ICAEW CFAB

ACCOUNTING

1
Chapter 6
ERRORS AND CORRECTIONS
TO ACCOUNTING RECORDS
AND FINANCIAL
STATEMENTS

2
Topic List
Reconciling to external documents

The bank reconciliation

Types of error in accounting

Correcting errors

Adjusting the initial TB for errors

3
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.

4
Reconciling to external documents
Accounting for receivables

At any time the balance on the trade receivables account should be equal to the
sum of the individual personal account balances on the receivables ledger.
Most customers have a debit balance
Some customer may have a credit balance, perhaps because it has overpaid
the business, or paid for goods and then returned some.

5
Reconciling to external documents
Accounting for payables

Refer back to revise the entries made in the purchases day book, the payables
ledger personal accounts and the trade payables account in the nominal ledger.
Such entries are mirror images of the way we account for receivables, though
there will be no irrecoverable debt entries in the payables accounts.

6
Reconciling to external documents
Accounting for 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)

8
Reconciling to external documents
The purpose of nominal accounts

Check the accuracy of entries made in the personal accounts.

They help us locate errors in postings promptly.
They provide an internal check where there is a separation of clerical
(bookkeeping) duties.
They provide total receivables and payables balances more quickly for
producing a trial balance or statement of financial position.
They keep the number of accounts in the trial balance down to a manageable
size, since the personal accounts are memorandum accounts only.

9
Reconciling to external documents
Balancing and agreeing control accounts with the memorandum ledgers
The balance on the control account may not agree with the following reasons.
✓ The total column in the book of original entry may be miscast so an incorrect amount is
posted to the control account
Effect:
✓ The nominal ledger debit and credit postings will balance, as both nominal ledger accounts will
be incorrect.
✓ The control account balance will not agree with the (correct) sum of individual balances
extracted from the receivables ledger or payables ledger.
Correction:
✓ A journal entry must be made in the nominal ledger to correct the control account and the
corresponding sales/VAT or expense/VAT accounts.

10
Reconciling to external documents
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.

11
Reconciling to external documents
Disagreement with the cash book

There are five common explanations for differences between cash book and bank statement.

Error
Unrecorded bank charges or bank interest.

Automated payments and receipts.

Dishonoured cheques

Timing differences

12
Bank reconciliation
Definition
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.
When doing a bank reconciliation, have to look for the following items on the bank statement and in
the cash book:
✓ Errors in the cash book
✓ Corrections and adjustments to the cash book
✓ Errors in the bank statement
✓ Items reconciling the correct cash book balance to the bank statement (timing differences)

13
Bank reconciliation
Definition
Items reconciling the correct cash book balance to the bank statement (timing differences):
Unpresented cheques
Uncleared lodgements

14
Bank reconciliation
Reconciliation procedures
Cash Balances

Per Bank Statement Per Books

Adjustment to the Adjustment to the

bank balance book balance

+ -
- -
+
+/- +/-

CORRECT BALANCE CORRECT BALANCE

15
Worked Example
Worked Example: Bank reconciliation I
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.

16
Worked Example

Answer:

17
Worked Example
Worked Example: Bank reconciliation II
At his year end of 30 June 20X0, Cook ‘s cash at bank account showed that he had a credit balance in the respect of an overdraft of
£310 on his current account at the bank. A bank statement as at 30 June 20X0 showed that Cook has an overdraft of £70.
On checking the cash at bank account and the bank statement you find the following:
(a) Cheques sent to suppliers amounting to £500, had been entered in the cash at bank account but have not yet been presented.
(b) Cheques received, amounting to £400, had been entered in the cash at bank account, but had not yet been credited by the bank.
(c) Bank charges of £35 shown in the bank statement had not been entered in the cash at bank account.
(d) Dividends received of £225 had been paid directly into the bank and not entered in the cash at bank account.
(e) 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. Eno entry hhas 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 balance with that
shown in the bank statement

18
Worked Example
Answer: The cash at bank account should be corrected for the items in notes (d)
and (e). Bank charges (note (c) also call for an adjustment.)

19
Types of error in accounting
Five broad types of error
Transposition errors

Errors of omission

Errors of principle

Errors of commission

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.

20
Types of error in accounting
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

21
Correcting errors
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.

23
Interactive Question
Interactive Question 1: Journal Entries
Write out the journal entries which would correct these errors:
(a) A business receives an invoice for £250 from a supplier which was omitted from
its accounting records entirely
(b) Repairs worth £150 were incorrectly debited to the non-current asset
(machinery) account instead of the repairs account
(c) The bookkkeper of a business reduces cash in sales by £280 because he was
not sure what the £280 represented. In fact, it was drawings
(d) Telephone expense of £540 are incorrectly debited to the electricity account

24
Interactive Question

Answer:

25
Interactive Question
Interactive Question 2: 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 and installation 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
(a) Prepare journal entries to correct each of the above errors. Narratives are not required
(b) Before the errors were conrrected, 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.

26
Interactive Question

Answer:

27
Interactive Question

Answer:

28
Adjusting the initial trial balance for errors

The initial trial balance can be adjusted for errors (and other transactions) that come to
light after the initial trial balance has been extracted.

29
Worked Example
Worked Example: Error correction and the trial balance
Handle extracted a trial balance and created a suspense account. He inserted the TB on his extended
trial balance as follows:

30
Worked Example
Worked Example: Error correction and the trial balance
Handle extracted a trial balance and created a suspense account. He inserted the TB
on his extended trial balance as follows:
Handle has now discovered the following matters:
a. 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.
b. 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.

31
Worked Example
Answer: To correct these errors Handle uses the following journals:

£ £
(a) CREDIT Trade receivables 1,000
DEBIT Suspense 1,000

(b) CREDIT Trade payables 5,400

DEBIT Suspense 5,400

32
Worked Example
Answer: The journals are entered in the adjustments column, and then each row is added across to produce
Handle’s final trial balance
No balance
remains on
the suspense
account

33
SUMMARY

34
SUMMARY

35