Interactive question 1: Bank reconciliation I

C
A bank reconciliation statement is being prepared. The closing balance shown by the bank H
statement is a positive balance of £388. The cash at bank account has a positive balance of £106. A
P
Requirement T
E
Using the table below, select the effect of each item on the closing balance shown by the bank
R
statement. Tick one box for each item.
6
Increase Decrease No effect

A The bank has made a mistake in crediting the

account with £110 belonging to another customer
– an error not yet rectified.
B £120 received by the bank under a standing order
arrangement has not been entered in the cash at
bank account.
C Cheques totalling £5,629 have been drawn,
entered in the cash at bank account and sent out
to suppliers but they have not been presented for
payment.
D Cheques totalling £5,577 have been received and
entered in cash at bank account but not yet
credited in the bank statement.
See Answer at the end of this chapter.

Interactive question 2: Bank reconciliation II

Tilfer's bank statement shows £715 direct debits and £353 investment income which have not
been automatically recorded by the computerised accounting system and are therefore not
included in the cash at bank account. The bank statement does not show a customer's cheque
for £875 entered in the cash at bank account on the last day of the reporting period. The cash at
bank account has a credit balance of £610.
Requirement
What balance appears on the bank statement?
See Answer at the end of this chapter.

3 Types of error in accounting

Section overview
• Errors can be classified as: transposition errors, errors of omission, errors of principle,
errors of commission and compensating errors.

As accounting software packages become increasingly sophisticated, the risk and occurrence of
errors is decreased. It remains important however for an accountant to be able to identify and
correct errors in the accounting system.

ICAEW 2020 Errors and corrections to accounting records and financial statements 149
 There are five broad types of error as follows:
· Transposition errors
· Errors of omission
· Errors of principle
· Errors of commission
· Compensating errors
Once an error has been detected, it needs to be put right via a journal entry.

3.1 Transposition errors

Definition
Transposition errors: When two digits in an amount are accidentally recorded the wrong way
round.

· A sale is credited in the sales account and trade receivables as £6,843, but the amount
should have been £6,483. The debits and credits will still be equal, but stated at the wrong
amount.

3.2 Errors of omission

Definition
Error of omission: Failing to record a transaction at all.

· A business receives an invoice from a supplier for £250, and the transaction is omitted from
the accounting records. As a result, both total debits and credits will be wrong by £250.

3.3 Errors of principle

Definition
Error of principle: Making a double entry in the belief that the transaction is being entered in the
correct accounts, but subsequently finding out that the accounting entry breaks the 'rules' of an
accounting principle or concept. A typical example of such an error is to treat revenue
expenditure incorrectly as capital expenditure.

· Machine repairs costing £150 (which should be treated as revenue expenditure) are
debited to the cost of a non-current asset (capital expenditure). Although total debits still
equal total credits, the repairs account is £150 understated and the cost of the non-current
asset is £150 overstated.
· A business owner takes £280 cash out of the till for his personal use. The bookkeeper
incorrectly debits sales by £280, when they should have debited drawings. This is an error
of principle, so that drawings and sales are both understated by £280.

150 Accounting ICAEW 2020

3.4 Errors of commission
C
H
Definition A
P
Error of commission: A mistake is made in recording transactions in the ledger accounts by T
E
recording a debit entry or a credit entry in the wrong account.
R

6
· Telephone expenses of £540 are debited to the electricity expense account, an error of
commission. Although total debits and credits balance, telephone expenses are
understated by £540 and electricity expense is overstated by the same amount.

3.5 Compensating errors

Definition
Compensating errors: Errors which are, coincidentally, equal and opposite to one another.

Compensating errors hide trial balance errors.

· Administrative expenses of £2,800 are entered as £2,200 in the administrative expenses
ledger account. At the same time, distribution costs have been entered as £4,700 but
should have been £4,100. Administrative expense are understated by £600 and distribution
costs are overstated by £600, but the two amounts cancel each other out.

4 Correcting errors

Section overview
• Errors are corrected via journals.
• A suspense account may be used when a bookkeeper does not know where to post one
side of an entry or when the computerised accounting system cannot match a transaction
on a bank transaction report to the relevant nominal ledger account
• Suspense accounts are always temporary and should never appear in financial statements;
these should not be prepared until the errors have been corrected and the suspense
account has been cleared.
• Some corrections of errors will result in adjustments to a draft profit calculated while there
were still errors in the accounts.

In a computerised accounting system, the total of the debit entries will always be equal to the
total of the credit entries as the system will not allow a one-sided entry or an imbalanced entry to
be recorded. That does not mean, however, that the accounting records are complete and free
from error. If an error is identified, it must be corrected via a journal entry.

Worked example: Correcting errors

A bookkeeper accidentally posts an invoice for £40 to the local property taxes account instead
of to the electricity account. A journal entry is required to correct the misposting error as follows.
DEBIT Electricity account £40
CREDIT Local property taxes account £40
To correct a misposting of £40 from the local property taxes account to electricity account

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