Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.

Topic Overview
Topic BAFS Elective Part - Accounting Module – Financial Accounting
A03: Bank Reconciliation Statement and Correction of Errors
Level S5 / S6
Duration 3 lessons (40 minutes per lesson)

Learning Objectives:

1. To apply the techniques in reconciling the differences between the balance on a

bank statement and a cash book;
2. To apply the knowledge in correction of errors which do not cause disagreement
with the trial balance and the calculation of profits; and
3. To apply correction of errors knowledge which cause disagreement in the trial
balance and calculation of profit.

Overview of Contents:

Lesson 1 Bank Reconciliation Statement

Lesson 2 Errors which do not Cause Disagreements in the Trial Balance
Lesson 3 Errors which Cause Disagreements in the Trial Balance and the
Suspense Account

Resources:

„ Topic Overview, Teaching Plan and Answers to Student Worksheet

„ PowerPoint Presentation
„ Student Worksheet

Suggested Activities:

„ Group Discussion
„ Oral Presentation
„ Case Study

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.2

Lesson 1
Theme Bank Reconciliation Statement
Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. Understand the timing differences between the Bank Statement and Cash Book
resulting reconciliation;
2. Using the vouchers provided, create a Bank account by consolidating the
accounting cycle learnt;
3. Identify discrepancies by comparing a Bank account to a Bank Statement;
4. Update the Bank account in the Cash Book and create the Bank Reconciliation
Statement;
5. Understand that the Bank Reconciliation Statement can be an internal control tool;
and
6. Understand the methods to minimise the possibility of misappropriation of funds.

Prior Knowledge:
z Different vouchers used in the accounting cycle; and
z Bank account.

Teaching Sequence and Time Allocation:

Time
Activities Reference
Allocation
Part I: Introduction
— Teacher explains the reasons for discrepancies between
the cash book and bank statement.
PPT
„ Students comprehend timing differences. 5 minutes
#1 - 10
„ Teacher summarises items recorded in the bank
statement but not recorded in the cash book.

Part II – Contents
— Activity 1: Matching PPT #11
„ Identify the discrepancies in either the cash book
or bank statement and their impact on the bank Student 6 minutes
balance. Worksheet
pp.1-2

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.3

— Activity 2: Problem solving

„ Students write up a cash book from source
documents.
„ Students update the cash book after comparing it
to the bank statement.
„ Students adjust the discrepancies.
„ Students present their findings. PPT
# 12-23
— Recommended teachers apply their own judgment in
using the supplementary documents (invoice and pro- 15 minutes
forma invoice) to investigate the following with Student
students: Worksheet
„ Accounting cycle. pp.3-15
„ Types and purposes of different documents –
invoice and pro-forma invoice.
„ Difference of Trade Discount and Cash Discount.
„ Terms of payment shown in the invoice, e.g., 1/5,
N10; COD; Prepaid.
„ Calculation of Cash Discount.
— Activity 3: Group discussion
„ The class is divided into groups of 4 to 5 students PPT
to discuss ways to minimise the possibility of # 24-25
misappropriation of funds, i.e. all properly
8 minutes
recording and accounting for all receipts and
payments. Student
„ Students present one suggestion from each group. Worksheet
„ Teacher wraps up the presentation. p.16
Part III – Conclusion
— Teacher concludes the lesson by highlighting the key
points learned:
„ Entries that were made in bank statement only.
„ Entries that were made in cash book only. PPT
6 minutes
„ Bank reconciliation statement will, in this activity # 22-23
only, include the discrepancies in the cash book.
„ Preparation of bank reconciliation statement can
be used as a tool of internal control.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.4

Lesson 2
Theme Errors which do not Cause Disagreement in the Trial Balance
Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. Differentiate the six types of errors that do not affect the trial balance;
2. Tell why these errors do not affect the trial balance;
3. Identify how these errors could be identified;
4. Correct these errors through journal entries; and
5. Understand the effects of errors on profit calculation and prepare a corrected profit
and loss statement.

Teaching Sequence and Time Allocation:

Time
Activities Reference
Allocation
Part I: Introduction
— Teacher defines the six types of errors not affecting the
trial balance. Students should:
„ Understand why these errors do not affect the trial
balance.
„ Understand the nature of various types of errors,
PPT #26-40 10 minutes
differentiate them and correct them through
journal entries.
„ Understand the effects of errors on profit
calculations and prepare a corrected profit and loss
statement.
Part II – Content
— Activity 4: Identify the errors and discuss how to
uncover these errors
„ Activity 4A “Identify the errors” - Students
PPT #41-52
identify the types of errors and complete the list.
„ Activity 4B “Why? Why? Why? - Students
explain why these errors do not affect the trial 10 minutes
Student
balance.
Worksheet
„ Activity 4C “Think. How could you identify these
pp.17 - 19
errors?” – Students suggest way to uncover each
error.
„ Teacher checks answers with the class.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.5

— Activity 5: Help your boss PPT #53-56 5 minutes

„ Students are asked to help their boss, the
accounting manager of Dragon Company, to Student
correct the errors in the books by journal entry. Worksheet
„ Teacher discusses answers with the class. p.20

— Activity 6: Profit Bingo

„ Students are asked to identify if the corrected
entries affect the profit and loss. Complete the
working table given.
„ Teacher asks students to prepare a correct profit PPT #57-62
and loss statement.
„ Students are expected to understand:
10 minutes
‹ The nature of the error; Student
‹ The reason why the error occurred; Worksheet
‹ Whether the error affects the profit and loss pp.21 - 23
statement and the trial balance;
‹ How the error affects profit;
‹ Procedure to correct the error.
„ Teacher discusses answers with the class.
Part III – Conclusion
— Teacher concludes the session and highlights the key
points learned:
PPT #63-64
„ Six types of errors not affecting trial balance.
5 minutes
„ Reasons why errors are discovered.
„ Methods to correct the error.
„ Techniques to arrive at the correct net profit.

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.6

Lesson 3
Theme Errors which Cause Disagreement in the Trial Balance and Suspense
accounts
Duration 40 minutes

Expected Learning Outcomes:

Upon completion of this lesson, students will be able to:

1. Understand the reasons for inequalities in the trial balance;

2. Understand the inequality of trial balance refers to the existence of errors;
3. Use a “Suspense Account” to temporarily maintain the trial balance;
4. Identify and locate errors from source documents and accounting records;
5. Correct the errors in the ledger accounts; and
6. Understand the effects of errors in the trial balance.

Prior Knowledge:
z Bank Reconciliation Statement;
z Updated Bank account for discrepancy;
z Correction of errors through Journal entries; and
z Correction of errors in the profit or loss account.

Teaching Sequence and Time Allocation:

Time
Activities Reference
Allocation
Part I: Introduction
— Teacher reviews the dual aspects of transactions to
maintain balance in the trial balance.
„ Errors will exist if the trial balance does not agree. PPT #65-70 4 minutes
„ A trial balance in agreement will not guarantee it
is error free.
Part II: Contents
— Teacher illustrates the use of Suspense Account to
rectify the imbalanced trial balance.
„ Errors are corrected by double entries after
identifying them. PPT #71-76 5 minutes
„ Suspense Account will be closed after correcting
all errors.
„ Adjust the net profit after correction, if necessary.
— Activity 7: Group Discussion
Review the four cases of errors and their effects on PPT #77
profit/assets/liabilities.
„ Students are paired up.
5 minutes
„ Teacher gives cases to the students and they Student
discuss the location of errors: (a) the trial balance Worksheet
total is/is not affected; (b) profit is/is not affected; pp. 24 - 27
(c) asset is/is not affected.
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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.7

„ Students explain how the accounts would be

affected by the errors and the steps to rectify the
errors.
„ Students to present their answers.
— Activity 8: Problem solving
„ Class is divided into groups of 4 to 6. Each group
is to distinguish errors that affect/not affect the
trial balance.
„ Teacher briefs students about question
assumptions -- explains steps to solve the problem.
„ Students prepare a bank reconciliation statement.
„ The case is used to improve students’ problem
solving ability. They have to co-operate and co- PPT #78-82
ordinate with members assigned on:
‹ Preparing the bank reconciliation statement
23 minutes
and input information for double entry in the Student
ledger; Worksheet
‹ Providing information to update the bank pp.28 - 44
account;
‹ Identifying the errors
„ Teacher can accelerate learning by showing the list
of errors and referring to the summary in the
Teacher Notes.
‹ Updating ledger accounts.
‹ Preparing a corrected trial balance.
„ Students present their answers and findings.
Part III: Conclusion
— Teacher concludes the lesson and highlights the key
points learned:
„ Errors may be obvious causing an imbalance in
trial balance.
PPT #83-84 3 minutes
„ Errors may still exist even if the trial balance is in
agreement.
„ Use the journal to initiate the double entry of error
corrections.

