Notes · AccountingUK · A-Levels

Verification of accounting records

This chapter covers the checks that give confidence in the ledger: the trial balance and the errors it does and does not reveal, the suspense account and the correction of errors through the journal, the bank reconciliation statement, and the sales and purchases ledger control accounts. Together these are the internal controls that keep the records reliable - and the source of many marks for accuracy and interpretation.

4 sections~18 min reading time3 competenciesLevel Standard 2 · Advanced 2

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Exam profile

AO1 · Understand the purpose and limitations of the trial balance and the methods of verificationAO2 · Correct errors, prepare a suspense account, a bank reconciliation statement and control accountsAO3 · Analyse the effect of errors on profit and the statement of financial position and evaluate the reliability of the records

Operators:preparecorrectcalculateexplainreconcileanalyseevaluate

basic level

AS-Level expects the trial balance, simple error correction, bank reconciliation and control accounts.

higher level

The full A-Level expects confident use of the suspense account, the effect of errors on profit and the statement of financial position, and evaluation of the reliability of the records.

Depth

Text

Contents · 4 sections

Verification of accounting records

The trial balance and the errors it does not reveal#

StandardAQA 7127 3.4

Errors and the trial balance

Fig. 1Six errors of equal entry leave the trial balance in balance and go undetected; errors that make debits and credits unequal are revealed.

The trial balance lists every ledger balance in a debit column and a credit column and checks that the two totals agree. Because double entry records equal debits and credits for every transaction, agreement of the totals gives assurance that the books are arithmetically in balance and provides the starting point for the financial statements. But agreement is not proof that the books are correct, and understanding exactly why is one of the most important - and most examined - ideas in this part of the course. A whole class of errors leaves the trial balance in balance and therefore goes undetected by it.

There are six errors that do not affect the agreement of the trial balance because each still involves equal debits and credits. An error of omission occurs when a transaction is left out entirely, so neither side is recorded. An error of commission occurs when an entry is posted to the wrong account of the right type - a payment from J Smith credited to T Smith's account. An error of principle occurs when an entry is posted to the wrong type of account - the purchase of a non-current asset debited to a repairs (expense) account. An error of original entry occurs when the wrong amount is recorded in both the debit and the credit. A complete reversal of entries occurs when the account that should be debited is credited and vice versa. A compensating error occurs when two separate errors happen to cancel out. In every case debits still equal credits, so the trial balance still balances.

By contrast, errors that make the debits and credits unequal will be revealed by the trial balance - it will fail to agree. These include recording only one side of a transaction (a single entry), posting different amounts to the two sides, entering the same figure on the same side twice, casting (adding up) an account or a column incorrectly, or transferring a wrong balance to the trial balance. When the trial balance does not agree, the difference is placed temporarily in a suspense account while the errors are found and corrected. The trial balance is therefore a useful but partial check: it catches errors of unequal entry but is blind to the six errors of equal entry.

This limitation is central to evaluation. The trial balance is cheap, quick and a good first check, but it cannot be relied on to prove the accounts are right, because errors of omission, commission, principle, original entry, complete reversal and compensating error all slip through. That is precisely why further verification is needed - bank reconciliations to check the bank figure against an independent record, and control accounts to check the receivables and payables ledgers against independent totals - and why an audit examines evidence rather than merely re-adding the trial balance. The moral is that a balanced trial balance is necessary but not sufficient for correct accounts.

Worked example

Classifying an error and its effect

A machine bought for £5,000 was debited to the repairs account. Identify the type of error, whether the trial balance is affected, and the effect on profit and the statement of financial position.

Classify the error
A non-current asset has been posted to an expense account - the wrong type of account - so this is an error of principle.
Trial balance effect
Both a debit (repairs) and a credit (bank) of £5,000 were made, so debits still equal credits: the trial balance still agrees and will not reveal the error.
Effect on the statements
Repairs (an expense) is overstated by £5,000, so profit is understated by £5,000; and non-current assets are understated by £5,000 (before depreciation) in the statement of financial position. Correcting it: Dr Machinery £5,000, Cr Repairs £5,000.

Result: This is an error of principle; the trial balance still agrees, but profit is understated by £5,000 and non-current assets are understated - corrected by debiting machinery and crediting repairs.

Typical mistakes

Claiming a balanced trial balance proves the accounts are error-free.
Confusing an error of commission (wrong account, right type) with an error of principle (wrong type of account).

