Verification of Accounting Records
What you must understand
The trial balance lists ledger balances and checks arithmetic accuracy, but it does not prove the records are free from error. Learn the errors that a trial balance will not reveal: error of omission, commission, principle, original entry, reversal of entries, and compensating errors. Understand the bank reconciliation statement, starting from the cash book or bank statement balance and adjusting for unpresented cheques, uncredited deposits, bank charges and standing orders. Know the purpose of a control account (sales ledger control and purchases ledger control) and how it is reconciled with the list of balances.
Traps in questions
- Assuming a balanced trial balance means no errors.
- Adding unpresented cheques in the wrong direction on a bank reconciliation.
- Forgetting bank charges appear on the statement before the cash book.
- Confusing error of principle (wrong class of account) with error of commission (right class, wrong person).
Worked example
Cash book shows a debit balance of $1,500. Unpresented cheques total $300; a deposit of $200 is not yet credited; bank charges of $40 are not in the cash book. Adjusted cash book balance = $1,500 − $40 = $1,460. Bank statement balance = $1,460 + $300 − $200 = $1,560. Rule of thumb: work from the cash book to the statement by adding unpresented cheques and deducting uncredited deposits.