Flashcards · 4AC1 · Topic 3

Introduction to control processes flashcards

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Purposes of a trial balance: To check the arithmetical accuracy of double entry (debits equal credits), to supply the balances for the financial statements, and to help locate errors.
Which balances go in the debit column of a trial balance?: Assets, expenses, purchases, returns inwards, discount allowed and drawings.
Which balances go in the credit column of a trial balance?: Liabilities (including a bank overdraft), income, sales, returns outwards, discount received and capital.
Limitations of a trial balance: Agreement does not prove the books are right: omission, commission, original entry, reversal, compensating errors and errors of principle leave it balanced. It is for one date only and shows neither profit nor the value of the business.
Which errors make trial balance totals differ?: A one-sided entry, different amounts on each side, a wrong addition of a ledger account, a wrongly carried down balance.

Purposes of control accounts: Check the accuracy of a ledger; help locate errors in a particular ledger; help deter fraud when kept by a different person; give a ready total such as trade receivables.
Trade receivables control account: entries on each side: Debit: opening balance, credit sales, dishonoured cheques. Credit: returns inwards, cash and cheques received, discount allowed, irrecoverable debts, contra, closing balance c/d.
Trade payables control account: entries on each side: Credit: opening balance, credit purchases. Debit: returns outwards, payments to suppliers, discount received, contra, closing balance c/d.
Opening receivables $8,000; credit sales $30,000; returns inwards $1,000; receipts $28,000; irrecoverable debts $600. Closing balance?: 8,000 + 30,000 − 1,000 − 28,000 − 600 = $8,400 debit.
Name items that do not appear in the trade receivables control account: Cash sales, the provision for irrecoverable debts, depreciation and purchases of non-current assets.

Errors of omission, commission and principle: Omission: the transaction was never recorded. Commission: the wrong account of the right type (telephone debited to postage). Principle: the wrong class of account (a new computer debited to repairs).
Errors of original entry, compensating errors and complete reversal: Original entry: the wrong figure in both entries. Compensating: two errors that cancel out. Complete reversal: the right accounts on the wrong sides.
Size of the correcting journal for each type of error: Omission: full amount. Commission and principle: move the amount to the right account. Original entry: the difference only. Complete reversal: twice the amount. One-sided entry: the missing side, with suspense.
A sale of $870 was recorded as $780 in both accounts. Correcting journal?: Debit Trade receivables $90; credit Sales $90.
A payment of $640 to a supplier was debited to bank and credited to the supplier. Correcting journal?: Complete reversal: Debit the supplier $1,280; credit Bank $1,280.
Debit column $86,420, credit column $85,960. A purchases return of $230 was posted to the debit of purchases returns. Entries?: Credit suspense $460 to make the totals agree. The account is wrong by twice 230, so Dr Suspense $460, Cr Purchases returns $460. Suspense clears to nil.

Purposes of a bank reconciliation statement: To check the cash book and bank statement agree apart from timing items; find errors by the business or bank; spot items missing from the cash book; help detect fraud and show the true balance.
Unpresented cheque compared with uncredited lodgement: Unpresented cheque: you have paid and recorded it, the bank has not yet. Uncredited lodgement: you have banked and recorded it, the bank has not yet credited it.
Which items update the cash book, and which go on the reconciliation statement?: Cash book: bank charges, interest, direct debits, standing orders, credit transfers, dishonoured cheques and cash book errors. Reconciliation: unpresented cheques, uncredited lodgements and bank errors.
Cash book $2,950; bank charge $38 and standing order $150 missing; unpresented cheques $410; uncredited lodgement $640. Statement balance?: Updated cash book 2,950 − 38 − 150 = 2,762. Statement = 2,762 + 410 − 640 = $2,532.
Updated cash book overdraft $1,025; unpresented cheques $520; uncredited lodgement $610. Statement balance?: Treat the overdraft as negative: (1,025) + 520 − 610 = (1,115), an overdraft of $1,115.