Chapter 6 - Errors and corrections to accounting records and financial statements

Question 1

What are some common documents we can reconcile to? (3)

Answer 1

EXTERNAL
Supplier statements
Bank statements

INTERNAL
Customer statements

Question 2

How do we reconcile Trade Payables? (1)
What are the source documents we can use? (2)

Answer 2

We use external supplier statements and reconcile our individual supplier accounts which can be found in our payables/memorandum ledger which all total up to give us our nominal ledger of trade payables

All payables/memorandum ledger = nominal ledger of trade payables

Source Docs
1. Purchase Invoice (Purchase)
2. Bank Transaction report (Payments)

Question 3

How do we reconcile Trade Receivables? (1)
What are the source documents we can use? (2)

Answer 3

This is less useful

We can use the internal customer statements (which we create) and reconcile our individual customer accounts which can be found in our receivables/memorandum ledger which all total up to give us our nominal ledger of trade receivables. As these two match we usually get flagged any issues from customers once we issue the statement, the reply back is what we would investigate.

All receivable/memorandum ledger = nominal ledger of trade receivables

Source Docs
1. Sales Invoice (Sales)
2. Bank Transaction report (Receipts)

Question 4

How would we journal the adjustments for a SALES RETURN in our TR and TP personal accounts and nominal ledger? What would the original journal have been?

Answer 4

SALES RETURN
Dr Sales Returns (or Sales)
Cr Trade receivables

SALES (INITIAL JOURNAL)
Dr Trade receivables
Cr Sales

Question 5

How would we journal the adjustments for a PURCHASE RETURN in our TR and TP personal accounts and nominal ledger? What would the original journal have been?

Answer 5

PURCHASE RETURN
Dr Trade payables
Cr Purchase returns (or Purchases)

PURCHASE (INITIAL JOURNAL)
Cr Trade Payables
Dr Purchases

Question 6

How would we journal the adjustments for a CONTRA in our TR and TP personal accounts and nominal ledger? What would the original journal have been?

Where do contras usually occur?

Answer 6

ALWAYS IS
Dr Trade payables
Cr Trade receivables

If we have a supplier who is also a customer and there is a balance on each account we can contra (off set) them and then pay out/invoice the remaining balance rather than exchanging a payable and receivable balance in full. The transaction will be journaled in the same way on out system as the customer/supplier.

CAR Acronym
Contras
Always
Reduce

Question 7

How would we journal the adjustments for a IRRECOVERABLE DEBT in our TR and TP personal accounts and nominal ledger? What would the original journal have been?

Answer 7

IRRECOVERABLE DEBT
Dr Irrecoverable debt expense
Cr Trade receivables

we would not DR Sales (reverse) the original sale as this went ahead. we would remove the balance of TR and then journal the balance onto our Dr Irrecoverable debt expense

IRRECOVERABLE DEBT (INITIAL JOURNAL) - When a customer is purchasing an item on credit
Dr Trade receivables
Cr Sales

Question 8

How would we journal the adjustments for a REFUNDS TO CUSTOMERS in our TR and TP personal accounts and nominal ledger? What would the original journal have been?

Answer 8

REFUNDS TO CUSTOMERS
Dr Trade receivables
Cr Cash

Always deal with the cash first

Question 9

How would we journal the adjustments for a REFUNDS TO SUPPLIERS in our TR and TP personal accounts and nominal ledger? What would the original journal have been?

Answer 9

REFUNDS TO SUPPLIERS
Dr Cash
Cr Trade payables

Always deal with the cash first

Question 10

How would we journal the adjustments for a DISHONOURED CHEQUE in our TR and TP personal accounts and nominal ledger? What would the original journal have been?

Answer 10

DISHONOURED CHEQUE
Dr Trade receivables
Cr Cash

Always deal with the cash first

Question 11

How does the whole refund process work?
a) Credit sale made to customer
b) Customers pays the goods
c) Customer returns the goods
d) We refund the customer

Answer 11

Refunds to customers and refunds from suppliers can be notoriously tricky in the exam. It is important to remember the entry to cash, that is, a refund to a customer involves a cash payment (Cr Cash) and a refund from a supplier is the receipt of cash (Dr Cash).

