CHAPTER 6: ERRORS AND CORRECTIONS TO

ACCOUNTING RECORDS AND FINANCIAL STATEMENTS

truongthihanhdung@uel.edu.vn
Topic list (3 main topics)

1. Reconcile to external documents

2. Bank reconciliations (bang dieu giai ngan hang)
3.Types of error in accounting
4. Correcting errors
5. Adjusting the initial trial balance for errors
RECONCILE TO EXTERNAL DOCUMENTS
1. TYPES OF RECONCILIATION WITH EXTERNAL DOCUMENTS

Types of reconciliation Documents used for reconciling Aim of reconciling

Bank reconciliation (chap 6) Bank statement vs Cash ledger 2 figures have to be the same

Inventory cut-off procedure (IFRS/ Physical count vs Inventory ledger Try to make it right as possible, 2
International accounting) figures may have slightly different
by leakage
Trade receivables reconciliation Customer statement vs Receivable 2 figures have to be the same
(chap 6) ledger
Trade payables reconciliation (chap Supplier statement vs Payable 2 figures have to be the same
6) ledger
In manual accounting sys, we have to reconcile Personal accounts vs Nominal ledgers of TR and TP.
In computerized sys, figures are updated automatically by software from personal accountss to nominal
ledger  no need for this type of reconciliation.
EX: Supplier statement reconciliation
Violet has received a supplier statement from Jade for the month of March
20x8 which shows the following transactions:
EX: Supplier statement reconciliation
Jade’s personal account in the payables ledger of Violet as follows:
Supplier statement (trade payables) reconciliation

 Customer statement (trade receivables) reconciliation is in the same way.

Account: Jade Date 31.3.20x8

Balance per supplier’s statement. £424.12

Less:
 Early settlement discount not on the statement (6.45)
 Returns in dispute not on the statement (64.40)
Balance per payale ledger 353.27
Self-test & some testbank questions
 BANK RECONCILIATION
A document/report to reconcile the differences between the business’s cash account recorded by
accountants (book amount) and business’s cash account recorded by the bank (bank amount)
 Bank reconciliations

Cash book balance Bank statement balance

Differences

Timing differences Errors by the business Errors by the bank

Eg: cheques issued and entered in the cash book but not Omission;
yet presented at the bank Misstatements
Explanation on using bank services
Debits and credits rules are contradictory between banks and
enterprises.

Enterprises Bank

Dr Investments in bank/Cash in bank Dr Cash

Cr Cash in hand/Cash Cr Liabilities
Explanation on bank services for cheques

Google images
Writing Checks (Chapter 3 revision)
Written order signed by depositor directing bank to pay a specified sum of
money to a designated recipient.

Maker

Payee

Payer

13 LO 6
Cheque Terms ASK GOOGLE FOR MORE!

To draw a cheque: to write a cheque for taking money out of a particular bank account
Outstanding check (unpresented cheque): is a check that a company has issued and
recorded in its general ledger accounts, but the check has not yet cleared the bank account
on which it is drawn.
Clearing: The process of transmitting, reconciling and confirming cheque or credit payment
messages prior to settlement, including the netting of payment messages and the
establishment of final positions for settlement.
Cheques clear the bank
Clearing house (Cheque and Credit Clearing Company): The organisation that provides the
central payment system services for the exchange and settlement of cheques and credits.
A bounced cheque (Non-sufficient fund cheque-NSF cheque/dishonoured cheque): is
one “returned unpaid” from the paying bank, normally because the payer does not have
sufficient funds in their account.
Bank reconciliation
Performing a bank reconciliation We also have
Step1: Correct the cash book direct credits
CASH ACCOUNT
Opening balance X Dishonoured cheque (bounced checks, NSF X
checks, Outstanding checks)

Undercast error X Bank charges X

Note receivables (direct credits) X Standing orders X
Deposit in transit X Direct debits X
(unclear/outstanding lodgments)
_ Overrcast error

X
Ending balance X
The corrected cash book balance is the cash balance that is shown in the SFP.
Standing orders: “lệnh chi thường xuyên”: fixed amounts decided by payers like rent, insurance
Direct debits: “Ghi nợ trực tiếp”: variable amounts decided by the receivers like: uitilities, telephone bill…
Bank reconciliation
Step 2: Reconcile to the bank statement
Proforma bank reconciliation

$
Balance per bank statement X
Less: outstanding cheques (unpresented cheques) X
Plus: outstanding/unclear lodgements (deposits in transit) X
Plus/less: bank errors X
Balance per corrected cash book X
Tackling the exam

