn’t be classified as regular business transactions. These included payments for holidays abroad (without the wives), alongside cocktails, and prostitutes.

Mr Scourfield was even given a credit card on Mr Mill’s American Express account, which Scourfield made much use of. At one point, an interior design company was set up in Mrs Scourfields’ name, laundering over £150,000. It was only when the press became interested in the dealings (with the catchy headline of ‘Bonk Rockers’) that the powers-that-be started to act, and Geoff was engaged to investigate.

The work resulted in the production of more that thirty reports over a period of three years. These were presented as evidence at Southwark Crown Court over a period of ten days.

Geoff’s evidence was instrumental to the successful outcome of the case, which ultimately saw Scourfield, Mills and more convicted.

“You sold your soul, for sex, for luxury trips with, and without, your wife – for bling and for swag,” the judge accused Scourfield.

The ethics of the case

Geoff has found that, in his experience, the line between what’s acceptable in business relationships and what’s not, is very thin.

One example is that of hospitality. When does using hospitality to build a business relationship cross the line?

Prior to the last financial crash, money was free-flowing. It was a time of excess. What was given in the name of ‘hospitality’ then may now be thought of as excessive.

The Forensic Accountant has to be able to identify and assess any payments that look likely to be over and above what is acceptable. As Geoff remarks “there’s a lot of looking at Bank Statements and movement of funds” before being able to draw any conclusions.

Key lessons from the HBOS fraud case

Geoff identified two main things he learned from his role on the HBOS case.

1. Determine where to draw the line between acceptable and unacceptable behaviour

Or in this particular case, the line between genuine hospitality, and bribery and corruption.

In Geoff’s experience, the villains are very skilled at recognising people they can manipulate. And then the gifts start arriving.

They start small and can be seen as legitimate hospitality at first. Later on though, the ‘gifts’ become larger and more elaborate.

It’s then that the individual becomes ‘hooked’ and can’t refuse.

2. Look at the message coming from the top of the organisation

In the vast majority of cases, the ‘tone’ or ethos of the organisation comes from the top. HBOS, as with many of the big banks before the Financial Crash, was all about the drive for profitability regardless of how those profits were gained.

There was an excess of everything, a pattern of greed, and this fed into the behaviour of those lower down the management hierarchy. Arguably it was this ethos that allowed the bribery, corruption, and money laundering to take place.

In summary

A Forensic Accountant can be seen as the ‘Sherlock Holmes of the accounting world’. A curious mind with attention to detail, good communication and the need to persist at a job are all qualities that a Forensic Accountant needs; discovery, analysis and communication are the watch words.

Geoff recently gave a fantastic talk on the HBOS case at the AAT Berkshire Branch; keep an eye out for him at future AAT Branch events.

Further reading on the role of a forensic accountant;

AAT calls for step change in funding for adult education

Posted by & filed under AAT news.

Upskilling and reskilling has a range of positive benefits for the individual, their employer and the wider economy.

These benefits include increased earnings and well-being for the individual; increased productivity and thus increased competitiveness, lower costs and higher output for employers; and increased tax revenues and reduced state benefit payments for the benefit of the wider economy.

A reduction in adult skills funding

Given the raft of benefits derived from adult education, it seems somewhat odd that there has been a 45% reduction in adult skills funding since 2009-10. Added to this are policy decisions such as scrapping plans to extend tax relief for self-funded work related training which again appear to be counter-intuitive.

AAT is not alone in being concerned about the current adult education landscape in the UK. Earlier today, the Centenary Commission published a comprehensive report on the provision for, and possibilities of, adult education today and for the century ahead.

The Commission consists of senior figures with a broad range of skills and experience including Dame Helen Ghosh, Sir Ken Olisa OBE, Ruth Spellman OBE and Lord Bilimoria. Its recommendations should therefore not be taken lightly.

Encouraging lifelong learning

Indeed, many of the 18 recommendations are things that AAT has been lobbying on for several years, for example broadening the apprenticeship levy and calling for national information campaigns to encourage lifelong learning.

Likewise, the Centenary Commission places a strong emphasis on literacy, numeracy and digital skills as AAT has frequently done in recent years.

But there is more to consider in the report, not least the recommendation to introduce a lifelong learning account for individuals. This is a proposal put forward and supported by many, indeed it is currently Liberal Democrat Party policy, but policymakers are nervous of such a scheme given the disastrous Individual Learning Accounts (ILAs) introduced by Labour at the turn of the century.

Parliament’s Public Accounts Committee reported that more than a third of the £290m taxpayer expenditure on the scheme related to fraud and abuse – and £37m of the total cost went to Capita to run it. Despite the fraud, abuse and mismanagement, there was widespread acceptance that the principle of ILAs was sound and that it helped many people to improve and gain new skills that they otherwise would not have.

