CHAPTER 6
ERRORS AND CORRECTIONS
TO ACCOUNTING RECORDS
AND FINANCIAL
STATEMENTS
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Topic list
Reconciling to external
documents
The bank
reconciliation
Correcting errors
Types of error in
accounting
Adjusting the initial TB
for errors
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Reconciling to external documents
Nominal ledger account in which a record is kept of the total value of a number of similar individual items.
A trade receivables account is a
nominal ledger account in which
records are kept of transactions
involving all receivables in total.
A trade payables account is a nominal
ledger account in which records are
kept of transactions involving all
payables in total.
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
CONTROL ACCOUNTS
Receivables control account
•
•
An account in which records are kept
of
transaction
involving
all
receivables in total.
The balance on the receivables
control account at any time will be
the total amount due to the business
at that time from its receivable
Payable control account
•
•
An account in which records are
kept of transaction involving all
payables in total.
The balance on this account at any
time will be the total amount owed
by the business at that time to its
payable.
There will be no irrecoverable debt entries in the payables accounts.
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Receivables and Payables
•
Contra: When a person or business is both a customer and a supplier, amounts owed by and owed
to the person may be 'netted off' by means of a contra:
DEBIT
Payables control account (and personal account in the payables ledger)
CREDIT
Receivables control account (and personal account in the receivables ledger)
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Supplier statements reconciliations
To ensure the AR & AP balance
recorded is correct
Reason for reconciliation
•
How?
•
•
Extract statements from subledger (detailed personal
accounts)
Send to clients; Or
Reconcile with the statement
receipt from suppliers
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Supplier statements reconciliations
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Purposes
Common errors cause difference between balance of control acc. & sub-ledger
of control
accounts
Causes
Correct action
Error
An incorrect amount may
be posted to the control
account
miscast of the total in the
book of prime entry
a journal has been made in
general ledger to correct the
error.
Transposition error
Putting numbers in the
wrong order
occur in posting an
individual’s balance from
the book of prime entry to
the memorandum account.
no any accounting entry
would be required except
the correction in the
memorandum account only
Careless
Additional entry should be
booked to control account
(or memorandum account)
Forget to post transactions
in control account (or
memorandum account)
Example
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Bank statement
• Bank statement: A record of transactions on the business's bank account maintained by the bank
in its own accounting records.
• Cash is an asset (a debit balance) in the business's ledger accounts. As far as the bank is concerned
it owes the business money. Thus every item recorded as a debit in the business's books – a
positive bank balance, and any receipts of cash – will be shown as a credit on the bank
statement.
• When cash is a liability (a credit balance) in the business's books, as far as the bank is concerned it
is owed money. Thus every credit entry in the business's books – a negative bank balance, and
any payments of cash – will be shown as a debit on the bank statement.
Cash at bank
1/3: Receivables
20,0003/3: Expenses
Balance c/f
15,000
5,000
Cash at bank balance: 5,000 Dr
Bank Statement
Account name:
Account number:
Opening Balance: 0
Date
Ref
Description
1-Mar
…
…..
3-Mar
…
…..
Bank Statement: 5,000 Cr
Debit
Credit
20,000
15,000
Balance
20,000
5,000
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Disagreement with the cash book
There are five common explanations for differences between cash book and bank statement.
Errors in recording
transactions in the cash at bank
account
Corrections and adjustments
to the cash at bank account
Errors in the bank statement
Items reconciling the correct
cash at bank account balance
to the bank statement (timing
differences)
Timing differences:
- uncleared payments or
unpresented cheques
- uncleared lodgements
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Bank reconciliation
• A comparison of a bank statement (sent monthly, weekly or even daily by the bank) with the cash book.
• Differences between the balance on the bank statement and the balance in the cash book should be identified
and satisfactorily reconciled.
• The cash at bank account should be updated accordingly, usually by posting a journal entry.