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.8

Suggested Answers

LESSON 1

Activity 1: Matching

(I) Complete the table below for discrepancies in cash book and bank statement
stating their originality.

Originality Items of Discrepancies

Bank Statement 1. Auto pay
2. Bank charges
3. Credit transfer
4. Direct debit
5. Dishonoured cheque
6. Errors in bank statement
7. Standing order – Receipts or Payments
Cash Book 1. Deposits in transit/Uncredited cheques
2. Errors in cash book
3. Unpresented cheques

Errors in the bank statement should not be reflected as they

should be rectified by the bank itself.

(II) Based on your findings above, classify the items according to the effect
on balances.

Category Items of Discrepancies

Resulting balance in cash book is Auto pay
greater than in bank statement Bank charges
Deposits in transit/Uncredited items
Direct Debit
Dishonoured cheque
Errors in bank statement (e.g. Bank draws out money
into the account by mistake.)
Errors in cash book (e.g. Receipts side overstated)
Standing order – Payments
Resulting balance in bank Credit transfer
statement is greater than in Errors in bank statement (e.g. Bank deposited money
cash book from the account by mistake.)
Errors in cash book (e.g. Payment side overstated)
Unpresented cheques
Standing Order - Receipts

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.9

Activity 2: Problem Solving

Step 1: Write up the Bank account based on the pay-in slips and cheque
counterfoils.

Dragon Company
Bank
Year 9 $ Year 9 $
Jan 1 Balance b/d 15,830 Jan 3 Somy Corp (#285701) 30,500
Jan 4 Blueberry Ltd 21,780 Jan 4 Office Furniture: OK 17,250
(#285702)
Jan 12 Plum Ltd 24,750 Jan 7 Electricity: H K Electric 285
(#285704)
Jan 12 Cherry Co 18,000 Jan 10 Kowloon (#287505) 16,000
Jan 28 Lemon Ltd 8,000 Jan 23 Somy Corp (#285706) 36,500
Jan 31 Cherry Co 35,640 Jan 30 Salary: Mary Kwan 10,000
(#285707)

Step 2: Pair off the entries in the bank account with the bank statement

Date Details Withdrawal Deposit Balance

Year 9 $ $ $
Jan 1 Balance 15,830
Jan 4 Deposit 21,780 37,610
Jan 4 Cheque # 285701 30,500 7,110
Jan 7 Cheque # 285702 17,250 (10,140)
Jan 10 Cheque # 285704 285 (10,425)
Jan 12 Deposit 42,750 32,325
Jan 13 Cheque # 285705 16,000 16,325
Jan 23 Cheque # 285706 36,500 (20,175)
Jan 28 Deposit 8,000 (12,175)
Jan 29 Bank interest 140 (12,315)
Jan 30 Returned cheque 8,000 (20,315)
Jan 31 TT 13,000 (7,315)

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.10

Step 3: Update the Bank account for the following discrepancy items
E.g. bank interest, dishonoured cheques, telegraphic transfers

Dragon Company
Bank
Year 9 $ Year 9 $
Jan 1 Balance b/d 15,830 Jan 3 Somy Corp (#285,701) 30,500
Jan 4 Blueberry Ltd 21,780 Jan 4 Office Furniture: OK 17,250
(#285702)
Jan 12 Plum Ltd 24,750 Jan 7 Electricity: H K Electric 285
(#285704)
Jan 12 Cherry Co 18,000 Jan 10 Kowloon (#287505) 16,000
Jan 28 Lemon Ltd 8,000 Jan 23 Somy Corp (#285706) 36,500
Jan 31 Cherry Co 35,640 Jan 30 Salary: Mary Kwan 10,000
(#285707)
Jan 31 Green Trees 13,000 Jan 31 Bank interest 140
Jan 31 Lemon Ltd: Returned 8,000
cheque
Jan 31 Balance c/d 18,325
137,000 137,000

Step 4: Analyse the following unpaired items and find their financial effects on
the bank statement.

(a) Money deposited after the cheque clearing cut-off time

Deposits in transit/Uncredited cheques

Cash book has recorded the receipt but not so for the bank. This would
result in a smaller/greater* balance in bank statement compared to the
Cash Book (Bank account).

(b) Cheque issued but not presented for payment by payee is called

Unpresented cheque

Cash book has recorded the payment but bank has not. This would then
result to a smaller/greater balance in bank statement compared to the Cash
Book (Bank account).

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.11

Step 5: Formalise the explanation in a proper statement.

Dragon Company
Bank Reconciliation Statement as at 31 January Year 9
$
Balance per adjusted cash book balance 18,325.00
Add Unpresented cheque (cheque no. 285707) 10,000.00
28,3250.00
Less Deposit in transit (35,640.00)
Overdraft per bank statement (7,315.00) OD

Conclusion: Prima facie, there is/is not a misappropriation of funds by the

former employee because the updated bank account balance matched the bank
statement.

Activity 3 - Group Discussion

Possible measures to avoid misappropriation of funds:

1. All payments should be made by cheque as far as practicable.
2. Payments should only be made for purchases duly authorised by the
management and supported by purchase order, delivery note to confirm
receipt as to the exact quantity and quality of goods.
3. Bills paid should be stamped with “PAID” and affixed with a copy of the
cheque issued.
4. All cash should be banked intact on a daily basis.
5. Accounting records such as sales invoices, purchase orders should be pre-
numbered to avoid omission or duplication of record. This also helps the
audit trail process.
6. Always take advantage of cash discounts offered by vendors if funding
permits.
7. Bank reconciliation statement should be prepared on a regular basis which
helps to highlight fraud and error.

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.12

LESSON 2

Activity 4:
Activity 4A
(A) Error of principle
(B) Error of complete reversal of entries
(C) Error of commission
(D) Error of original entry
(E) Error of omission
(F) Compensating error

Activity 4B
Reasons:
z Transactions are recorded using the double entry method so that every debit
must have a corresponding credit in the ledger account.
z There were no single debit and credit entries made to the accounts in the above
error.
z A wrong amount has been used for both the debit and credit entry.

Activity 4C
Suggested ways
A. Accountant found that the monthly total purchases day book did not match the
company’s purchases account. Upon reviewing the purchase account, the
accountant found that there was a household electricity expense relating to Mr.
Lung, the owner of the company.
B. There is a difference shown between the bank statement balance and the cash
book balance. Investigating the difference, the accountant found a cheque paid
to OK Furniture Co was recorded as a debit in the cash book.
C. Plum Ltd phoned us and complained that the statement we sent them showed an
unpaid amount which they had already paid.
D. Cherry Co paid an invoice for $30,000.
E. The property owner sent an overdue rent reminder to the company and the
accountant found that this month’s rent expense was absent from the profit and
loss account.
F. The errors were found when the manager asked another staff to re-calculate
the sales and purchases journals.

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.13

Activity 5: Help your boss

Date Particulars Dr. Cr.

