Reconciliation and verification

Accounting AS · Financial accounting. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Ledger accounts are checked against other evidence so that errors are found early. The bank column of the cash book is checked against the bank statement, a supplier's account against the supplier's statement, and the sales and purchases ledgers against their control accounts.

A trial balance is one such check, but it is limited. Six types of error leave it balanced. When it does not balance, the difference is placed in a suspense account until the errors are found and corrected through the general journal.

In a bank reconciliation, the cash book is first updated for items found only on the bank statement. The remaining difference is explained by timing: unpresented cheques and outstanding lodgements.

Rules to remember

Errors the trial balance does not show: omission, commission (wrong account of the right type), principle (wrong type of account), original entry, complete reversal, compensating.
Errors the trial balance does show: one side not posted, different amounts on the two sides, two entries on the same side, an addition error in one account.
The suspense account is opened on the side of the trial balance with the smaller total. Only errors that stop the trial balance agreeing are corrected through it.
Update the cash book first for bank charges, direct debits, standing orders, credit transfers and dishonoured cheques.
Balance on bank statement = updated cash book balance + unpresented cheques − outstanding lodgements.
Sales ledger control account: debit credit sales; credit receipts, discounts allowed, sales returns, irrecoverable debts and contra entries.
Purchases ledger control account: credit credit purchases; debit payments, discounts received, purchases returns and contra entries.

Common mistake

Putting cash sales, cash purchases or the allowance for irrecoverable debts into a control account. Only items that change what credit customers or credit suppliers owe belong there.

Worked example

A trial balance has debit total $61,250 and credit total $61,700. Two errors are then found: (1) rent paid of $380 was entered in the cash book but not posted to the rent account; (2) a credit sale of $200 was left out of the books completely. What balance remains on the suspense account?

Debits are smaller by $61,700 − $61,250 = $450, so the suspense account opens with a debit balance of $450.
Error 1 affects the trial balance: debit Rent $380, credit Suspense $380.
Error 2 is an error of omission. It does not affect the trial balance, so it is corrected without using the suspense account.
Remaining balance = $450 − $380 = $70 debit.

Answer: $70 debit still remains, so there is at least one more error to find.

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