Defining, Finding and Correcting Bookkeeping Errors
The Trial Balance, Reconciliation and Control Accounts
Whilst maintaining records during the bookkeeping process, human error could occur
quite easily, and as such, it becomes necessarily important to spot the errors and correct
them accordingly.
There are various types of errors that may occur, and each is classified under one of the
following categories:
1. Omission – a transaction is not recorded at all
2. Error of commission – an item is entered to the correct side of the wrong account.
3. Error of principle – an item is posted to the correct side of the wrong type of
account.
4. Error of original entry – an incorrect figure is entered in the records and then
posted to the correct account
5. Reversal of entries – the amount is correct, the accounts used are correct, but the
account that should have been debited is credited and vice versa.
6. Addition Errors – figures are incorrectly added in a ledger account.
7. Posting Error
a) an entry made in one record is not posted at all
b) an entry in one record is incorrectly posted to another
8. Compensating errors – two equal and opposite errors leave the trial balance
balancing
9. Trial balance errors – a balance is omitted, or incorrectly extracted, in preparing
the trial balance.
The Correction of Errors
The Trial Balance
Many of us believe that the trial balance forms the bases of summarizing all the debits and
credits of the company’s nominal ledger and journal entries in order for us to simply pull
out the data to reproduce the profit and loss account and the balance sheet. While that is
so, it is further used to spot any errors that usually cause the trial balance not to balance. In
other words we find that the debits are larger than the credits or vice versa. The following
methods are often used to find and correct these errors and to further test the accuracy of
the accounts. Obviously compensating errors are the hardest to spot since they couldn’t
affect the balance of debits and credits on the trial balance.
Suspense Accounts
Errors are often corrected by the use of journal accounts or through the use of a suspense
account when the trial balance does not balance. Basically a suspense account is a
temporary account that may be used to correct any mistakes at the year-end or whilst
preparing the draft accounts. An accountant may also use it when he is not sure of where
to post a transaction. Errors 6, 7, and 8, mentioned above, require a suspense account to
correct them; otherwise only a journal entry is necessary. Trial balance errors do not
require journal entries or a suspense account, it is simply amended.
Suppose a company revalued an asset and the accountant wasn’t sure whether he had to
create a revaluation reserve or not. The accountant may open a suspense account and debit
it with the balance on the provision for depreciation account. Once the accountant realizes
that he should actually create a revaluation reserve account, he would simply credit the
suspense account and debit the revaluation reserve. As such the suspense account is closed
off, and the error is corrected.
When tackling examination questions involving the correction of errors, one must pay
attention to the following points.
1. Deal with the errors in order and mark those that affect the balancing on the trial
balance, as these would require a suspense account.
2. Then open a suspense account, if the trial balance shows that debits are more than
credits, one must credit the suspense account with the difference, otherwise debit
the suspense account with the difference.
3. Adjust the suspense account with the necessary amendments until the debits equal
the credits on both sides of the account. Please note however, that it is necessary to
make sure that you debit or credit the right side of the suspense account!
Bank Reconciliation
It is not surprising to find that the balances on the bank statement do not match those
found in the cashbook. There are many reasons for this, and not necessarily only do to
errors.
The circumstances that may affect the cashbook are:
1. Interest, Dividends charged or received may not be recorded in the cashbook as
these things are usually automated.
2. The company might have a standing order, which the accountant may have
forgotten to record.
3. A bounced cheque.
The circumstances that may affect the bank statement from representing the correct picture
shown in the cashbook are:
1. Errors – the least possible reason
2. Unpresented Cheques, i.e. customers yet to present their cheques to the bank, and
as such the company’s bank account is yet to be debited.
3. Timing differences. These may occur frequently since the company records a
transaction in its book as soon as a sale is realized, not necessarily when cash is
received. Suppose that two days prior to the receipt of the statement, we sell some
goods, and we deposit the customer’s cheque in the bank. This cheque would take
a few days more prior to having the money actually credited to the bank account.
This process is called ‘clearing’, and as such we receive a bank statement that
doesn’t mention any cheques being deposited, even though it had.
It is therefore necessary to reconcile the cashbook with the bank statement to make sure
that the differences are due only because of Unpresented Cheques or Timing Differences,
because otherwise, the closing balance in the cashbook may include bad debts in the form
of bounced cheques, or any form of error.
This process of reconciliation is fairly simple, but may be confusing at start. The first thing
one does is to spot the errors, and the reasons for difference. The reasons are then divided
in the form shown above. The balance on the cashbook and bank statements are then
corrected accordingly, and hopefully they would both match. The balance on the cashbook
will always be the balance shown in the balance sheet.
Debtors and Creditors Control Accounts
Another way of checking the accuracy of the bookkeeping process and to locate the errors
is through the use of Control Accounts. Control accounts are impersonal accounts that will
appear in the Nominal Ledger.
A debtors control account is an account in which records are kept of transaction involving
all debtors in total. In other words the balance on the debtors control account at ay time
will be the total amount due to the business at the time from its debtors. Does BPP
explanations make sense? NOPE. This is why I’m writing this article.
Whenever a business makes a sale on credit, the bookkeeper will send out an invoice to
the debtor, and the details of the transaction would be recorded in the debtor’s personal
account. Well, imagine trying to aggregate the total of the outstanding balances of all
debtors at the year end? Imagine the room for error?
Therefore, the bookkeeper may simultaneously open a debtors control account in the
nominal ledger, where the accountant would summarize the entire transactions of the day,
week or month, depending on the volume of credit sales.
Obviously at the year end when the bookkeeper decides to double check whether the
balance on the debtors account is correct, he may add up the balances on the personal
accounts, if they both match, then obviously the debtors control account is correct.
Otherwise, there’s an error that must be corrected.
Furthermore, the multiple-choice questions really test your ability to understand the topics
mentioned above. I have just summarized them but without serious practice, it is easy to
make mistakes. Best of luck guys!