Summary — What This Chapter Covers
- Ledger balances are reconciled and verified against internal documents (inventory counts, invoices) and external ones (bank statements, supplier statements).
- Some errors make the trial balance disagree; six types do not: omission, commission, principle, original entry, reversal and compensating.
- A suspense account holds the difference until the errors are found and corrected by journal entries; corrections may change the profit.
- The cash book is updated from the bank statement, then a bank reconciliation statement explains the remaining timing differences.
- Control accounts summarise the sales and purchases ledgers; their balance is reconciled with the total of the individual accounts.
- Each check has benefits and limitations: none of them finds every error.
1. Why Reconcile and Verify?
Syllabus 1.4.1 · AS Level · Papers 1 & 2
Internal and external evidence
Verification means checking that a ledger balance is supported by evidence. Reconciliation means explaining the difference between two sets of figures that should agree.
| Ledger figure | Checked against | Source |
|---|
| Bank account in the cash book | Bank statement | External |
| A supplier’s account in the purchases ledger | Supplier’s statement of account | External |
| Sales ledger control account | Total of the individual customer accounts | Internal |
| Inventory | Physical inventory count at the year end | Internal |
| Non-current assets | Physical inspection and the non-current asset register | Internal |
| Benefits | Limitations |
|---|
| Errors are found and corrected before the financial statements are prepared, so they are more reliable | Some errors (for example compensating errors or an item omitted from both records) are not revealed |
| Fraud and theft are harder to hide and easier to detect | Time-consuming and costly, especially for a small business |
| Out-of-date items (old unpresented cheques, disputed invoices) are found and followed up | An external document may itself contain errors |
| Users such as lenders have more confidence in the figures | It shows that a difference exists but not always why |
Practice Question 1
A supplier’s statement shows $6,240 owing but the supplier’s account in the purchases ledger shows $5,860. Suggest two reasons for the difference and what the business should do.
2. Errors and the Trial Balance
Syllabus 1.4.2 · AS Level · Papers 1 & 2
Which errors does it reveal?
Errors that make debits ≠ credits affect the trial balance: a one-sided entry, two debits or two credits, different amounts on each side, a wrong balance, or a casting (adding) error in one account. Six types of error do not affect it.
| Error | Meaning | Example |
|---|
| Omission | The transaction is not recorded at all | A credit sale invoice is lost and never entered |
| Commission | Correct amount, correct type of account, but the wrong person’s account | A payment from A. Khan is credited to A. Kamal |
| Principle | Entered in the wrong class of account | Repairs debited to the machinery (asset) account |
| Original entry |
The wrong amount in the book of prime entry, so both entries are wrong |
| Reversal |