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Reconciliation example 1
At 30 September 20X6, the balance in Wordsworth Co's cash at bank account was £805.15 debit. A bank
statement on 30 September 20X6 showed Wordsworth Co to be in credit at the bank by £1,112.30.
On investigation of the difference, it was established that:
(a) a customer paid £90 by electronic transfer in settlement of an invoice which was not matched by
the computerised accounting system and has not yet been recorded in the cash at bank account;
(b) cheques paid in but not yet credited by the bank were £208.20; and
(c) cheques sent to suppliers but not yet presented to the bank were £425.35.
We need to show the correction to the cash at bank account, then prepare a statement reconciling it to the
balance per the bank statement.
Step 1: Compare
- Cash book: 805.15
- Bank statement: 1,112.30
Step 2: Investigate difference
a. Cash book +;
b. uncleared lodgements +;
c. unpresented cheques -;
Step 3: Correct Cash book (transaction a) → Dr Cash/Cr Receivables: 90
Draft cash book balance:
805.15
Add: Cash Receivable from customer:
90
Final cash book balance:
895.15
(Correct cash book balance)
Step 4: Bank Reconciliation report
Balance per bank statement:
1,112.30
Timing differences:
+ uncleared lodgements
208.2
- unpresented cheques
(425.35)
Balance per bank statement:
895.15 = Final cash book balance
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Reconciliation example 1
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Reconciliation example 2
At his year end of 30 June 20X0, Cook’s cash at bank account showed that he had a credit balance in respect of
an overdraft of £310 on his current account at the bank. The bank statement as at 30 June 20X0 showed that
Cook has an overdraft of £70.
On reconciling the cash at bank account and the bank statement you find the following:
(1) Cheques sent to suppliers amounting to £500, had been entered in the cash at bank account but have not
yet been presented.
(2) Cheques received, amounting to £400, had been entered in the cash at bank account, but had not yet
been credited by the bank.
(3) Bank charges of £35 shown in the bank statement had not been entered in the cash at bank account.
(4) Dividends received of £225 had been paid directly into the bank and not entered in the cash at bank account.
(5) A cheque for £50 from Sunil was recorded and banked on 24 June. This was returned unpaid on 30 June and
then shown as a debit on the bank statement. No entry has been made in the cash at bank account for the unpaid
cheque.
Requirement
Make the appropriate adjustments in the cash at bank account, then prepare a statement reconciling the amended
cash at bank account balance with that shown on the bank statement.
Step 1: Compare
- Cash book: (310)
- Bank statement: 70
Step 2: Investigate difference
(1) unpresented cheques -;
(2) uncleared lodgements +;
(3) Cash book -;
(4) Cash book +;
(5) Dishonour cheques Step 3: Correct Cash book
Draft cash book balance:
(310)
(3) Bank charge:
(35)
(4) Devidend:
225
(5) Dihonoured cheque:
(50)
Final cash book balance:
(170)
(Correct cash book balance)
Step 4: Bank Reconciliation report
Balance per bank statement: overdraft (70)
Timing differences:
- unpresented cheques
(500)
+ uncleared lodgements
400
Balance per bank statement:
(170) = Final cash book balance
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Reconciliation example 2
Solution
The cash at bank account should be corrected for the items in notes (4) and (5). Bank charges (note (3)) also call
for an adjustment.
CASH AT BANK ACCOUNT
£
£
30 June 20X0
30 June 20X0
Dividends paid direct to
bank (d)
Balance c/d
225
Balance b/d
310
Bank charges (c)
35
Dishonoured cheque (e)
50
170
____
395
395
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Reconciliation example 2
Solution
Bank reconciliation at 30 June 20X0
£
Balance per bank statement
(70)
400
Add Outstanding lodgements
330
Less Unpresented cheques
(500)
Balance per corrected cash at bank account
(170)
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Types of error in accounting
Transposition
errors
Errors of
omission
Errors of
commission
•
•
Errors of
principle
Compensating
errors
If the correction involves a double entry in the nominal ledger accounts, then it is recorded via an
entry in the journal.