$ $
(A) Drawings 600
Year 8/12/31 Purchases 600

Being drawings incorrectly recorded as company

purchases.
(Correction - Error of principle)

(B) OK Furniture Co Ltd ($200 x 2) 400

Year 8/12/31 Cash 400

Being cash payment to OK Furniture Co Ltd

recorded in the wrong side of accounts.
(Correction - Error of complete reversal of
entries)

(C) Blueberry Co Ltd 500

Year 8/12/31 Plum Co Ltd 500

Being cash receipt from Plum Co Ltd wrongly

credited to Blueberry Co Ltd.
(Correction – Errors of commission)

(D) Cherry Co ($30,000 - $12,000) 18,000

Year 8/12/31 Sales 18,000

Being sales to Cherry Co recorded in incorrect

amount.
(Correction – Error of original entry)

(E) Rent 15,000

Year 8/12/31 Accounts payable – Property Co Ltd 15,000

Being rent due but not recorded in the books.

(Correction – Error of omission)

(F) Sales 300

Year 8/12/31 Purchases 300

Being sales and purchases journals both

overstated.
(Correction – Compensating error)

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 Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.14

Activity 6: Profit Bingo

Workings:-

Errors Profit Amount

Circle:
Fill in the accounts affected and circle if Affect (3) + $ /
Date they are to profit and loss (P/L) account or - $ /
balance sheet account (B/S). Not
Affect(X)
~
(A)
Dr. Drawings P/L ; B/S

3/ X
Year 8/12/31
+$600
Cr. Purchases P/L ; B/S

(B)
Dr. OK Furniture Co P/L ; B/S

3/ X
Year 8/12/31
~
Cr. Cash P/L ; B/S

(C)
Dr. Blueberry Ltd P/L ; B/S

3/ X
Year 8/12/31
~
Cr. Plum Ltd P/L ; B/S

(D)
Dr. Cherry Co P/L ; B/S

3/ X
Year 8/12/31
+ $18,000
Cr. Sales P/L ; B/S

(E) Dr. Rent P/L ; B/S

3/ X
Year 8/12/31
- $15,000
Cr. Accounts payable P/L ; B/S
– Property Co Ltd
(F)
Dr. Sales P/L ; B/S - $300
3/ X
Year 8/12/31

Cr. Purchases P/L ; B/S + $300

Total effect on Profit / loss: $3,600 ( Increase / Decrease in Profit)

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.15

Dragon Company
Income statement for the year ended 31 December Year 8
$ $

1,127,550
Sales
Less: Returns inwards 3,600
1,123,950
Cost of goods sold:
Opening stock 23,650
Purchases 539,830
563,480
Less: Closing stock 15,800 547,680
Gross profit 576,270

Less expenses:
Electricity 18,750
Rent 180,000
Salaries 411,500
Other operating expenses 200 610,450

Net loss (34,180)

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.16

LESSON 3

Activity 7: Group Discussion

Case 1: Sales Day Book is understated.

Which account(s) is/are affected? What is the effect?

Sales account is understated.

What can be done to rectify the errors?

(a) Dr Suspense

(b) Profit understated

(c) No effect on assets/liabilities

(d) Dr Suspense

Cr Sales

Case 2: Closing stock is overstated after Trading Account has been

drawn up.

Which account(s) is/are affected? What is the effect?

Closing stock account is overstated.

What can we do to rectify the errors?

(a) Trial balance is balanced because the same “wrong’ amount is used to
record the closing stock (Dr Closing Stock, Cr Trading Account). No
entry is to be made in Suspense .

(b) Profit overstated because the greater the closing stock, the smaller the
cost of goods sold and thus the higher the profit.

(c) Assets (Stock) is overstated.

(d) Dr Profit and Loss

Cr Closing Stock

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.17

Case 3: Machinery Repairs being recorded as Machinery

Which account(s) is/are affected? What is the effect?

Machinery Repairs is overstated while Machinery account is understated.

What can we do to rectify the errors?

(a) Trial balance is incorrect though it is balanced. It is because as the

wrong accounts are used, both the Machinery Repairs (Revenue
expenditure) and Machinery (Capital expenditure) show an incorrect
figure.

(b) Profit is understated as the expense of Machinery Repairs is

overstated.

The incorrect treatment of expenditures has resulted in an understated

fixed assets figure. While cost of fixed asset is being depreciated over
its useful life and the depreciation expense is charged against P&L in
the year. It inadvertently results in a higher profit.

(c) The net book value of the fixed assets are incorrectly increased.

(d) Dr Machinery

Cr Machinery Repairs

And

Dr Profit and Loss - Depreciation

Cr Provision for Depreciation on Machinery

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.18

Case 4: Payroll cheque recorded as debit bank and credit salaries.

Which account(s) is/are affected? What is the effect?

Bank account is overstated and Salary account is understated by the amount of

the cheque.

What can be done to rectify these errors?

(a) Trial balance is incorrect though it is balanced. It is because the same

“wrong” amount is entered on the reverse side of both accounts

(b) Profit overstated because the salary expenses are understated.

(c) Assets (Bank) is overstated because a payment is entered as the

receipt.

(d) Dr Salaries

Cr Bank

for double of the cheque amount.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.19

Activity 8: Problem Solving

Step 1:
Compare the entries in the bank statement and bank account.
Identify the entries shown in the bank statement only.
Amount
(A) $10,000
(B) $250
(C) $14,696
(D) $211
(E) $678

Note: Sequence of answers may vary for each student.

Step 2:
Update the Bank Account and complete the corresponding double entries as
follows:

Journal
Dr Cr
$ $
(1) Bank 10,000
Debtor – P 10,000

(2) Subscription 250

Bank 250

(3) Debtor – O 14,696

Bank 14,696

(4) Bank interest 211

Bank 211

(5) Printing 678

Bank 678

Step 3:
Check the entries against the source documents such as Day Books, opening
balances from previous year’s financial statement, etc.
Identify the errors and make correction entries. Number the errors found
using (1), (2), (3), (4), (5), etc.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.20

Notes:
After checking the source documents, day books, ledgers and opening balances,
etc, the following errors are found for the month of January Year 19:
1. Total of Sales Day Book was understated by $1,000.
2. Opening balance of Machinery account on 1 January Year 19 was $254,000
instead of $245,000.
3. Opening balance of Accrued Telephone $138 at 1 January Year 19 was
omitted.
4. The closing balance of Bank account should be $31,873 instead of $31,783.
5. Payments by cheque $1,500 for Machinery repairs was entered in the Cash
Book correctly but was debited to Machinery account.
6. Credit purchases from $2,800 to Creditor B was mistakenly entered in
Creditor C’s account.
7. Returned goods of $300 to Creditor C was completely reversed in the
ledger entries.

(I) Errors affecting trial balance

No. Amount
(1) $1,000
(2) $9,000
(3) $138
(4) $90

Complete the journal entries to correct the errors.

Journal
Dr Cr
$ $
(1) Suspense 1,000
Sales 1,000

(2) Machinery ($254,000 - $245,000) 9,000

Suspense 9,000

(3) Suspense 138

Accrued Telephone 138

(4) Bank ($31,873-$31,783) 90

Suspense 90

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.21

(II) Errors not affecting trial balance agreement.