Active revision

The purchase of a delivery van has been debited to the motor expenses account. Name the type of error, state whether the trial balance still agrees, and explain the effect on profit.

Active recall

Recall the key points — then reveal.

Sources: AQA A-level Accounting 7127 specification (AQA)

The suspense account and the correction of errors#

AdvancedAQA 7127 3.4

Clearing a suspense account

Fig. 2The suspense held a £700 debit difference; correcting a £400 purchases undercast and a £300 missing bank debit clears it to zero.

When a trial balance fails to agree, the bookkeeper does not wait to find the errors before proceeding - the difference is entered in a suspense account so that the trial balance balances temporarily. If the debit column is short, the suspense account carries a debit balance equal to the difference; if the credit column is short, a credit balance. The suspense account is a holding account with no meaning of its own; it exists only until the errors are found. If financial statements have to be prepared before the errors are located, the suspense balance appears in the statement of financial position, but it must be cleared as soon as possible.

Errors are corrected through the journal, which records the debit and credit needed to put each error right, with a narrative explaining it. Only errors that unbalanced the trial balance are corrected against the suspense account; the six errors that did not affect the trial balance are corrected by a journal entry between the two ledger accounts involved, with no suspense entry, because there was never a difference to hold. Deciding whether a correction touches the suspense account is therefore the key judgement: if the original error made debits and credits unequal, the correction restores the balance through suspense; if it did not, the suspense account is not involved.

The mechanics reward careful thought about what the original error did. If an account was undercast (added up to too little) on its debit side, the debit total was short, so the correction debits that account and credits suspense. If a receipt was credited to the customer but never debited to the bank, the debit side was short by that amount, so the correction debits the bank and credits suspense. Each correction that adds a missing debit is matched by a credit to suspense (and vice versa), and when all the errors that caused the difference have been corrected, the suspense account clears to zero - a satisfying confirmation that every cause of the difference has been found.

The correction of errors also feeds a statement of corrected profit, because several errors affect the income statement. Correcting an understated expense reduces profit; correcting an overstated expense or an understated income increases it. A typical question asks you to correct the errors, clear the suspense account and then restate the profit, and the two must be consistent. Working carefully here is important because an error in the correction propagates: a wrong journal entry not only fails to fix the original mistake but can unbalance the books further. Precision, and a clear narrative for each journal, are what earn the marks.

Worked example

Correcting errors and clearing the suspense account

The trial balance did not agree and a suspense account was opened with a £700 debit balance. Errors: (i) the purchases account was undercast by £400; (ii) a £300 cheque received from a customer was credited to the customer but omitted from the bank. Prepare the journals and clear the suspense account, and state the effect on profit.

Correct the undercast purchases
Purchases (a debit-balance account) is £400 too low, which helped make the debit total short. Journal: Dr Purchases £400, Cr Suspense £400.
Correct the missing bank entry
The debit to bank of £300 was never made, so the debit total was £300 short. Journal: Dr Bank £300, Cr Suspense £300.
Clear the suspense and restate profit
Suspense: opening Dr £700; credits £400 + £300 = £700; balance nil - cleared. Only the purchases correction affects profit: increasing purchases by £400 reduces profit by £400 (the bank correction does not affect profit).

Result: The two journals (Dr Purchases £400 / Cr Suspense £400; Dr Bank £300 / Cr Suspense £300) clear the £700 suspense balance to zero, and profit falls by £400 because purchases were understated.

Typical mistakes

Passing a correction through the suspense account when the original error did not affect the trial balance (for example an error of principle).
Getting the direction wrong - correcting an undercast expense must increase that expense (a debit), reducing profit.

Active revision

A trial balance has a £700 debit difference held in a suspense account. Two errors are found: purchases were undercast by £400, and a £300 receipt from a customer was credited to the customer but not entered in the bank. Prepare the journal entries and the suspense account.

Active recall

Recall the key points — then reveal.

Sources: AQA A-level Accounting 7127 specification (AQA)

Bank reconciliation statements#

StandardAQA 7127 3.4

Bank reconciliation statement

Fig. 3Starting from the bank statement balance of £3,100, deduct unpresented cheques (£900) and add outstanding lodgements (£400) to reach the updated cash-book balance of £2,600.