When the error breaks the rule of double entry, then it is corrected via a journal entry using a
suspense account to complete the double entry.ca
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Correcting errors
The journal requires a debit and an equal credit entry for each correction.
• If total debits equal total credits before a journal entry is made then they will still be
equal after the journal entry is made
• If total debits and total credits are unequal before a journal entry is made, then they
will still be unequal (by the same amount) after it is made.
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Correcting errors
Example
Write out the journal entries which would correct these errors:
Requirements
1. A business received an invoice for £250 from a supplier which it omitted from its accounting
records entirely.
2. Repairs worth £150 were incorrectly debited to the non-current asset (machinery) account
instead of the repairs account.
3. The bookkeeper of a business reduced cash sales by £280 because he was not sure what the £280
represented. In fact, it was drawings.
4. Telephone expenses of £540 were incorrectly debited to the electricity account.
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Correcting errors
Example
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Correcting errors
Example
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Suspense account
Using a suspense account when the trial balance does not balance
A suspense account is a temporary account which can be opened for the following reasons.
A trial balance is drawn up which does not balance.
The bookkeeper of a business knows where to post one side of a transaction, but does not
know where to post the other side.
In both these cases, a suspense account is opened up until the problem is resolved
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Suspense account
Interactive question 4: Errors
Down & Co has the following errors and omissions in its accounting records:
(1) A sale of goods on credit for £1,000 has not been recorded.
(2) Delivery costs of £240 on a new item of plant has been recorded as revenue expenditure in the
distribution costs account.
(3) Cash discount of £150 had been taken on paying a supplier, JW, even though the payment was
made outside the time limit. JW is insisting that £150 is still payable.
(4) A raw materials purchase of £350 (on credit) has been recorded as £850.
Requirements
4.1 Prepare journal entries to correct each of the above errors. Narratives are not required.
4.2 Before the errors were corrected, Down & Co’s gross profit was calculated at £35,750 and the
net profit for the year at £18,500. Calculate the revised gross and net profit figures after correction
of the errors
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
IInteractive question 4: Answer
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
IInteractive question 4: Answer
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Correcting errors via the ETB
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Correcting errors via the ETB
Handle has now discovered the following matters:
a)
b)
An amount of £1,000 was credited on the bank statement in the year and entered in the cash book, but no
other entry was made as the bookkeeper did not know what the receipt was in respect of. Handle tells you it
was a payment on account from a major customer.
A non-current asset was purchased on credit just before the year end, for £9,300. This was incorrectly
entered in the trade payables account via a journal as £3,900, but the correct entry was made in non-current
assets.
To correct these errors Handle uses the following journals:
£
(a) CREDIT Trade receivables
DEBIT Suspense
(b) CREDIT Trade payables
DEBIT Suspense
£
1,000
1,000
5,400
5,400
ERRORS AND CORRECTIONS TO ACCOUNTING RECORDS AND
FINANCIAL STATEMENTS
Correcting errors via the ETB
These are entered in the adjustments columns of the ETB, which is then cross-cast to produce Handle's statement of profit or
loss and statement of financial position:
Ledger balance
Cash at bank
Opening capital
Loan
Non-current assets
Trade payables
Expenses
Purchases
Sales
Trade receivables
Suspense
Drawings
Net profit
Trial balance
Debit
£
5,415
Adjustments
Credit
£
Debit
£
Credit
£
Statement of profit or loss
Debit
£
Credit
£
10,000
5,000
30,000
18,689
5,400
6,781
21,569
6,781
21,569
38,974
38,974
1,000
9,445
6,400
8,445
6,400
5,853
79,063
Statement of financial
position
Debit
Credit
£
£
5,415
10,000
5,000
30,000
24,089
5,853
79,063
No balance remains on the suspense account.
6,400
6,400
10,624
38,974
38,974
49,713
10,624
49,713