No. Amount Name of the Error

(i) $1,500 Error of Principle
(ii) $2,800 Error of Commission
(iii) $300 Error of Complete reversal of entries

Journal
Dr Cr
$ $
(i) Machinery repairs 1,500
Machinery 1,500

(ii) Creditor – C 2,800

Creditor – B 2,800

(iii) Creditor – C 600

Returns inwards 300
Returns outwards 300

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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.22

Ledgers after reconciliation and correction of errors:

Machinery 1
Year 19 $ Year 19 $
Jan 1 Balance b/d 245,000 (i) Machinery repairs 1,500
Jan 20 Bank 1,500
(2) Suspense 9,000

Furniture 2
Year 19 $ Year 19 $
Jan 1 Balance b/d 150,000

Stock 3
Year 19 $ Year 19 $
Jan 1 Balance b/d 15,800

Debtor – M 4
Year 19 $ Year 19 $
Jan 1 Balance b/d 25,304 Jan 25 Bank 25,304
Jan 10 Sales 20,300

Debtor – N 5
Year 19 $ Year 19 $
Jan 1 Balance b/d 90,000 Jan 26 Bank 87,000

Debtor – O 6
Year 19 $ Year 19 $
Jan 1 Balance b/d 14,696 Jan 28 Bank 14,696
Jan 17 Sales 25,800
(C) Bank 14,696

1
Corrected balance at 31.1.Year 19 $254,000
2
Corrected balance at 31.1.Year 19 $150,000
3
Corrected balance at 31.1.Year 19 $15,800
4
Corrected balance at 31.1.Year 19 $20,300
5
Corrected balance at 31.1.Year 19 $3,000
6
Corrected balance at 31.1.Year 19 $40,496
BAFS Learning and Teaching Example
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Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.23

Debtor – P 7
Year 19 $ Year 19 $
Jan 1 Balance b/d 10,000 (A) Bank 10,000

Bank8
Year 19 $ Year 19 $
Jan 31 Balance b/d 31,783 (B) Subscription 250
(A) Debtor - P 10,000 (C) Debtor - O 14,696
Suspense 90 (D) Bank interest 211
(E) Printing (#302293) 678
Balance c/d 26,038
41,873 41,873

Bank (Alternative answer)

Year 19 $ Year 19 $
Jan 1 Balance b/d 29,573 Jan 3 Purchases (#302288) 19,100
Jan 4 Sales 20,000 Jan 7 Electricity (#302289) 1,300
Jan 25 Debtor - M 25,304 Jan 12 Rent (#302290) 15,000
Jan 26 Debtor - N 87,000 Jan 19 Purchases (#302291) 100
Jan 28 Debtor - O 14,696 Jan 20 Machinery Repairs (#302292) 1,500
(A) Debtor - P 10,000 Jan 27 Creditor - A (#302294) 27,200
Jan 27 Creditor - B (#302295) 2,500
Jan 27 Creditor - C (#302296) 45,000
Jan 30 Salary - Chan (#302297) 18,000
Jan 30 Salary - Lee (#302298) 15,000
(B) Subscription 250
(C) Debtor - O 14,696
(D) Bank interest 211
(E) Printing (#302293) 678
Balance c/d 26,038
186,573 186,573

7
Corrected balance at 31.1.Year 19 Nil
8
Corrected balance at 31.1.Year 19 $26,038
BAFS Learning and Teaching Example
As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.24

Loan 9
Year 19 $ Year 19 $
Jan 1 Balance b/d 200,000

Creditor – A 10
Year 19 $ Year 29 $
Jan 27 Bank 27,200 Jan 1 Balance b/d 27,200
Jan 22 Purchases 22,000

Creditor – B 11
Year 19 $ Year 19 $
Jan 27 Bank 2,500 Jan 1 Balance b/d 2,500
(ii) Creditor - C 2,800

Creditor – C 12
Year 19 $ Year 19 $
Jan 27 Bank 45,000 Jan 1 Balance b/d 48,300
(ii) Creditor - B 2,800 Jan 3 Returns inwards 300
(iii) Returns inwards 300 Jan 13 Purchases 2,800
(iii) Returns outwards 300

Capital 13
Year 19 $ Year 19 $
Jan 1 Balance b/d 311,235

Purchases 14
Year 19 $ Year 19 $
Jan 3 Bank 19,100
Jan 19 Bank 100
Jan 31 Creditors 24,800

9
Corrected balance at 31.1.Year 19 $200,000
10
Corrected balance at 31.1.Year 19 $22,000
11
Corrected balance at 31.1.Year 19 $2,800
12
Corrected balance at 31.1.Year 19 $3,000
13
Corrected balance at 31.1.Year 19 $311,235
14
Corrected balance at 31.1.Year 19 $44,000
BAFS Learning and Teaching Example
As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.25

Sales 15
Year 19 $ Year 19 $
Jan 4 Bank 20,000
Jan 31 Debtors 45,100
(1) Suspense 1,000

Electricity 16
Year 19 $ Year 19 $
Jan 7 Bank 1,300

Rent 17
Year 19 $ Year 19 $
Jan 12 Bank 15,000

Salaries 18
Year 19 $ Year 19 $
Jan 30 Bank 18,000
Jan 30 Bank 15,000

Returns inwards 19
Year 19 $ Year 19 $
Jan 31 Creditor - C 300 (iii) Creditor - C 300

Suspense 20

Year 19 $ Year 19 $
Difference in Trial Bal 7,952 (2) Machinery 9,000
(1) Sales 1,000 (4) Bank 90
(3) Accrued telephone 138
9,090 9,090

15
Corrected balance at 31.1.Year 19 $66,100
16
Corrected balance at 31.1.Year 19 $1,300
17
Corrected balance at 31.1.Year 19 $15,000
18
Corrected balance at 31.1.Year 19 $33,000
19
Corrected balance at 31.1.Year 19 Nil
20
Corrected balance at 31.1.Year 19 Nil
BAFS Learning and Teaching Example
As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.26

Accrued telephone 21

Year 19 $ Year 19 $
(3) Suspense 138

Machinery repairs 22

Year 19 $ Year 19 $
(i) Machinery 1,500

Returns outwards 23

Year 19 $ Year 19 $
(iii) Returns inwards 300

Subscription 24
Year 19 $ Year 19 $
(B) Bank 250

Bank interest 25

Year 19 $ Year 19 $
(D) Bank 211

Printing 26

Year 19 $ Year 19 $
(E) Bank 678

21
Corrected balance at 31.1.Year 19 $138
22
Corrected balance at 31.1.Year 19 $1,500
23
Corrected balance at 31.1.Year 19 $300
24
Corrected balance at 31.1.Year 19 $250
25
Corrected balance at 31.1.Year 19 $211
26
Corrected balance at 31.1.Year 19 $678
BAFS Learning and Teaching Example
As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Topic Overview P.27

Dragon Company
Corrected Trial Balance as at 31 January Year 19
$ $
Machinery 254,000
Furniture 150,000
Stock at 1 January Year 19 15,800
Debtor – M 20,300
Debtor – N 3,000
Debtor – O 40,496
Bank 26,038
Loan 200,000
Creditor – A 22,000
Creditor – B 2,800
Creditor – C 3,000
Capital 311,235
Purchases 44,000
Sales 66,100
Electricity 1,300
Rent 15,000
Salaries 33,000
Accrued telephone 138
Machinery repairs 1,500
Returns outwards 300
Subscription 250
Bank interest 211
Printing 678

605,573 605,573

Dragon Company
Bank Reconciliation Statement as at 31 January Year 19
$ $
Balance per Cash Book 26,038
Add Unpresented cheque
#302287 2,000
#302297 18,000
#302298 15,000 35,000
Balance per Bank Statement on 31 January Year 19 61,038

BAFS Learning and Teaching Example

As at April 2009
 BAFS Elective Part Lesson One
Accounting Module – Bank Reconciliation Statement
Financial Accounting

Topic A03:
Bank Reconciliation Statement and
Correction of Errors

Technology Education Section

Curriculum Development Institute
Education Bureau, HKSARG
Topic A03
April 2009 Bank Reconciliation and
BAFS Elective Part
2 Learning and Teaching Example
Correction of Errors

Introduction Lesson 1

This session aims to reinforce students’ understanding of the reasons for

differences between the bank statement and cash book balances; and the Upon completion of this lesson, students will be able to:
techniques in reconciling such differences and preparing the bank
reconciliation statement. Errors which cause and do not cause
• Understand the timing differences between the Bank Statement and
disagreement in the trial balance and the techniques to correct them will be
Cash Book resulting reconciliation.
discussed. Way that profit is affected by errors will also be identified.
• Using the vouchers provided, create a Bank account by consolidating the
accounting cycle learnt.
Duration
• Identify discrepancies by comparing a Bank account to a Bank
Three 40-minute lessons Statement.
• Update the Bank account in the Cash Book and create the Bank
Contents Reconciliation Statement.
Lesson 1 – Bank Reconciliation Statement • Understand that the Bank Reconciliation Statement can be a internal
Lesson 2 – Errors which Do not Cause Disagreement in Trial Balance control tool.