A bank reconciliation checks the business's own record of its bank balance (the cash book) against the bank's record (the bank statement), and explains any difference between the two. The two rarely agree at a given date for legitimate timing and information reasons: cheques the business has written and recorded but which have not yet been presented and cleared by the bank (unpresented cheques); amounts the business has received and recorded but which the bank has not yet credited (outstanding lodgements or deposits in transit); and items the bank has recorded but the business has not yet entered (bank charges, interest, direct debits, standing orders, dishonoured cheques). Reconciling the two provides an independent check on the bank figure - one of the most important assets - and catches errors and, sometimes, fraud.

The process has two stages. First, the cash book is brought up to date by entering the items the bank recorded but the business had not - bank charges and interest, direct debits and standing orders, credit transfers received, and any dishonoured cheques. These are genuine transactions the business simply had not yet learned of, so they belong in the cash book and change its balance to the updated (corrected) cash-book balance. Second, a bank reconciliation statement is prepared that starts from the bank statement balance and adjusts for the pure timing differences - unpresented cheques and outstanding lodgements - to arrive at the updated cash-book balance, demonstrating that the two records agree once timing is accounted for.

Getting the direction of each adjustment right is where care is needed. Starting from the bank statement balance: unpresented cheques have already reduced the cash book but not yet the bank, so they are deducted from the statement balance; outstanding lodgements have already increased the cash book but not yet the bank, so they are added to the statement balance. (Starting instead from the cash book, the adjustments reverse.) The reconciliation succeeds when the adjusted bank statement balance equals the updated cash-book balance. If it does not, there is an error to find - a transposed figure, an item posted twice, or a genuine discrepancy that needs investigating.

The value of a bank reconciliation lies in the independent verification it provides: because the bank statement is prepared by a third party, agreeing the cash book to it confirms that recorded receipts and payments actually reached the bank. It routinely uncovers errors in the cash book, unrecorded bank charges, and standing orders the business forgot - and a persistent unexplained difference can be the first sign of theft. Its limitation is that it only verifies the bank figure and only at a point in time, and it cannot catch a fraud in which both records have been manipulated consistently. Still, as a regular control it is cheap, effective and expected of any well-run business.

\text{Updated cash book} = \text{Bank statement balance} - \text{Unpresented cheques} + \text{Outstanding lodgements}

Reconciling the bank

Timing differences only. Unpresented cheques have reduced the cash book but not yet the bank; outstanding lodgements have increased the cash book but not yet the bank.

Worked example

Preparing a bank reconciliation

A firm's cash book shows a debit balance of £2,650. The bank statement shows £3,100. Bank charges of £50 are on the statement but not the cash book. Unpresented cheques total £900 and outstanding lodgements £400. Reconcile the two.

Update the cash book
The only item the bank recorded but the cash book had not is the £50 bank charge. Enter it: updated cash-book balance = £2,650 - £50 = £2,600.
Start the reconciliation from the bank
Bank statement balance £3,100. Deduct unpresented cheques £900 (recorded by us, not yet by the bank): £3,100 - £900 = £2,200.
Add outstanding lodgements
Add outstanding lodgements £400 (recorded by us, not yet by the bank): £2,200 + £400 = £2,600, which equals the updated cash-book balance - the records reconcile.

Result: The updated cash book is £2,600, and the bank statement of £3,100 less unpresented cheques £900 plus outstanding lodgements £400 also gives £2,600 - the two records agree once the bank charge and timing differences are accounted for.

Typical mistakes

Adjusting the wrong balance - bank charges and standing orders go in the cash book, not the reconciliation statement.
Reversing the additions and deductions (adding unpresented cheques instead of deducting them).

Active revision

The cash book shows £2,650 before adjustment. Bank charges of £50 appear on the statement but not the cash book. There are unpresented cheques of £900 and outstanding lodgements of £400, and the statement shows £3,100. Update the cash book and prepare a reconciliation statement.

Active recall

Recall the key points — then reveal.

Sources: AQA A-level Accounting 7127 specification (AQA)

Sales and purchases ledger control accounts#

AdvancedAQA 7127 3.4

Sales ledger control account

Fig. 4The sales ledger control account: opening receivables £15,000 plus credit sales £80,000, less receipts, discounts, irrecoverable debts and returns, leaves closing receivables of £14,000.