Remember we would only be refunding a customer if we owed them money, so the trade receivable (usually a debit balance) has become a credit. Hence the effect of the refund is to cancel the credit balance that you would not expect to see within trade receivables. Consider the following:

As credit sale is made to a customer for £100
Dr Trade receivables
Cr Sales

The customer then pays for the goods
Dr Cash
Cr Trade receivables

The customer then returns the goods (having already paid for them)
Dr Sales returns
Cr Trade receivables

Leaving a net “credit” in trade receivables of £100.

We then refund the £100 to the customer
Dr Trade receivables (to cancel to credit above)
Cr Cash

If you feel confused by the double entry for a refund, remember to “follow the cash”, ie a refund from a supplier will be cash in to the business (Dr Cash) but a refund to a customer will be cash out of the business (Cr Cash).

Question 12

Example layout out for a Trade Receivable T account

Answer 12

See sheet

Question 13

Example layout out for a Trade Payable T account

Answer 13

See sheet

Question 14

Computerised accounting systems will use brand transaction reports to update the cash transactions in the nominal ledger accounts. When transactions can’t be matched where are they posted?

Answer 14

Any transactions which cannot be matched are posted to a temporary account known as the suspense account and highlighted in an exception report.

Question 15

What is a suspense account?

Answer 15

A suspense account is a temporary account used when the computerised accounting system or the bookkeeper is unsure how to record one side of a transaction.

Once the issue has been resolved and the correct account identified, the suspense account should be cleared using a correcting journal.

A suspense account may contain several unmatched transactions, all of which should be investigated and correcting entries made.

Suspense accounts should never appear in the final accounts.

Occurs when there is a one sided double entry e.g. DR and no CR and CR and no DR

Question 16

What you should beware about when reviewing a bank statement?

Answer 16

The bank statement is a mirror image of the cash at bank account.

Moneyreceivedis“credited”bythebank(debitedbythebusiness)asthebanknow
owes this money back to the business.
Moneypaidis“debited”bythebank(andcreditedbythebusiness).Thusabank overdraft is recorded by the bank as a “debit balance” representing the receivable to the bank from the business.

Question 17

When completing a bank reconciliation between the bank transaction report and the cash at bank T account and we notice an ‘Unrecorded bank interest or charges’ which account do we need to correct?

Answer 17

Correction required to cash at bank T account

CR CASH

Question 18

When completing a bank reconciliation between the bank transaction report and the cash at bank T account and we notice an ‘error’ which account do we need to correct?

Answer 18

Could be either the cash at bank T account or the bank statement

Question 19

When completing a bank reconciliation between the bank transaction report and the cash at bank T account and we notice an ‘Automated payments and receipts’ which account do we need to correct?

e.g. direct debit

Answer 19

Correction required to cash at bank T account

CR CASH IF PAYMENT
DR CASH IF RECEIPT

Question 20

When completing a bank reconciliation between the bank transaction report and the cash at bank T account and we notice an ‘Dishonoured cheques’ which account do we need to correct?

Answer 20

Correction required to cash at bank T account

As the bank will inform us that the check is dishonoured

CR CASH

Question 21

When completing a bank reconciliation between the bank transaction report and the cash at bank T account and we notice an ‘Timing differences (unpresented cheques and uncleared lodgements or electronic transfers that have not yet cleared)’ which account do we need to correct?

Answer 21

Correction required to the bank statement

Question 22

When completing a bank rec on a bank statement what is a ‘unpresented cheques’?

Answer 22

This is a payment so we LESS (MINUS) this on

Question 23

When completing a bank rec on a bank statement what is a ‘outstanding lodgement’?

Answer 23

This is a receipt so we ADD this on

Question 24

Transposition error - define

Answer 24

when two digits are accidentally recorded the wrong way around

Question 25

Omission error - define

Answer 25

failing to record a transaction at all

Question 26

Errors of principle - define

Answer 26

an accounting entry that breaks the “rules” of an accounting principle or concept, eg incorrectly classifying capital vs revenue expenditure

Question 27

Errors of commission - define

Answer 27

an accounting entry into the wrong account but of the correct nature, eg recording a telephone expense as an electricity expense

Question 28

Compensating errors - define

Answer 28

errors which are, coincidentally, equal and opposite to each other

Question 29

When we have our initial TB and we have noticed errors what do we need to create?

Answer 29

We need to adjust our initial TB and create an adjustment TB and finally our final TB

We would create 7 columns
1 for ledger, 2 for initial TB (DR and CR), 2 for adjustment TB (DR and CR), 2 for final TB (DR and CR)