Lesson 3 – Errors which Cause Disagreement in Trial Balance • Understand the methods to minimise the possibility of misappropriation
of funds.

1
 Record of Money owned by the Discrepancies between bank
Company statement and cash book
Should these
Should these z Timing differences
two records
two records z How long would it take for a cheque to be sent
have the
have the same
same to our supplier in Singapore?
Cash Book balance
balance onon aa
particular date?
particular date?

Bank Statement

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 3 Learning and Teaching Example Bank Reconciliation and 4 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher asks the students how to record the money owned by the company. Teacher explains that recording should be done once the transaction has
occurred.
Suggested answers:
(a) in the Cash Book by the company book-keeper; and Ask students how they would send the cheque to a Singapore vendor.
(b) a mirror image provided by the bank in the form of bank statement sent
to its customers at regular intervals. If this is done by mail, it may take 4 to 5 days. Even if it is by courier, it may
reach the vendor on the next day. However, it takes 2 working days for a
The teacher then asks students whether these two records will have the local banking system, or even longer for the Singapore vendor to deposit the
same balance on a particular date. If their answer is: cheque into their HK$ account with a Singapore bank then must send it back
(a) Yes, go to the next page and explain to them why it is not the case. to Hong Kong for clearing.
(b) No, with compliment remarks and go to the next page.
 Discrepancies may happen … For Explaining the Differences
z An overseas customer chooses to wire the
money to us without sending us the
cheque physically (electronic money Bank
transfer). Reconciliation
z Bank charges us overdraft interest. Statement
Cash Book Bank
Statement

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 5 Learning and Teaching Example Bank Reconciliation and 6 Learning and Teaching Example
Correction of Errors Correction of Errors

Similarly, an overseas customer may find it more convenient to ask his bank In reality, the bank account (Cash Book) and the bank statement will not
to debit his own account directly for remitting the money to us. However, we reflect the same balance on any given date even though neither party has
will not be aware of the remittance until we receive the credit advice or bank not done anything wrong. Hence, we have to prepare the Bank
statement. Reconciliation Statement.

Bank would charge the company interest directly for amount overdrawn.

Again, discrepancies will appear between the balance of bank statement and
cash book.
 Causes of Differences:
Causes of Differences: Entries which were made in
Entries which were made in bank statement only
cash book only
z Standing Order
z Unpresented cheques z Direct debit
z Deposit in transit/Uncredited item z Credit transfer
z Errors in the cash book z Bank charges
z Dishonoured cheques
z Bank Errors

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 7 Learning and Teaching Example Bank Reconciliation and 8 Learning and Teaching Example
Correction of Errors Correction of Errors

Unpresented cheques refer to cheques issued to payee who has not Teacher explains that the bank will charge (debit) the company’s account for
presented to his bank for payment. a prior auto-pay arrangement in terms of standing order or direct debit, eg
monthly donation of a fixed amount to the Community Chest, payment of
electricity to Hong Kong Electric, etc. The book-keeper may realise and
Deposit in transit/Uncredited item refers to receipts not yet deposited in the record these items in the cash book only after receipt of the bank statement.
bank account or have been kept in the deposit drop-in box after banking Standing Order can also serve with a receipt purpose.
business hours.

A customer may choose to settle his account by bank transfers. The details
Occasionally, the book-keeper may make a mistake in the cash book, eg, may only be known when the bank statement/phone banking/online banking
entering a transaction on the wrong side of the cash book, thereby recording enquiry is checked.
an incorrect balance from the previous page, or omit an entry, etc.

The bank will charge for services such as overdraft facility, inward/outward
remittance, setup of direct debit arrangements and issuance of cheque
books for some banks.

If a cheque deposited fails to clear, because of, eg, insufficient funds,

unverifiable signature or at the order of the drawer, the bank will debit the
account for the returned cheque.

Sometimes the bank might, by mistake, debit or credit the company’s

account though it is unlikely in the Hong Kong banking system.

7 8
 Steps for Reconciliation
(1)Pair
(1) Pairup
upentries
entriesin
inBank
BankAccount
Accountwith
withthose
thoseon
on
theBank
the BankStatement.
Statement.

(2)Update
(2) UpdateBank
BankAccount
Accountfor
foritems
itemsfound
foundon
onthe
the
BankStatement
Bank Statementonly.
only.

(3)Correct
(3) CorrectErrors
Errorsfound
foundin
inthe
theBank
BankAccount.
Account.

(4)Prepare
(4) Prepare Bank
Bank Reconciliation
Reconciliation Statement
Statement with
with
theadjusted
the adjustedBank
Bankaccount
accountdifference
difference

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 9 Learning and Teaching Example Bank Reconciliation and 10 Learning and Teaching Example
Correction of Errors Correction of Errors

The reconciliation process starts by comparing the monthly bank statement

with the cash book for the corresponding period. If the opening balance on
the bank statement does not correlate with the cash book, check for any
outstanding items in the bank reconciliation statement of the preceding
period now appearing on the current bank statement.

Match entries appearing in both the current period cash book and bank
statement. Adjust for discrepancies shown in the bank statement only. At
this point any errors disclosed in the cash book should be updated as well.
Then we’ll have a ‘clean’ bank balance in the cash book.

Prepare the bank reconciliation statement starting with the adjusted cash
book bank balance to arrive at the balance shown on the bank statement.
Adjust entries shown in the cash book with a/an:
(a) Increase for
(i) Items on the payments side, e.g. unpresented cheque
(ii) Error of incorrect deposits made by the bank
(b) Decease for
(i) Items on the receipts side, e.g. deposits in transit
(ii) Error of incorrect withdrawals made by the bank

10
 Activity 1: Matching Activity 2: Problem
Solving

The Case Study of Dragon Limited

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 11 Learning and Teaching Example Bank Reconciliation and 12 Learning and Teaching Example
Correction of Errors Correction of Errors

Refer to Student Worksheet p. 1 – 2. Students must verbally distinguish the Refer to Student Worksheet p. 3 – 15. The case of Dragon Company is
discrepancy items for reconciliation listed either in cash book or bank used to help students understand and apply the skills in creating the bank
statement. They must also show the effects on the cash book/bank account in the ledger and prepare the bank reconciliation statement.
statement balances.
Objectives of the activity:
Objectives of the activity: • Apply the skills of creating the Cash Book (Bank only) from the
•Identify the discrepancy items listed on either cash book or bank source documents: cheque counterfoils, pay-in-slips, etc.
statement and their impact on the bank balance. • Invoice and pro-forma invoices are provided for further study.
•Distinguish discrepancy items shown on bank statement or cash • Identify the reconciliation process discrepancies.
book only.
• React to the discrepancies.
•Identify their effects on bank balance.
 z Dragon Company is an electronic appliances wholesaler
with its year end on 31 December. It is also the sole
agent of Somy Corporation. The business has
experienced a downturn during the past two years with
poor financial control and inefficient accounting
information management.

z You are asked to answer questions about this Company

in the coming Activities.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 13 Learning and Teaching Example Bank Reconciliation and 14 Learning and Teaching Example
Correction of Errors Correction of Errors

In this activity, a set of documents were provided for students in helping the Refer to Student Worksheet p. 4. When money is deposited into the bank
manager of Dragon Company to determine if there is any misappropriation of account, the bank will acknowledge receipt on the pay-in-slip.
funds by a former employee.

Students can do it in groups and they have 15 minutes to complete the task.