A control account is a summary account that duplicates, in total, the many individual accounts in a subsidiary ledger, providing an independent check on that ledger. The sales ledger control account (the total receivables account) summarises all the personal accounts of credit customers; the purchases ledger control account (the total payables account) summarises all the personal accounts of credit suppliers. The control account is written up from the totals of the books of prime entry (total credit sales, total receipts, total discounts allowed, and so on), whereas the individual accounts are written up from the individual entries. Because the two are built from different sources, they should agree - and if they do not, there is an error to find.

The sales ledger control account is built like any receivables account. It opens with the balance of receivables brought down (a debit), is increased by credit sales and by any dishonoured cheques or interest charged, and is decreased by receipts from customers, discounts allowed, sales returns (returns inward), irrecoverable debts written off, and any set-off (contra) against the purchases ledger. The closing balance carried down should equal the total of the individual customer balances in the sales ledger. The purchases ledger control account is the mirror image: it opens with payables (a credit), is increased by credit purchases, and is decreased by payments, discounts received, purchases returns and set-offs.

The main purposes of control accounts are to provide a check on the accuracy of the subsidiary ledgers, to locate errors (a disagreement between the control account and the ledger totals localises the error to that ledger), to provide the receivables and payables figures quickly for the financial statements without adding up hundreds of accounts, and to help prevent and detect fraud by separating the person who keeps the control account from the person who keeps the individual accounts. This separation of duties is an important internal control - it is much harder to conceal a fraud when an independent total must be reconciled.

In evaluation, control accounts are a powerful but not infallible check. They will catch many errors - a miscast day book, a receipt posted to the wrong side - because these throw the control account out of agreement with the ledger. But they will not catch an error made consistently in both the control account and the individual account (for example a credit sale omitted from both), nor an error of commission within the subsidiary ledger (a receipt posted to the wrong customer, since the ledger total is unchanged). Like the trial balance, then, a control account that agrees is reassuring but not conclusive, which is why businesses combine control accounts with reconciliations, audits and a proper separation of duties.

\text{Closing receivables} = \text{Opening} + \text{Credit sales} - \text{Receipts} - \text{Discounts allowed} - \text{Returns} - \text{Irrecoverable debts}

Sales ledger control account

The control account rebuilds the total receivables from the day-book totals; its closing balance should equal the sum of the individual customer accounts.

Worked example

Finding closing receivables from a control account

Prepare the sales ledger control account from: opening receivables £15,000; credit sales £80,000; receipts from customers £75,000; discounts allowed £2,000; irrecoverable debts written off £1,000; sales returns £3,000. Determine the closing receivables.

List the debit entries
Debit side: balance b/d £15,000 and credit sales £80,000, total £95,000 (these increase receivables).
List the credit entries
Credit side: receipts £75,000, discounts allowed £2,000, irrecoverable debts £1,000 and sales returns £3,000 - these reduce receivables and total £81,000.
Balance the account
Closing receivables = £95,000 - £81,000 = £14,000, entered as the balance carried down so both sides total £95,000. This £14,000 should equal the sum of the individual customer accounts.

Result: Closing receivables are £14,000 (opening £15,000 + credit sales £80,000 - receipts £75,000 - discounts £2,000 - irrecoverable debts £1,000 - returns £3,000), and this should agree with the total of the sales ledger.

Typical mistakes

Putting an item on the wrong side - discounts allowed, returns inward and irrecoverable debts all reduce receivables (credit side of the sales ledger control account).
Forgetting a set-off (contra) entry between the sales and purchases ledger control accounts.

Active revision

Opening receivables were £15,000. During the year: credit sales £80,000, receipts £75,000, discounts allowed £2,000, irrecoverable debts £1,000 and sales returns £3,000. Prepare the sales ledger control account and find the closing receivables.

Active recall

Recall the key points — then reveal.

Sources: AQA A-level Accounting 7127 specification (AQA) · Ofqual - GCE AS and A level qualifications (Ofqual)

References & sources

Sources

AQA

AQA A-level Accounting 7127 specification

Ofqual

Ofqual - GCE AS and A level qualifications

Verification of accounting records

4 sections~18 min reading time3 competenciesLevel Standard 2 · Advanced 2

Verification of accounting records

Key points

Classifying an error and its effect

Key points

Correcting errors and clearing the suspense account

Key points

Preparing a bank reconciliation

Key points

Finding closing receivables from a control account

Sources

Verification of accounting records

Key points

Classifying an error and its effect

Key points

Correcting errors and clearing the suspense account

Key points

Preparing a bank reconciliation

Key points

Finding closing receivables from a control account

Sources