Flashcards · 0452 · Topic 3

Verification of accounting records flashcards

27 cards on Topic 3, subtopics 3.1 to 3.4. Pick a subtopic or study them all.

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3.1 The trial balance

Trial balance: A list of every ledger balance on a given date, in a debit column and a credit column.
Purposes of a trial balance: Tests that total debits equal total credits; signals that an error exists when the totals differ; provides the balances for the financial statements.
Name the six errors that do not affect the agreement of the trial balance: Commission, compensating, complete reversal, omission, original entry, principle (“C C C O O P”).
Error of commission compared with error of principle: Commission: right class of account, wrong account (gas debited to electricity). Principle: wrong class of account (a machine debited to repairs).
Error of original entry and complete reversal of entries: Original entry: the same wrong amount on both sides (1,860 entered as 1,680). Complete reversal: the right accounts and amount, but debit and credit swapped.
The trial balance totals disagree and debits are larger. Where does the difference go?: On the credit side of a suspense account, so the totals agree until the errors are found. (Credits larger: debit suspense.)
A balance of $250 is put in the wrong column of the trial balance. Effect on the difference?: It changes the difference between the totals by twice the balance: $500.

3.2 Corrections of errors

Method for a correcting journal: Write what was done, then what should have been done; journal the difference in each account; add a narrative.
A $650 cheque from a customer was debited to the customer and credited to bank. Correcting journal?: Complete reversal: correct with double the amount. Debit Bank $1,300, credit the customer $1,300.
A purchase of $1,860 was entered as $1,680 in both accounts. Correcting journal?: Error of original entry: journal the difference only. Debit Purchases $180, credit the supplier $180.
Which errors need a suspense account entry to correct them?: Those that made the totals disagree: one-sided entries, different amounts on each side, two entries on the same side, and addition mistakes. Suspense must clear to nil.
Which corrections change profit?: Only those that involve a revenue or expense account. Increasing revenue or reducing an expense raises profit. If both accounts are expenses, or both assets or liabilities, profit is unchanged.
A drill costing $2,450 was debited to repairs. Effect of correcting it on profit and on the statement of financial position?: Error of principle. Profit rises by $2,450 (repairs fall); non-current assets rise by $2,450, and capital rises with the profit.

3.3 Bank reconciliation

Unpresented cheque and uncredited deposit: Unpresented cheque: issued and entered in the cash book, not yet paid by the bank. Uncredited deposit: paid in and entered in the cash book, not yet added by the bank.
Which items from the bank statement update the cash book, and on which side?: Credit side: bank charges, interest paid, direct debits, standing orders. Debit side: credit transfers received, interest received.
Standing order compared with direct debit: Standing order: a fixed payment your bank makes on dates you set. Direct debit: collected from your account by the other party, which sets the amount.
Starting from the updated cash book balance, what do you do with unpresented cheques and uncredited deposits?: Add unpresented cheques; deduct uncredited deposits. You should finish on the bank statement balance. (From the statement, the signs reverse.)
Updated cash book $2,500, unpresented cheques $600, uncredited deposit $350. Bank statement balance?: 2,500 + 600 − 350 = $2,750.
The bank charges your account in error. Is the cash book changed?: No. The bank is told and the error appears on the bank reconciliation statement. Only the business’s own errors and omissions are corrected in the cash book.
Effect of digital payments on bank reconciliation: Card, online and transfer payments clear quickly, so fewer timing differences; online banking allows daily checking and software can match items. Charges and direct debits still need entering, and unmatched items still need review.

3.4 Control accounts

Purposes of control accounts: Give total trade receivables or payables at any date; check the ledgers, as totals come from the books of prime entry; help control, as a different person can keep them; help find a missing figure.
Sales ledger control account: what goes on the debit side?: Opening debit balances, credit sales, dishonoured cheques, interest on overdue accounts, refunds paid to customers, closing credit balances c/d.
Sales ledger control account: what goes on the credit side?: Opening credit balances, receipts from customers, discount allowed, sales returns, irrecoverable debts, contra, closing debit balances c/d.
Purchases ledger control account: main entries on each side: Credit: opening credit balances, credit purchases, interest charged by suppliers, refunds received. Debit: payments to suppliers, discount received, purchases returns, contra.
A contra (set-off) between a customer who is also a supplier: entries?: Debit the purchases ledger control account; credit the sales ledger control account, with the amount set off. No cash moves.
Opening debit balances $8,200; credit sales $15,000; receipts $13,100; discount allowed $300; returns $500. Closing debit balance?: 8,200 + 15,000 − 13,100 − 300 − 500 = $9,300.
Do trade discount and cash sales appear in a control account?: No. Only credit transactions go in, and only at the net invoice value. Cash discount does appear.