Teacher can now use a few minutes to introduce those documents (slide
#14-18) to students.
 BANK OF HONG KONG LTD

DATE 10/1/Year 9
TO Somy Corporation
BAL B/F

AMT DEPOSITED

AMT DEPOSITED

TOTAL

AMT THIS CHECK 16,000.00

BAL C/F

CH No. 285701
Camrecorder (PO A370)

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 15 Learning and Teaching Example Bank Reconciliation and 16 Learning and Teaching Example
Correction of Errors Correction of Errors

Refer to Student Worksheet p. 6. A cheque counterfoil is that part of a Refer to Student Worksheet p. 8. An invoice or bill is a commercial
cheque that is retained in the cheque book as a record. A cheque will be document issued by a seller to the buyer, indicating the products, quantities,
torn off from the cheque book leaving the counterfoil for record or and agreed prices for products or services the seller has provided for the
identification purposes. buyer. An invoice indicates the buyer must pay the seller, according to the
payment terms.

From the seller’s perspective, an invoice is a sales invoice. The buyer sees it
as a purchase invoice. The document indicates the buyer and seller, but the
term invoice indicates money is owed.
 Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 17 Learning and Teaching Example Bank Reconciliation and 18 Learning and Teaching Example
Correction of Errors Correction of Errors

Refer to Student Worksheet p. 11. Refer to Student Worksheet p. 12.

In trade transactions, a pro forma invoice states the commitment from the A bank statement is a bank report (released on a fixed date every month)
seller to sell the goods to the buyer at the specified price and terms. It is that lists deposits, withdrawals, cheques paid, and service charges incurred
used to declare the value of the sale. It is not a true invoice, because it is not on an account. It shows the cumulative effects of these transactions and the
used to record Debtors for the seller and Creditors for the buyer. account’s balance, up to the date the report was prepared.

Simply, a ‘Proforma Invoice’ is a Confirmed Purchase Order where buyer

and Supplier agree on the Product Detail and its cost to buyer. The content
of a pro forma invoice is almost identical to a commercial invoice. It is usually
considered a binding document although the price might change prior to the
final sale.
 Dragon Company
Dragon Company Bank (Revised)
Bank Year 9 $ Year 9 $

Year 9 $ Year 9 $ Jan 1 Balance b/d 15,830 Jan 3 Somy Corp (#285701) 30,500

Jan 1 Balance b/d 15,830 Jan 3 Somy Corp (#285701) 30,500 Jan 4 Blueberry Ltd 21,780 Jan 4 Office Furniture: Ikea 17,250
(#285702)
Jan 4 Blueberry Ltd 21,780 Jan 4 Office Furniture: Ikea 17,250
(#285702) Jan 12 Plum Ltd 24,750 Jan 7 Electricity: H K 285
Electric (#285704)
Jan 12 Plum Ltd 24,750 Jan 7 Electricity: H K 285
Electric (#285704) Jan 12 Cherry Co 18,000 Jan 10 Kowloon (#287505) 16,000

Jan 12 Cherry Co 18,000 Jan 10 Kowloon (#287505) 16,000 Jan 28 Lemon Ltd 8,000 Jan 23 Somy Corp (#285706) 36,500

Jan 28 Lemon Ltd 8,000 Jan 23 Somy Corp (#285706) 36,500 Jan 31 Cherry Co 35,640 Jan 30 Salary: Mary Kwan 10,000
(#285707)
Jan 31 Cherry Co 35,640 Jan 30 Salary: Mary Kwan 10,000
(#285707) Jan 31 Green Trees 13,000 Jan 31 Bank interest 140

Jan 31 Balance c/d 13,465 Jan 31 Lemon Ltd – Ret 8,000

cheque
124,000 124,000
Jan 31 Balance c/d 18,325
Feb 1 Balance b/d 13,465
130,000 130,000
Feb 1 Balance b/d 18,325
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 19 Learning and Teaching Example Bank Reconciliation and 20 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher begins checking the answer with students. Teacher shows students the adjusted bank account incorporating all items
shown in the bank statement.
Teacher shows students that the bank account balance is different from the
bank statement balance.
 Summary
Discrepancies found in Cash Book Î
Dragon Company
Bank Reconciliation Statement as at 31 January Year 9
Bank Reconciliation Statement

Nature Change in Cash Adjustment in

$
Book Bank
Balance per adjusted cash book balance 18,325.00 Reconciliation
Add Unpresented cheque (cheque no. 285707) 10,000 Statement
28,3250.00 Unpresented cheque ‐ Increase
Less Deposit in transit (35,640.00)
Overdraft per bank statement (7,315.00) OD Deposit in ‐ Decrease
transit/Uncredited item
Receipts Overstated Decrease ‐
Payments Overstated Increase ‐
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 21 Learning and Teaching Example Bank Reconciliation and 22 Learning and Teaching Example
Correction of Errors Correction of Errors

A bank reconciliation statement is prepared which reconciles the “adjusted” Teacher reiterates that only unpresented cheques and deposits in transit
balance on the cash book with the balance on the bank statement. should be shown on the bank reconciliation statement.

Should there be a bank overdraft on the bank statement, the same steps
apply except the amount is in parenthesis ending with the suffix “OD”.

Students should be reminded that errors identified in the cash book must be
corrected before the reconciliation.

22
 Discrepancies found in Bank Statement
Î Update Cash Book

Nature Change in Adjustment in

Cash Book Bank
Reconciliation
Statement Activity 3:
Auto‐pay /Standing order Decrease ‐
payments/Direct Debit Group Discussion
Standing order receipts Increase
Dishonoured cheque Decrease ‐
Credit transfer Increase ‐
Bank charges Decrease ‐
Withdrawal by mistake ‐ Decrease
Deposit by mistake ‐ Increase
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 23 Learning and Teaching Example Bank Reconciliation and 24 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher continues to conclude that the items requiring updating in the cash Teacher asks students to divide into groups of 4 to 5 students to find out
book include: standing order payments/receipts, auto-pay, dishonoured measures which can effectively and efficiently protect the assets of cash to
cheque, credit transfer, bank charges, bank interest. avoid misappropriation of funds in small businesses.

Any bank errors should be dealt with on the bank reconciliation statement Objectives of the activity:
with the bank duly informed. • Identify measures to minimise the possibility of misappropriation of
funds.
The preparation of the bank reconciliation statement is an ongoing exercise • Apply internal control and cash management in small businesses.
which acts as an important internal control tool.
Students can refer to Student Worksheet p.16 for details.

23
 Internal Control
z Segregation of duty Lesson Two
z Preparation of Bank Reconciliation Correction of Errors (I)
Statement - Errors which do not cause
disagreement of trial balance

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 25 Learning and Teaching Example Bank Reconciliation and 26 Learning and Teaching Example
Correction of Errors Correction of Errors

The responsibility for keeping of bank account should be separate from Lesson 2
preparation of the bank reconciliation statement to avoid duplication of
potential errors and fraud.
This session provides students will be able to:

Fraud occurs when a cashier or clerk steals cash from one customer's
payment and covers it up by stealing cash from the next customer's - understand and differentiate the six types of errors that do not affect the
payment ... and so on. For small size businesses, it is easier where cash trial balance.
handling and cash recording duties are handled by one person. A bank - understand why these errors do not affect the trial balance.
reconciliation statement can help to locate any fraud and or errors. - understand how these errors could be identified.
- understand how to correct these errors through journal entries.
End of Lesson 1 - understand the effects of errors on profit calculations and how to prepare
a corrected profit and loss statement.

25 26
 Is this Trial Balance correct?

Have you ever watched the Chinese Dragon Company

acrobatic circus? Or the tightrope walking? Trial balance as at 31 December Year 6

Dr Cr
$ $
They fall if they could not maintain
balances.
Building 100
Dr Totals
Cash 150 = Cr Totals
Capital 120
Can you remember a Beijing Olympic
Gold Medalist who missed her Creditors
Furniture 130
130
balance in the semi-final? 250 250
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 27 Learning and Teaching Example Bank Reconciliation and 28 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher asks students if they have ever watched the Chinese acrobatic
circus or the tightrope walking. (1) Just as the slide shows, even though the trial balance is in balance, we
know there is something wrong because the Furniture account appears
(1) Chinese acrobatic circus specialises in the art of jumping, tumbling, and on the credit side of the trial balance.
balancing, requiring agility and skilful control of the body. Tightrope walking
requires balances of the body when walking on a rope. (2) After investigation, the accountant found that creditor’s account of $130
was mistakenly written as Furniture account in the above trial balance,
(2) The performers will fall if they do not maintain their balance. Olympic and must be corrected.
Gold Medalist, He Kexin in Beijing 2008 is no exception to this rule.
(3) When preparing the trial balance, we need to check the reasonableness
(3) Similar to Chinese acrobatic circus performance and tightrope walking, if and consistency of the data and accounts from the supporting documents.
a trial balance is not in balance, there are errors. (eg. Invoices, ledgers, journals, etc) in order to prevent such errors.

