Flashcards · 9215 · Topic 2

Verification of accounting records flashcards

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Verification of the double entry records

Verification of the double entry records: Checking that the double entry records are accurate. The techniques named are the trial balance, control accounts (receivables and payables ledgers) and bank reconciliation statements.
Which four errors make the trial balance totals disagree?: Addition (an account added up wrongly), partial omission (one side missing), transposition (digits swapped on one side) and unequal posting (debit and credit amounts differ).
Omission compared with partial omission: Omission: the whole transaction is missing, so the totals still agree. Partial omission: one side is recorded and the other missing, so the totals differ.
Transposition compared with error of original entry: Transposition: digits swapped on one side only, so the trial balance disagrees. Original entry: the same wrong figure on both sides, so it agrees.
A balance of $3,270 is listed as $3,720. Effect, and what clue does the difference give?: The total is $450 too high. 450 divides exactly by 9 (450 ÷ 9 = 50), the sign of a transposition.

Prepare and understand the use of a trial balance

Trial balance: A two-column list of all the ledger account balances at a chosen date, debits on one side and credits on the other. It tests arithmetic agreement only.
Which balances go in the debit column and which in the credit column?: Debit: assets, expenses, purchases, returns inwards, drawings, opening inventory. Credit: capital, income, returns outwards, liabilities (trade payables, loans, bank overdraft).
A bank overdraft of $1,640 is entered in the debit column. Effect on the totals?: It should be a credit, so the totals differ by 2 × 1,640 = $3,280, with the debit column higher.
Uses and limitations of a trial balance: Uses: a quick arithmetic check; shows an error exists; source of balances for the statements. Limitations: six error types leave it agreeing; it does not say where an error is or show that amounts are valued correctly.
Draft totals: debit $28,980, credit $31,200. Rent $1,200 is in the credit column; electricity $680 is listed as $860. Corrected totals?: Debit: 28,980 − 180 + 1,200 = 30,000. Credit: 31,200 − 1,200 = 30,000. Both $30,000.
The trial balance totals differ. What should you not do?: Do not change any figure to force agreement. Re-add, find the difference, test the clues (twice a balance, equal to a balance, divisible by 9) and trace it to the ledger.

Prepare, understand and interpret trade payables and trade receivables ledger control accounts

Trade receivables and trade payables ledger control accounts: Summaries of all the individual customer accounts in the receivables ledger and all the supplier accounts in the payables ledger. Each is a memorandum record, not part of the double entry.
Receivables control account: which items go on the debit side?: Opening debit balances, credit sales, dishonoured cheques from customers, interest charged on overdue accounts, closing credit balances c/d.
Receivables control account: which items go on the credit side?: Opening credit balances, money received, cash discount allowed, sales returns, irrecoverable debts, contra entries, closing debit balances c/d.
Payables control account: main entries on each side: Credit: opening credit balances, credit purchases, interest charged by suppliers. Debit: money paid, cash discount received, purchases returns, contra entries.
A customer owes the business $1,800 and is owed $2,500 by it. Contra entry?: The contra is the smaller figure, $1,800: debit the trader in the payables ledger, credit the trader in the receivables ledger. The business still owes $700.
Opening receivables $12,400; credit sales $30,100; receipts $28,650; sales returns $900; discount allowed $350; irrecoverable debts $400. Closing balance?: 12,400 + 30,100 − 28,650 − 900 − 350 − 400 = $12,200.
Why keep control accounts?: They give total receivables or payables quickly; check the ledger against the list of balances; narrow the search when they disagree; and give a missing figure such as credit sales. Agreement does not prove the ledger correct.

Prepare and understand the use and purpose of bank reconciliation statements

Unpresented cheque and outstanding banking: Unpresented cheque: paid out and recorded by the business, not yet deducted by the bank. Outstanding banking: entered in the cash book, not yet credited 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: bank interest received, credit transfers received.
Layout of a bank reconciliation statement starting from the bank statement: Balance per bank statement, add outstanding bankings, add or less bank errors, less unpresented cheques = balance per updated cash book.
Bank statement $1,900 credit; unpresented cheques $300; outstanding banking $450. Balance per updated cash book?: 1,900 + 450 − 300 = $2,050.
Cash book error compared with bank error: A cash book error is corrected in the cash book. A bank error is not: it is adjusted on the reconciliation statement and the bank is told.
Use and purpose of a bank reconciliation statement: Confirms the cash at bank figure; finds errors in the cash book and the bank’s record; reveals unrecorded items such as charges; helps spot fraud; shows what is still to clear.
A payment of $85 was recorded in the cash book as $58. Correction?: The payment was understated, so credit the cash book with $27 (85 − 58).

How to correct errors in double entry records

Method for correcting an error with a journal: Name the error; write what was posted; write what should have been posted; journal the difference (through suspense if the trial balance disagreed); add a narrative beginning “being correction of”.
Which side of the suspense account takes the trial balance difference?: The smaller side. Credits bigger: suspense is a debit. Debits bigger: suspense is a credit. It should close to nil after the corrections.
A gas bill of $130 was debited to the telephone account. Error and journal?: Commission (both are expenses). Debit Gas $130; credit Telephone $130.
A $410 payment to a supplier was debited to bank and credited to the supplier. Journal?: Complete reversal: correct with double the amount. Debit the supplier $820; credit Bank $820.
Repairs to a van of $380 were debited to motor vehicles. Error and journal?: Principle. Debit Motor expenses $380; credit Motor vehicles $380.
The wages account was overcast by $700. Journal?: Debit Suspense $700; credit Wages $700.

The effect of errors on profit calculations

How does a correcting journal change profit?: Credit to an income or expense account: profit up. Debit to an income or expense account: profit down. Only asset, liability or capital accounts: no change.
Draft profit $18,900. Rent overcast by $600; a credit sale of $1,400 omitted; bank charges of $250 not entered. Corrected profit?: 18,900 + 600 + 1,400 − 250 = $20,650.
Profit $9,500. Insurance was undercast by $400 and a sale of $650 was omitted. Corrected profit?: 9,500 − 400 + 650 = $9,750.
Which errors change gross profit as well as profit for the year?: Errors in sales or purchases move both by the same amount. An error in an expense changes profit for the year only.
A suspense account closes to nil. Does that prove the books are free of errors?: No. Only errors revealed by the trial balance pass through suspense; omission, principle or compensating errors may remain.