Errors, reconciliation and financial controls
What the domain tests
You must extract a trial balance, classify errors by whether they affect its agreement, journalise corrections and clear a suspense account. Questions often supply a difference and a list of discovered errors.
Core rules
A trial balance lists debit and credit balances at a date. It proves only that total debits equal total credits, not that the ledger is correct.
Errors that do not affect trial balance agreement:
- error of omission, where a transaction is completely left out;
- error of commission, where the right class of account but wrong account is used;
- error of principle, such as capital expenditure posted to repairs;
- error of original entry, where a wrong amount is posted consistently to both accounts;
- error of reversal, where the correct accounts are used but the sides are reversed;
- compensating errors, which cancel out.
Errors that do affect agreement: one-sided postings, partial omission, different amounts on the two sides, and addition errors in one account.
A suspense account is opened for the difference. Each correction is journalised and the suspense account is cleared when every error is found.
Worked example
The trial balance credit column exceeds the debit column by 36,000 FCFA, so a suspense account with a debit balance of 36,000 is opened. Three errors are found:
- The payables entry for a 30,000 credit purchase was correct, but only 3,000 was debited to Purchases. Purchases alone is understated by 27,000: Dr Purchases 27,000; Cr Suspense 27,000.
- The customer account was correctly credited for a sales return of 18,000, but the debit to Sales returns was omitted: Dr Sales returns 18,000; Cr Suspense 18,000.
- Rent paid of 45,000 was posted to the rent account as 54,000. Rent is overstated by 9,000: Dr Suspense 9,000; Cr Rent 9,000. Suspense account: opening debit 36,000, credits 27,000 and 18,000, debit 9,000. The account clears exactly.
Traps
An error of principle never affects trial balance agreement, so do not look for it as the cause of a difference. Do not correct errors by altering the original source document. A suspense account is temporary, not a real asset or liability. If a difference remains, investigate and document unresolved errors rather than inventing an asset or liability to force agreement. Any real reporting treatment depends on the facts, materiality and applicable requirements.
What the domain tests
This domain tests reconciliation of the cash book bank balance with the bank statement, and the preparation of receivables and payables control accounts. You must distinguish timing differences from errors and know which items enter the adjusted cash book.
Bank reconciliation rules
Items appearing in the bank statement but not the cash book are entered in the adjusted cash book: bank charges, interest, standing orders, direct debits, dishonoured cheques, and dividends or transfers credited by the bank. Items in the cash book but not yet on the statement are timing differences: unpresented cheques and uncredited deposits. Errors by the trader are corrected in the cash book; errors by the bank are notified to the bank.
The reconciliation is: balance per adjusted cash book + unpresented cheques − uncredited deposits = balance per bank statement.
Control accounts
- Receivables (sales ledger) control: opening debit balance + credit sales − receipts − discount allowed − sales returns − bad debts + interest charged = closing debit balance.
- Payables (purchase ledger) control: opening credit balance + credit purchases − payments − discount received − purchases returns = closing credit balance. Contra entries reduce both control accounts. A credit balance in the receivables ledger is a payable and is shown separately.
Worked example
Cash book bank column shows a debit balance of 500,000 FCFA. The statement shows bank charges of 20,000 and a standing order of 10,000, neither in the cash book. Unpresented cheques total 120,000; deposits not yet credited total 80,000.
- Adjusted cash book: 500,000 − 20,000 − 10,000 = 470,000.
- Bank statement: 470,000 + 120,000 − 80,000 = 510,000. The 10,000 difference between the original cash book and the statement is explained entirely by the two charges and the two timing items.
Traps
Do not put unpresented cheques in the adjusted cash book; they are timing differences. A dishonoured cheque reduces the cash book and is also reversed in the customer's account. Use a consistent signed-balance or clearly labelled overdraft convention throughout the reconciliation. Financial-statement presentation is a separate question. In control accounts, opening balances must be on the correct side, and contra entries affect both controls.