Improved testing and piloting required

Given the significant benefits to individual learners and in turn to employers and the economy, AAT would cautiously back the return of a lifelong learning account provided there is substantially improved planning and risk management, robust quality assurance and extensive testing and piloting before any national rollout.

The Centenary Commission also calls for there to be a specific minister for adult education. Given the Government scrapped the position of Skills Minister (for whom Adult education was a responsibility) and subsumed all the responsibilities of that role into the large remit of the Secretary of State, AAT can understand why this is a particularly sensitive subject.

However, whilst the sentiment is understandable, the reality is that every sector thinks they are important enough to warrant a specific minister and even those that have this, are far from guaranteed good policy or increased investment. A dedicated Minister might be helpful but is certainly not essential.

Reporting on employee education spending

Finally, another Centenary Commission recommendation requires further consideration – the recommendation that employers be required to report annually on their employee education spending and to break this down to show how much is spent on the top 20% of earners and how much on the bottom 20% of earners.

This undoubtedly has some merit because it could incentivise (or embarrass) poor performers into investing more. But would simply reporting on this encourage behaviour change?

Reporting requirements have grown exponentially in recent years, for example in relation to the gender pay gap, executive pay gap and prompt payment reporting – much of this has made little difference because policymakers seem unable to understand that merely reporting on a problem is very different to doing something about it, especially amongst the most stubborn of organisations.

Good companies will always comply but it’s not the good companies that are the problem.

In summary

AAT backs the majority of recommendations in the report; believes further work is needed on some of these but that it offers a very positive contribution to the debate on the future of adult skills and lifelong learning in the UK today.

More AAT news and further reading:

Exploring CPD: how different options work in practice

Posted by & filed under CPD, In business.

Continuous professional development allows those working in the accountancy space to keep their qualifications up to date and gain vital experience and expertise.

Continuous professional development (CPD) forms an essential part of accountants reaching their full potential, enabling them to keep their technical credentials, business skills and industry knowledge up to date.

Many qualifications, including AAT affiliate and professional membership, also insist on CPD.

What are the main CPD options?

There are a wide variety of options when it comes to how CPD is delivered. Formal qualifications are one route, with individuals undertaking online or classroom-based courses, attending conferences or studying towards other qualifications.

“Once someone embarks on CPD, they can take points from any relevant module and in any delivery method they choose,” says David Wilson, managing director of Qualification Central. “Hours are stacked over a certain period of time and often professionals are required to complete a set amount of hours per year to maintain their standing professionally.”

Professional activities, such as becoming involved with an industry body, mentoring or networking, can also count as CPD, while self-directed learning is a fourth area, which can include taking part in webinars, podcasts or undertaking reading or research into relevant topics.

What does good CPD look like in accountancy?

One accountancy firm which makes good use of CPD is d&t accountants, based in Swindon. “One of the big things that we have noticed is that although only qualified accountants are mandated to hit CPD targets, everyone within the firm should be undertaking CPD for their own benefit, and also to benefit the firm and its clients,” says Carl Reader, chairman of the firm.

The business tends to use external training providers, as its size of around 50 people means it’s caught in between relying on informal, on-the-job training and having its own dedicated training team in-house.

An important part of the process is that its individuals who choose the areas they want to develop in, although this is likely to be linked to the job or sector they are currently undertaking and there are obvious benefits to employers to invest in this.

Picking CPD that’s relevant to you

For those who have completed the AAT qualification, studying towards a higher-level accounting qualification will count as CPD. But there are plenty of other options for those who are not yet ready to embark on that, including some courses which are very specific to a particular industry or sector.

“It’s important to understand your own ambition and where you wish to proceed in the future,” points out Luke Robért, accounting and finance recruitment consultant at Acorn Recruitment.

“Double-check that any qualifications or other development pathways offered to you during the course of your work are relevant, either to the industry you happen to be working in at the time or those you may have an eye on joining in the future, official or unofficial. It’s also important to note that these qualifications often have their own optional modules that you might find more relevant so choose wisely.”

Examples of the kind of CPD courses that can be undertaken include insolvency, Making Tax Digital and cloud accounting, but others are more generic, such as employment law, selling a business or dealing with difficult people.

CPD advice for employers

Marilyn Devonish, owner of TranceFormations, suggests managers and team leaders speak to individual employees to identify the best areas to focus on to develop them, both professionally and personally.

“I usually suggest doing some kind of values elicitation to find out more about individual employees,” she says. When you understand employee triggers, drivers, motivators, and learning styles, you can offer training interventions and support which are specifically geared to each employee, and which address and meet a real need.”

For the employer, it’s important to have a system in place that allows the firm to monitor progress or improvement as a result of any CPD. “You can measure levels of productivity, task competence, confidence, resilience and improvements in problem-solving capabilities, critical-thinking skills and the ability to make more independent decisions,” says Devonish

In summary

There are many different options for firms looking to invest in continuous professional development for their staff. Some relate to pure accountancy knowledge; others to soft skills or sector-specific learning.

