week 7 Flashcards
how do you prepare financial statements
if required, balance off and close ledger accounts at the period end
list all balances in the trial balance and check debit and credits are equal
make adjustments using journals to the trial balance
how do you calculate COGS
opening inventory + purchases - closing inventory
how do you calculate expenses
CB accruals + payment - OB accruals
OB prepayments + payments - CB prepayments
why are internal controls required
prevent managers/employees from misappropriating cash and other assets from the organisation
identify errors in recording transactions and amounts
provide evidence to external stakeholders that the company is well governed
what are the external controls
use of external auditors, scrutinise accounts and guarantee they are correct
auditors do not guarantee that the accounts are correct or that no fraud has occurred
why do companies prepare bank reconciliations
the purpose of a bank reconciliation is to check whether the cash book balance is correct by comparing it to the bank statement
a bank reconciliation is not part of the double entry system but must be prepared as part of preparing the financial statements
can help deter and detect fraud
why are there differences between cash book and bank statements
corrections and adjustments to the cash book
payments made into or from the bank directly
dishonoured cheques - receipts recorded in the cash book but return unpaid by customers bank
bank interest and charges not yet entered into the cash book
payments out from bank not yet in cash book are sometimes called unrecorded cheques
payments into bank not yet in cash book are sometimes called unrecorded lodgements
what are timing differences
reconciling items between cash book and bank statements (cash book is correct, bank statement is not)
unpresented cheques - cheques which have been paid by the business and entered in the cash book but have not yet been paid in/presented to the bank
outstanding receipts - cash/cheque receipts shown in the cash book but not yet recorded by the bank
what is the bank reconciliation procedure
check all the items in the cash book against those on the bank statement to identify the reasons for the difference
check all the computations in the cash book
enter the omissions in the cash book and correct any errors
prepare a bank reconciliation statement
what are the errors which don’t cause the trial balance to disagree
errors of principle
errors of commission
errors of omission
errors of original/prime entry
compensating errors
double posting errors
what are errors of principle
entries in the wrong type of account
what are errors of commission
entries are in the wrong account
what are errors of omission
the transaction hasn’t been recorded anywhere
what are errors of prime entry
the incorrect amount has been entered in the day book
what are compensating errors
two errors are posted which are different but are the same amounts and offset each other
