Bank_Recs_and_Errors_and_Suspense_acs_lecture_PowerPoints_2024-25

Page 1: Overview

• Topic: ACFI101 Topic 8 - Bank Reconciliations and Correction of Errors & Suspense Accounts

• Instructor: Lewis Gordon

• Attendance Code: 1

Page 2: Introduction

• Focus on Bank Reconciliation processes.

Page 3: Understanding Bank Reconciliation

• Differences between cashbook balance and bank statement balance are common due to:

  • Errors in the cashbook.

  • Omissions from the cashbook (e.g., bank fees, direct debits, dishonoured cheques).

  • Errors committed by the bank.

  • Uncleared deposits (money paid in but not recorded in the statement).

  • Unpresented cheques (payments issued but not recorded in the statement).

• Bank transaction report is another term used for the bank statement.

Page 4: Procedure for Bank Reconciliation

• Successful reconciliation indicates that all differences have been identified:

  • "Tick-off" items in both the cashbook and bank statement.

  • Update cashbook for errors or omissions.

  • Notify the bank regarding their errors.

  • Any remaining differences indicated on the reconciliation statement as timing differences, such as uncleared deposits.

Page 5: Cashbook Reconciliation Steps

• Cashbook (Cash at Bank T account):

  • Bank reconciliation questions include:

    • Balance shown on bank statement

    • Adjustments from errors

    • Updated balance carried forward (c/d).

  • Ensure clarity in the bank reconciliation format:

    • Unpresented cheques and uncleared deposits should be accounted for.

Page 6: Understanding Bank Statement Balances

• Important to recognize that:

  • Dr and Cr are REVERSED in bank statements.

  • Double entry rule (‘DEADCLIC’):

    • Money in the bank = debit in cashbook but credit in bank statement.

    • Overdrawn = credit in cashbook but debit in bank statement.

• Debit (Dr) increases: Expenses and Assets.

• Credit (Cr) increases: Income and Liabilities.

Page 7: Importance of Regular Bank Reconciliation

• Essential internal control measures:

  • Identifies cashbook errors and omissions.

  • Highlights errors by the bank.

  • Enhances confidence in the accuracy of overall accounts.

• Regular reconciliation is recommended (monthly, weekly, or daily).

Page 8: Introduction to Error Correction & Suspense Accounts

• Topic shift: Correction of errors and the use of suspense accounts.

• Attendance Code: 8.

Page 9: Methods for Correcting Errors

• Avoid simply crossing out/removing errors from ledger accounts.

• Use journal entries to correct errors regardless of their impact on balance.

• Recommended approach:

  • Determine what entries were made.

  • Identify what should have been entered.

  • Compare the two to identify necessary corrections.

Page 10: Types of Errors

• Differentiation between error types affecting the trial balance (TB):

  • Errors that do NOT affect TB:

    • Errors of omission.

    • Duplication errors.

    • Errors of commission and principle.

    • Errors of original entry.

    • Complete reversal of entries.

Page 11: Example of Errors Not Affecting TB

• Example scenario:

  • Interest received of £18 misallocated to ‘Rental income’ instead of ‘Interest income’:

    • Original Entry: Dr Cash £18 / Cr Rental Income £18.

    • Correct Entry: Dr Cash £18 / Cr Interest Income £18.

    • Correction: Dr Rental Income £18 / Cr Interest Income £18.

Page 12: Errors Affecting the Balancing of TB

• Specific errors lead to imbalance in the trial balance:

  • One-sided transaction entries.

  • Incorrect figures on debit/credit entries.

  • Errors in addition when balancing.

  • ‘Extraction errors’ during TB preparation.

• Use of suspense accounts to balance TB when discrepancies arise.

Page 13: Suspense Accounts Overview

• Two uses of suspense accounts:

  • Balancing TB when total debits do not equal total credits.

  • Holding entries when the correct posting is uncertain.

• A suspense account is temporary until full information is obtainable.

Page 14: Example of Suspense Accounts

• Scenario: Imbalanced Trial Balance as of 31 December 20X2:

  • Given values clearly indicated.

  • Total Dr vs. Total Cr shows imbalance leading to a £80 suspense account.

Page 15: Error Correction Involving a Suspense Account

• Scenario 1 example:

  • Incorrect debit entry for electricity leads to:

    • Incorrect impact on the cash flow.

  • Correction involves adjusting the suspense account.

Page 16: Further Error Correction Involving Suspense Accounts

• Scenario 2 example:

  • Receipt of £500 with unknown classification:

    • Entry into suspense account until clarification is achieved.

    • Subsequent correction once information is accurately identified.

Page 17: Profit Effect from Error Corrections

• Some corrections affect reported profit:

  • Entries involving assets, liabilities, or suspense do NOT affect profit.

  • Corrections affecting income/expenses directly alter profit.

Page 18: Essential Study Tasks

• Suggested exercises for mastering topic:

  • Complete specific questions from practice documents.

  • Attempt the Topic 8 quiz on Canvas.

  • Review lecture recordings or seek help in discussions if needed.

Page 19: Recommended Additional Study

• Reading assignments from required texts with specific sections identified:

  • Recommended review questions and self-test questions from ICAEW Workbook.

  • Further practice from Q&A provided in lecture documents.