Exam focus point:

In the exam, you may be given a list of adjustments and asked to select
which ones will be adjusted in the cash book and/or the bank reconciliation.
Alternatively you may be asked to calculate the bank balance to be reported
in the SFP (the adjusted cash book figure).
Lecture example 1
The cash account of Graham showed a debit balance of $204 on 31 March 20X8. A
comparison with the bank statements revealed the following:
$
(1) Cheques drawn but not presented 3,168
(2) Amounts paid into the bank but not credited 723
(3) Entries in the bank statements not recorded
in the cash account
(i) Standing order payments 35
(ii) Interest on bank deposit account 18
(iii) Bank charges 14
(4) Balance on the bank statement at 31 March 20X8 was $2,618
Required
Make any necessary adjustments to the cash book balance and complete the bank
reconciliation statement as at 31 March 20X8.
Guidance for quicker bank reconciliation computation

19
Lecture example 2
Whilst preparing a bank reconciliation statement at 31 December. The following items caused a differenc
e between the bank statement balance and the cash book balance.
(1) Bank interest charged to the account in error
(2) Direct debit for $500 for insurance
(3) Bank charges of $70
(4) Cheque paid to a supplier on 29 December
(5) Receipt from a trade receivable by electronic transfer
Required:
Which of these items will result in an adjustment to the balance per the bank statement?
A 2, 3, and 5
B 1 and 4
C 1, 4, and 5
D 1, 3 and 5
Example 4
Prepare the bank reconciliation:
Quick calculation
Solution
Example 5
Quick computation
Solution
Example 6
Quick calculation
Example 7
Quick calculation

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Self-test & some testbank questions
 Part 3 – chapter 6
ERRORS AND CORRECTIONS

32
Overview
Types of error

Correction of errors

Suspense account Adjustments to profit

Tackling the exam
Exam focus point:

The examiner has highlighted suspense accounts and errors as areas

that students find particularly difficult. You need to use a methodical
approach as highlighted in this chapter.
Types of error in accounting 1

The main types of error are as follows

Errors of transposition: when two digits in an amount are accidentally
recorded the wrong way round,
eg writing $6,843 as $6,483 (the difference is divisible by 9)
Errors of omission: when a transaction is completely omitted, so neither
a debit nor a credit is made, eg receive supplier's invoice for $500 and do
not record it in the books at all
Types of error in accounting 2
The main types of error are as follows
Errors of principle: breaks the rules of an accounting principle or convention, eg
treating capital expenditure as revenue expenditure
Errors of commission (wrong accounts): when an error is made in the ledger
accounts, eg putting telephone expenses in the electricity expense account
Compensating errors (offsetting errors): when two errors are equal and opposite to
each other, eg both sales and purchases transaction coincidentally undercast by $500;
one expense overstated the other is understated…
Correcting errors

Errors

Imbalance TB Balance TB

Use Suspense Use journal

account entries

37
The correction of errors 1
Correction of errors
Errors can be corrected using the journal entries:

Example
Accountant omits to record invoice from supplier for $2,000. This
would be corrected by the following journal entry.

Dr Purchases $2,000
Cr Payables $2,000
A transaction previously omitted.
The correction of errors 2
Another example:
Accountant posts car insurance of $800 to motor vehicles account. Correct as
follows.
DEBIT Motor expenses $800
CREDIT Motor vehicles $800

Understand:
It was: Dr Motor vehicles 800
Cr Cash 800
It should be: Dr Motor expenses 800
Cr Cash 800
Correcting entries: Dr Motor expenses 800
Cr Motor vehicles 800
The correction of errors 3
A suspense account is a temporary account that is used in the followings:
1/ The bookkeeper does not know which account for debiting or crediting?
 temporarily posted to the suspense account until finding the correct account
2/ A difference occurs in the the total trial balance (caused by the incomplete
recording of the double entry in respect of one or more transactions).
 The difference is recorded in the suspense account and included in the trial
balance, until we find the correct entries.
Suspense account illustration
Dr Cr
Cash 500
TR 500
TP 200
Capital 600
Revenues 200
Expenses 200
Suspenses a/c 200
1,200 1,200

Your duties: - Finding the errors

- Correcting errors
- Suspense accounts back to 0
Example 1
Solution
Example 2
Solution
Example 3

CREDIT
Example 3 CREDIT
Solution
FS presentation
FS presentation
Homework

Self test textbook chap 6

Testbank chap 6

51