(4) However, it still cannot be assumed it is error free even if the trial balance (4) Usually we would have 6 types of errors that could happen without
is in balance. affecting the trial balance equality.

27 28
 Errors that do not affect
equality of trial balance 1. Errors of commission

Example: Paid Somy Corp

Corp.. by cheque
$6,
$6,000. It was correctly entered in the
cash book, but was entered by
mistake in the account of Somi Co.

Correction:
Can you name Dr Cr
those types of $ $
errors? Somy Corp 6,000
Somi Co 6,000
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 29 Learning and Teaching Example Bank Reconciliation and 30 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher tells the students that even if the trial balance is in balance, it does These errors arise when the correct amounts are entered, but not to the
not mean that there are no mistakes in the accounting records. correct account even though the accounts are in the same group.

Teacher then introduces the six types of errors not affecting the equality of
trial balance, that is:

1.Errors of commission
2.Errors of principle
3.Errors of original entry
4.Errors of omission
5.Compensating errors
6.Errors of complete reversal

29 30
 2. Errors of principle 3. Errors of original entry

Example: Credit purchase of $17,

$17,000
Example: The purchase of a motor from Somy Corp has been entered as
van $80
$80,000
,000 by cheque was debited in both as a $10,
$10,000 debit and a credit.
error to the motor expenses account.
Correction:
Correction:
Dr Cr Dr Cr
$ $ $ $
Motor van 80,000 Purchases 7,000*
Motor expenses 80,000 Somy Corp 7,000

Topic A03
Bank Reconciliation and
BAFS Elective Part Topic A03
Bank Reconciliation and
* $17,000 - $10,000 = $7,000 BAFS Elective Part
31 Learning and Teaching Example 32 Learning and Teaching Example
Correction of Errors Correction of Errors

These errors arise where an item is entered in the wrong type of account. These errors arise when the same incorrect amounts are entered in debit
and credit of the ledger accounts.

31 32
 4. Errors of omission 5. Compensating errors

Example: Goods purchased from Somy Example: Both the stationery expense
Corp for $2,000 -- but no entry made in and the commission income were
the books. overcast by $50. These errors offset
the effect on the other.
Correction:
Dr Cr Correction:
$ $ Dr Cr
Purchases 2,000 $ $
Somy Corp
Corp 2,000 Commission income 50
Stationery expenses 50
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 33 Learning and Teaching Example Bank Reconciliation and 34 Learning and Teaching Example
Correction of Errors Correction of Errors

These errors will arise when transactions are completely omitted from the There are 2 or more errors which have offset the effect of the other. The
books. errors do not have to be related in any way.

33 34
 6. Errors of complete reversal Steps for Errors correction
of entries
(1) Identify
(1) Identifythe
theerrors.
errors.

Example: A cheque of $400 was paid to OK (2) Make

(2) Makethe
thecorrections.
corrections.
Furniture Co. for amount owing. $400 was
debited to cash book and $400 was credited (3) Check
(3) Checkififthe
thecorrections
correctionsaffect
affectprofit
profitand
andloss
loss
to OK Furniture Co account. accounts(P/L)
accounts (P/L)or
orbalance
balancesheet
sheet(B/S)
(B/S)accounts
accounts
Correction: (4) For
(4) Forthose
thoseaffecting
affectingP/L,
P/L,quantify
quantifythe
theeffect
effectand
and
Dr Cr make adjustment to the company profit,
make adjustment to the company profit, by by
$ $ Debitingprofit
Debiting profitand
andloss
lossaccounts
accounts Æ ÆProfit
ProfitÐ Ð
OK Furniture Co. 800* OR
Bank 800 OR
Creditingprofit
Crediting profitand
andloss
lossaccounts
accountsÆÆProfit
ProfitÏÏ
Topic A03
* $800 = $400 x 2 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 35 Learning and Teaching Example Bank Reconciliation and 36 Learning and Teaching Example
Correction of Errors Correction of Errors

This type of errors occurs where the correct accounts and correct amounts Teacher goes through steps as above for identifying and correcting the
are used, but the entries were entered in the wrong side of the accounts. errors.

Students are required to understand the impact of errors to the profit / loss
position of the company.

35 36
 STEP 1 STEP 2 STEP 3 STEP 4
STEP 1 STEP 2 STEP 3 STEP 4
Types of Dr Cr $ Effect Effect on
Types of Dr Cr Effect on Effect on Errors on P/L profit
Errors $ P/L profit a/cs
accounts
4 Errors of Purchases Somy 2,000 Yes - $2,000
1 Errors of Somy Somi 600 Nil Nil omission (P/L) Corp (B/S)
commission Corp Corp (B/S)
5 Compen- Commission Stationery 50 Net off + $50 - $50 = 0
(B/S)
sating income Expenses
2 Errors of Motor Motor 80,000 Yes + 80,000 errors (P/L) (P/L)
principle van expenses
(B/S) (P/L) 6 Errors of OK Bank 800 Nil Nil
complete Furniture (B/S)
3 Errors of Purch- Somy 7,000 Yes - $7,000 reversal of Co (B/S)
original ases Corp entries
entries (P/L) (B/S)
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 37 Learning and Teaching Example Bank Reconciliation and 38 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher leads students to identify the errors, correct the errors and Teacher continues to lead students to identify the errors, correct the errors
understand the effects on profitability, step by step. and understand the effects on profitability.

Types of Errors: Types of Errors:

(1)Somi Co Account which was wrongly debited should be credited back to (4) Purchases from Somy Corp has been completely omitted. We simply
correct the error. Also Somy Corp should be debited to reflect the payment record in the books by debiting $2,000 to the purchase account and crediting
made. Because the accounts affected are all balance sheet accounts, there $2,000 to the Somy Co account. As the purchase account is a profit and
would be no impact on profit and loss. loss account, increasing it will lead to a decrease of $2,000 in profit.

(2)To record the purchase, the motor van account should be debited, not the (5) To correct the error, deduct both debit and credit sides with $50. As the
motor expenses account. The correction should be made by debiting the two errors compensate each other, there will be no effect on profit and loss.
motor van account and crediting the motor expenses account. Since the
correction would affect the credit side of an expense account, the company (6) Issuing a cheque to a creditor should be recorded as debiting the creditor
profit would increase accordingly. and crediting the bank. Entries reversal will have a double effect on both
sides. Therefore, the correction should be done by debiting $800 ($400 x 2)
(3)The purchase from Somy Corp should be $17,000 instead of $10,000. to creditor – OK Furniture account and crediting the bank account. As both
Thus the purchase from Somy Corp is understated. Debiting purchases and accounts are balance sheet accounts, they do not affect company profit.
crediting Somy Corp by $7,000 could rectify the error. As the purchase
account is a profit and loss account, the increase of $7,000 purchase would
lead to a decrease of $7,000 in profit.

37 38
 Effects of Adjustments on
Summary
Profit and Loss
z Before correcting the errors, the net profit of Dragon Effects of errors on Profit:
Company for the year ended 31 December Year 7 was
$12,000.
Errors P/L accounts Debit / Credit ? + Profit or
Errors affecting P/L
affected - Profit ? accounts (eg. Sales)
2 Motor expenses Credit + $80,000 Æ Affect profit
3 Purchases Debit - $7,000
4 Purchases Debit - $2,000
5 Commission income Debit - $50 Errors not affecting P/L
5 Stationary expenses Credit + $50 accounts (eg. Debtors)
Æ No effect on profit
Total effect on P/L + $71,000

After adjustment, the profit would be $83,000.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 39 Learning and Teaching Example Bank Reconciliation and 40 Learning and Teaching Example
Correction of Errors Correction of Errors

The original profit of Dragon Company for the year ended 31 December Year Students should identify the accounts that will be affected by the errors and
7 was $12,000. After the adjustment, its profit is now $83,000 ($71,000 + the way it affects the company’s profit.
$12,000).