What’s important is that staff are continuously developed, both for the additional value this will bring them in their role and in their own sense of professional development. In turn, employers stand to benefit from having better-engaged employees, who are more likely to remain with the business for the long term.

Key tips

  • Make sure staff understand the need to engage in CPD
  • Work with them to identify the most appropriate options
  • Ensure they have the time they need to study and attend courses
  • Have in place some mechanism to measure outcomes

Further reading

Study Tips: Final accounts preparation – current accounts

Posted by & filed under Advanced Diploma.

Final accounts preparation series

In the prequel to this article, we prepared an appropriation account in order to divide up the net profit of a partnership, in accordance with its partnership agreement.

We had already clarified the difference between a partners’ long-term capital, recorded in their capital account, and their short-term capital, recorded in their current account. We stated that the current account records the routine changes in the amount a business owes each partner that come about in the normal course of business. For example, as profit is generated it increases a partner’s short-term capital and as drawings are taken, the short term capital is decreased. However, neither affect the balance of the long-term capital account. 

Whilst in theory the value of a partner’s short-term capital fluctuates over the course of a financial year, in reality, the current accounts are only updated at year-end, unless there is a significant change in the business that requires a partner’s overall capital to be calculated.

Appropriating a loss

If you remember, you and I are in partnership, but our third year of trading was slow. We had made a net profit of £30,000 but the terms of our partnership agreement meant that at the end of the allocation stage, the profit had turned into a small loss which was then appropriated between us. It’s important to remember that it was not a loss as such, because the partnership made a net profit.

Appropriating a loss in this situation is just a way of reflecting the fact that we had been allocated more profit than the partnership actually made, so some needed to be taken back in order to balance the appropriation account.  

It’s the same concept as accounting for a profit or loss on the disposal of a non-current asset, here there is no true profit or loss and the adjustment redresses either over or under depreciation.

The appropriation account

Let’s remind ourselves of the completed appropriation account:

The account is presented as a statement but it’s part of the double entry bookkeeping system and can be written up as a T account. Our £30,000 profit will have been calculated as a credit balance on the statement of profit or loss (SoPL). Therefore, the first double entry would be debit SoPL and credit the appropriation account. 

You can sanity check your entry by thinking of the profit as a liability. It’s the amount the business owes us, it’s owners, and liabilities have credit balances. The rest of the entries can then be made in relation to the profit. Items that reduce it, in our case salaries and sales commission, are in effect debit entries and items that increase it, like the interest on drawings will be credit entries. The profit, or in our case loss, share will balance the account to nil:

Updating the current accounts

Understanding what is going on behind the scenes, is useful as the entries in the appropriation account now need to be entered into our current accounts. The balances at the end of last year showed, that at that time the partnership owed you £13,500 and that I owed the partnership £600*:

There are two ways of thinking about the entries required to ensure you get them on the right side. Firstly, you can use your understanding of debits and credits and simply post the double entries for the entries made in the appropriation T account into the current accounts. All the debits in appropriation account will be credits in the current account and visa versa.

Alternatively, you can think in terms of increasing and decreasing the current account balances. As the current account is a capital account you would expect it to have a credit balance because it is categorised as a liability. However, as we have seen small debit balances are possible when a partner is the equivalent of overdrawn. Therefore, anything that increases the amount the business owes the partner is entered on the credit side, and items that reduce what the partner is owed, are entered on the debit side. 

It doesn’t matter which way you prefer, as long as your thought process results in the correct entries:

The appropriation account’s job is now complete. The current account, on the other hand, is not.

Accounting for drawings in the current account

There is still one more item that needs to be accounted for, and that is drawings. Unlike in the financial statements of a sole trader, neither the net profit or loss, or the drawings are shown as individual items in the ‘financed by’ section on the statement of financial position. The net profit or loss, as we have just seen, is posted to the current accounts via the appropriation account. The drawings are simply double entered into the current account as the balances on the drawings accounts are written off at year-end**:

Finally, the accounts can be balanced and this is easiest to do if we balance each of our account in turn:

You have a closing debit balance. This means you took more out of the partnership, within the year, than was covered by your share of our £30,000 profit.

I have a closing credit balance, which is as a result of the terms of the partnership agreement. As I worked full time in the business, I was paid a salary and was able to generate significantly more sales than you. I also took less in the way of drawings.

In these circumstances, the allocated items guaranteed me a bigger proportion of our profits and the 2:1 ratio gave you a larger share of the so-called loss.

In summary

We’ve looked at the year-end adjustment required for a partnership that is operating as a going concern with no significant changes in these articles.

Look out for future pieces that will consider what happens when changes occur that have long-term impacts and therefore affect partners’ capital accounts.

* Remember, that this is just in the short term, so as I also have long term capital of £20,000 then overall, the partnership owed me £19,400.

** Note: these figures have been made up for illustrative purposes.

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