Understanding your assessment questions

Have you every completed a task set by your manager, only to find that it wasn’t what they wanted because you miss read their instructions or question? 

One of the problems with mistakes is that often we do not find out about them until they are pointed out to us.  This can be embarrassing if the person who finds them is our manager or a client, but at least once we know and can put things right, we can make a note of the issue and resolution and try to avoid repetition.

Unfortunately in an assessment situation we don’t get that kind of feedback, just a result that doesn’t reflect our feelings about our performance. Therefore, we have to approach assesments with awareness and extra care.

Obvious but necessary

It sounds really obvious to say but it is really important to read a question thoroughly if we want to stand a good chance of answering it correctly.  Errors due to not reading the question carefully are very common but students are unaware that they have made mistakes because they think they’ve read and interpreted the question accurately.

So what can we do to try and improve our skills in question reading?  The first step is to acknowledge that it is an issue.  Once we have done that we can come up with a formula to ensure every time we read a question we go through a process to identify the active verb*, note the key elements and query whether we have fully understood the question and any information we have been given.

Let’s apply this to a scenario where we are about to prepare the VAT return for the period ended 31 July.  Standard rate VAT is applicable to all UK sales and purchases and rules regarding exports of goods to non-EU countries are observed.  (Be careful of wording, goods sold within the EU are known as despatches and not exports.)  The following information has been extracted from the ledgers:

Let’s say we also have discover a couple of errors that need to be corrected before the return is submitted:

  1. An invoice sent to a credit customer for £7,500 including VAT, has been recorded in the sales account as the gross value and no entry was made in the VAT account.
  2. A purchase return, with a net value £256.20, has been entered into the accounts as an invoice
  3. A receipt for a cash sale of £2,000 is showing in the bank account but has been omitted from the accounting records.

The question we are asked is:

Calculate the figures to be included in the VAT return, once any necessary corrections to the ledger accounts have been made.  Boxes 1-5 should be calculated to two decimal places and boxes 6-9 should be in whole pounds only.

Active verb

In this question the active verb is ‘calculate’.  This means we must work out a numerical answer and sometimes we are required to show our workings.*

Key elements

The key elements are identified by picking out the main points in the question and the scenario information:

  • figures to be included in the VAT return
  • corrections:

need to be corrected before the return is submitted

sales invoice for a VAT-inclusive figure, no entry in the VAT account

credit note for returned purchases has been posted as an invoice. VAT-exclusive figure given

cash sales receipt left out of the records – VAT on sales is due to HMRC so correction should increase the amount currently owed or decrease any refund owing

  •  boxes 1-5 two decimal places
  • boxes 6-9 whole £s

Have we fully understood the question and information we have been given?

Finally but crucially, we need to query whether we have correctly and fully understood the question.  Do we need to look up any information and/or draw on our accounting knowledge?

  • Is there any information we can use to help us?

Yes, HMRC’s website or helpline if at work or the AAT Indirect Tax Reference material if studying.

  • Can the errors be corrected in the ledgers?

Yes, they need correcting before the return is submitted. If they had of been made in a previous quarter then the net error would need correcting instead.

  • What is wrong with the way the sales invoice has been posted?

The net figure should be entered into the sales account and the VAT should be accounted for in the VAT account.

  • How can the error be corrected?

The VAT must be remove from the sales account and added to the VAT account.

  • How is the VAT calculated?

As it is an inclusive figure, the VAT must be extracted rather than added on:

£7,500 ÷ 120 x 20 = £1,250

or

£7,500 ÷ 6 = £1,250

  • What are the implications for the VAT return figures?

Box 1 – VAT due in the period on sales and other outputs

Therefore £1,250 must be added to the basic box 1 calculation

Box 6 – Total value of sales and all other outputs excluding any VAT.

Therefore £1,250 must be deducted from the basic box 6 calculation

  • What is wrong with the way the purchases credit note has been posted?

The postings have been made on the wrong sides of the PLCA and VAT accounts and in the purchases instead of purchases returns account. As VAT is posted on the same side as the net figure, it has been posted as a debit instead of a credit thereby increasing the amount of VAT reclaimable instead of decreasing it.

  • How can the error be corrected?

As the posting were made on the wrong side of the accounts the value of the error will have doubled. Therefore, the corrections will need to be double the error values as well.

  • How is the VAT calculated?

As it is an exclusive figure, the VAT must be added on rather than extracted:

£7,500 ÷ 120 x 20 = £1,250

or

£7,500 ÷ 6 = £1,250

  • What are the implications for the VAT return figures?

Box 4 – VAT reclaimed in the period on purchases and other inputs.

Therefore £102.48 (£51.24 x 2) must be deducted from the basic box 4 calculation

Box 7 – Total value of purchases and all other inputs excluding any VAT.

Therefore £512.40 (£256.20 x 2) must be deducted from the basic box 7 calculation

  • What needs to happen with the cash receipt?

It must be posted to the sales and VAT accounts. As it is a bank receipt it must be a VAT inclusive figure as that is the amount the customer will have paid.

  • How what are the VAT and Net figures?

VAT £333.33  (£2,000 ÷ 120 x 20)

Net £1,666.67  (£2,000 – £333.33)

  • What are the implications for the VAT return figures?

Box 1 – needs to be increased to account for the extra VAT due

Box 6 – needs to be increased to reflect the net value of the cash sale

One of the following VAT returns accurately reflects the corrections required:

See if you can use the formula in this article to answer the following questions:

  1. Identify the correct VAT return.
  2. Explain the errors that have been made on the incorrect VAT return.

Use the AAT reference material to help you.  Once you are ready, take a look to see if you have the correct answers.

* Whilst the definition of ‘calculate’ is straight forward not all active verbs are.  Further common verbs plus there definitions can be found in the active verbs series.

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

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