CIE AS Level Accounting: Reconciliation and Correction of Errors

Bank Reconciliation

The closing balance of the bank statement may be different to the closing balance in the cash book due to a numberof reasons. These reasons include:

• cheques not banked

• bank charges not known until bank statement released

• cheques credited but not debited

Unpresented cheques: cheques drawn and presented in the cash book but not yet presented to the bank

Uncredited/Outstanding bankings: cash/cheques received and paid into the bank and recorded in the cash book but have not yet appeared on the bank statement

Direct debits: an authority granted by the business to a third-party for a fixed or variable payment to be made of the request of the third-party e.g water bill

Standing orders: a fixed payment made at regular intervals by the bank

The bank reconciliation statement is important for the following reasons:

• identifies errors in the cash book

  • however, there are errors that the trial balance will not identify, such as:

    • ommission — records are completely left out

    • compensating — errors on incorrect sides cancel each other out

    • commission — incorrect accounts of the same class

    • principle — incorrect accounts of different class

    • original entry — transferring amounts from source documents

    • reversal — accounts wrongly posted on their sides

• identifies errors in the bank statement

• enables missing entries to be accounted for

• identifies out-of-date cheques

• identifies dishonoured cheques

• acts as a fraud deterrent

Method

1. update the cash book with any items appearing on the bank statement but not appearing in the cash book

2. pepare a bank reconciliation statement as follows:

OR

Suspense

When errors are identified either in the trial balance or in various accounts, a suspense account will be opened.

Suspense accounts are used for the following reasons:

• as a place for unusual items to be put until a decision can be made about the correction

• as a temporary account to deal with errors that have caused a difference between debit and credit accounts

• for single entry errors — only half of the financial transaction has been posted

• for same side entry errors — both entries have been posted to the same sides rather than its respective debit and credit entry (duality concept)

• for unequal entry errors — entries have been made on the correct sides but the figures differ

• for arithmetical errors — one or more accounts being over or understated and therefore, the trial balance is not balancing

E.g.