Accounting Flashcards
BENEFITS OF PRODUCING A TRIAL BALANCE
The trial balance reveals that some types of errors have taken place
because the total debits will not be equal to the total credits
The other main benefit of producing a trial balance is that it clearly lists all of the figures that are needed to produce the financial statements.
Name the error that reveal if the trial balance is incorrect
Addition error
There have been mathematical errors when calculating balances on accounts or when calculating totals in books of prime entry.
Partial omission error
An item has only been entered once
(either as a debit or a credit)
Transposition error
An amount has been posted with two numbers the wrong way around (e.g. £456 instead of £465)
Unequal posting error
Different amounts have been debited and credited, usually because one side of the double entry has been wrongly posted
LIMITATIONS OF TRIAL BALANCES
There are several types of errors that will not be revealed by a trial balance,
because the total debits will still be equal to the total credits.
The other main limitation of a trial balance is that, although it may reveal that an error has taken place, it will not show where the error has happened.
Types of errors which won’t reveal if any error
Error of omission
A transaction has been completely omitted from the accounting records.
Complete reversal
(‘Reversal of entries’)
The debit and credit entries have been made the wrong way around.
Error of commission
A transaction has been entered in the wrong account but the right type of account (e.g. the wrong expense or the wrong account in the receivables ledger or payables ledger).
Error of principle
A transaction has been entered in the wrong type of account
(e.g. ‘Motor expenses’ instead of ‘Motor vehicles’)
Error of original entry
The correct accounts have been used, but the wrong amount was entered in both of them.
Compensating errors
Two errors cancel each other out
BENEFITS OF PRODUCING A BANK RECONCILIATION STATEMENT
- It enables missing entries in the cash book to be accounted for, which prevents errors in the financial statements (e.g. direct debits, standing orders, debit card payments, credit transfers, dishonoured cheques and bank charges).
- It enables errors in the cash book to be corrected, which also prevents errors in the financial statements (e.g. wrong amounts entered for cheque payments).
- It enables errors on the bank statement to be investigated and notified to the bank for correction.
- It enables you to identify dishonoured cheques and seek repayment from customers.
BENEFITS OF SALES & PURCHASE LEDGER CONTROL ACCOUNTS
They show if an arithmetical error has taken place if the balance on the control account does not equal the total of the individual accounts in the receivables ledger or payables ledger. If they don’t agree, then an error has definitely taken place. This helps to avoid incorrect balances in the receivables ledger and in the payables ledger.
They immediately provide total figures for trade receivables and trade payables, instead of having to add up the
individual accounts in the receivables ledger and payables ledger. This helps to produce the financial statements.
Explain, using examples, the differences between the role of the accountant and the role of the bookkeeper in the preparation of the financial statements.
The main differences are:
Bookkeepers are usually responsible for recording the day to day transactions:
maintaining accounting records
• entering transactions in the day books and ledger accounts checking the accuracy of the bookkeeping.
Bookkeepers may assist in the preparation of the financial statements by preparing the trial balance.
However, accountants are usually responsible for the actual preparation of the financial statements including making sure that:
accounting concepts are applied to the preparation
the financial statements show a true and fair view of the business.
In some businesses the bookkeeper may prepare the financial statements and the accountant may be involved in the bookkeeping.
Describe two main differences between management accounting and financial accounting.
Management accounting
Focuses on planning, control and decision making
Examples such as:
Planning: preparation of budgets
Control: standard costing
Decision making:
Short-term using marginal costing
Long-term using capital investment appraisal
Provides information to help management set prices
Prepared for internal use - to provide information for internal rather than external stakeholders.
Financial accounting
Focuses on preparation of financial statements based on historical information
Examples :
Income statement
Statement of financial position
Annual report
Prepared for external stakeholders - principally the shareholders but also for other stakeholders such as the government, banks, potential investors
