Correction of Errors, Suspense Accounts and Bank Reconciliation Statements
This domain tests two related control skills: correcting errors so that the ledger agrees, and reconciling the cash book with the bank statement. Exam questions typically give a list of errors, ask for journal corrections and the suspense account, then ask you to prepare an adjusted cash book and a bank reconciliation statement.
Errors and the trial balance
Errors that do not affect trial balance agreement: omission (the whole transaction is left out), commission (right class of account, wrong person), principle (an asset treated as an expense), original entry (the same wrong figure on both sides), reversal of entries, and compensating errors.
Errors that do affect agreement: a one-sided posting, an entry on the wrong side only, an addition error, a transposition, or one side omitted. The difference is carried in a suspense account until the correction is made. After all corrections the suspense account should have a nil balance.
Correcting entries
Correct through the journal with a narration. Goods of 20,000 sold to Ayuk were posted to his account as 2,000: the correction is Dr Ayuk 18,000, Cr suspense 18,000, because a debit entry was understated by 18,000.
Bank reconciliation
Compare the cash book bank column with the bank statement. Items in the cash book not yet on the statement: unpresented cheques (deduct) and lodgements not yet credited (add). Items on the statement not in the cash book: bank charges, interest, standing orders, direct debits, credit transfers, dishonoured cheques and bank errors. Update the cash book first; then reconcile the statement to the adjusted cash book balance.
Worked example
Cash book balance 250,000 Dr. Unpresented cheques 120,000; lodgements not credited 40,000; bank charges 5,000; standing order 15,000; credit transfer from a customer 10,000. Adjusted cash book: 250,000 − 5,000 − 15,000 + 10,000 = 240,000. Statement: 240,000 + 120,000 − 40,000 = 320,000. Reasoning: the charges, standing order and credit transfer are already on the statement, so they must be entered in the cash book first, leaving only timing differences to reconcile.
Traps
- Adding unpresented cheques to the cash book instead of deducting them from the statement.
- Deducting bank charges twice, once in the cash book and again in the reconciliation.
- Treating a dishonoured cheque as a bank error; it is reversed in the cash book.
- Leaving a balance on the suspense account after corrections.
- Blaming a trial balance difference on an error of principle.