Control systems: bank reconciliation, petty cash imprest, and the correction of errors with suspense accounts
Domain 4 tests three controls: bank reconciliation, the petty cash imprest and correction of errors. A bank reconciliation explains the difference between the cash book bank balance and the bank statement. Update the cash book for items the bank has recorded but the business has not: bank charges, interest, standing orders, direct debits and dishonoured cheques. Then reconcile using items not yet on the statement: unpresented cheques and deposits not credited.
Worked example
Cash book shows a debit balance of N$2,400. Bank charges of N$80 are not yet recorded. Adjusted cash book = 2,400 − 80 = N$2,320. Unpresented cheques are N$650; deposits not credited are N$900. Bank statement balance = 2,320 + 650 − 900 = N$2,070 credit. Reasoning: unpresented cheques mean the business has already reduced its cash book but the bank has not, so the bank statement is higher by N$650. Deposits not credited mean the business has already increased its cash book but the bank has not, so the bank statement is lower by N$900.
Petty cash imprest
A fixed float is established. Payments are supported by vouchers and analysed. Reimbursement equals cash spent, restoring the float. The petty cash book is not used to record credit transactions.
Suspense and errors
If the trial balance does not balance, open a suspense account for the difference. Correct errors of omission, commission, principle, original entry, reversal and compensating entries by journal. Errors that do not affect trial balance equality still need correction but not through suspense.
Traps
Adding unpresented cheques to the cash book; treating a bank statement credit as a debit in the cash book; reimbursing petty cash for the float rather than expenses; leaving a suspense balance in the final accounts.