39
 Activity 4: Identify the
errors

Activity 4: Activity 4A:

Identify the errors As the bookkeeper of Dragon
Company, you found the following
errors from the company books. You
are asked by your manager to identify
the type of errors.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 41 Learning and Teaching Example Bank Reconciliation and 42 Learning and Teaching Example
Correction of Errors Correction of Errors

Refer to Student Worksheet p. 17. Teacher asks students to identify the 6 In this activity, students are required to study (A) to (F) and identify what
errors discovered on the accounting records with the type of error. types of errors each belongs to.

Teacher asks students to think why these 6 types of errors do not affect the Students can write down the answer on Student Worksheet p.17.
trial balance.

Students can form groups to complete the whole task. (1A-1C).

Objectives of the activity:

•Distinguish the six types of errors which do not affect the trial balance.
•Understand why these type of errors do not affect the trial balance.
 Activity 4A: Identify the errors - Activity 4B:
Answers

(A) Errors of principle

(B) Errors of complete reversal of entries
(C) Errors of commission Do you know why these errors
(D) Errors of original entry do not affect agreement of the
(E) Errors of omission trial balance totals?
(F) Compensating errors

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 43 Learning and Teaching Example Bank Reconciliation and 44 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher checks answers with students. Refer to Student Worksheet p. 18. Teacher asks students to think of possible
answers why these errors do not affect agreement of trial balance totals.
 Activity 4B: Answers Activity 4C:

Reasons Discuss with your

members to
(1) Double Entry System: One Debit = suggest one
One Credit possible way to
uncover errors
(2) For the above errors to happen: (A) to (F) ?
- No Debit and No Credit at the same
time.
- Wrong amount for both Debit and
Credit entry.
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 45 Learning and Teaching Example Bank Reconciliation and 46 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher checks answers with students. Refer to Student Worksheet p.19. Teacher asks students to discuss the
possible ways to locate the errors from (A) to (F). An example of (A) is given
for students’ reference.
 Activity 4C: Answers Activity 4C: Answers

Answer for (A)

Accountant found that the Answer for (B)
total of monthly purchases
day book did not match the There is a difference between
purchases account of the the bank statement balance
company. Reviewing the and the cash book balance.
purchases account details, Investigating the difference,
the accountant found that the accountant found a cheque
there was an electricity paid to Ikea Furniture Co was
expense relating to Mr. recorded as debit in the cash
Lung’s home. book.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 47 Learning and Teaching Example Bank Reconciliation and 48 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher checks answers with students. Teacher checks answers with students.
 Activity 4C: Answers Activity 4C: Answers

Answer for (C)

Answer for (D)
Plum Ltd phoned us and
complained that the Cherry Co paid us
statement we sent them $30,000.
showed an unpaid amount
which they had already paid
us before the month end.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 49 Learning and Teaching Example Bank Reconciliation and 50 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher checks answers with students. Teacher checks answers with students.
 Activity 4C: Answers Activity 4C: Answers

Answer for (E) Answer for (F)

The property owner sent the The errors were found when
company an overdue rent the manager asked another
reminder and the accountant staff member to re-calculate
found that there was no rent the sales and purchases
expense in profit and loss journals.
account for this month.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 51 Learning and Teaching Example Bank Reconciliation and 52 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher checks answers with students. Teacher checks answers with students.
 Activity 5:
Help your boss
Activity 5:
Help your boss Your boss, the accounting
manager of Dragon Company,
would like you to correct the
errors identified in Activity 4 by
means of journal entries.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 53 Learning and Teaching Example Bank Reconciliation and 54 Learning and Teaching Example
Correction of Errors Correction of Errors

Refer to Students Worksheet, p. 20. Teacher asks students to prepare

journal entries for correction of errors and correct the profit.

Objectives of the activity:

•Understand the journal entries for correction of errors.
•Provide narratives to describe each type of errors corrected.
•Ascertain the effects on profit as affected by errors which are of
nominal nature.
 Activity 5: Activity 5:
Help your boss - Answers Help your boss - Answers

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 55 Learning and Teaching Example Bank Reconciliation and 56 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher checks answers with students. Teacher checks answers with students.
 Activity 6:
Profit bingo
Activity 6:
Your manager would like to know
Profit bingo the impact of the errors identified
in Activity 4 on the company’s
profit and loss.

You were provided the income

statement for the Dragon
Company (Before adjustment).

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 57 Learning and Teaching Example Bank Reconciliation and 58 Learning and Teaching Example
Correction of Errors Correction of Errors

Refer to Students Worksheet p. 21, teacher asks students to complete a

table of journal entries and amend the income statement for the Dragon
Company.

Objectives of the activity:

•complete the journal entries to correct them.
•differentiate if the error will affect the company’s profit.
•adjust the profit and loss account after the correction of errors.

Teacher can also explain the components of the profit and loss accounts,
especially those accounts that will be affected by the errors.
 Activity 6: Profit bingo
Please help the manager to determine
Activity 6: Profit bingo
the profit and loss position by - Answers
completing the following table.

Dr. OK Furniture Co

???
??? ??

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 59 Learning and Teaching Example Bank Reconciliation and 60 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher asks students to complete a table of journal entries and amend the Teacher checks answers with students.
trading and profit and loss accounts for Dragon Company.
 Dragon Company – (After Adjustment)
Activity 6: Profit bingo Income Statement for the year ended 31 Dec Year 8
$ $
- Answers Sales 1,127,550
Less: Returns inwards 3,600
1,123,950
Cost of goods sold:
Opening stock 23,650
Purchases 539,830
563,480
Less: Closing stock 15,800 547,680
Gross profit 576,270
Less Expenses:
Electricity 18,750
Rent 180,000
Salaries 411,500
Other operating expenses 200 610,450
Topic A03
Bank Reconciliation and 61
BAFS Elective Part Net Loss
Topic A03
Bank Reconciliation and 62
(34,180)
BAFS Elective Part
Learning and Teaching Example Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher checks answers with students. Teacher checks the adjusted profit and loss accounts with students.
 Recap!!
Errors
Recap!!
Errorsof
of
Commission
Commission Effects of errors to the profit
Complete
Complete Errors
Errorsof
of
Reversal
Reversal Principle
Principle Account being affected Any effect on Increase / Decrease
of
ofEntries
Entries by correction of errors the profit ? in profit
Errors not affecting
Trial Balance Agreement
As an account grouped in Yes Profit Ð Debit entry

Compensating
Compensating Errors
Errorsof
of Profit and loss account Profit Ï Credit entry
Errors
Errors Original
OriginalEntry
Entry
As an account grouped in No No effect
Errors
Errorsof
of Balance Sheet
Omission
Omission
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 63 Learning and Teaching Example Bank Reconciliation and 64 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher recaps with students the definition and nature of the six types of Teacher recaps with students the impacts of the errors to profit and loss of
errors. the company.

Teacher reiterates the reasons why these errors happen. End of Lesson 2.

63 64
 Lesson Three
Correction of Errors (II)
- Errors which cause
disagreement of trial balance When she could not
maintain balance.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 65 Learning and Teaching Example Bank Reconciliation and 66 Learning and Teaching Example
Correction of Errors Correction of Errors

Lesson 3 Teacher invites students to state the Rule of Double Entry, i.e., every debit in
one account must have a corresponding credit in another account(s). Trial
balance is an extract of the accounts in the books after balancing.
This session provides students will be able to:

This means if the rule of double entry is not followed, e.g., Debit not
- understand the reasons of trial balance inequality. accompanied by a corresponding Credit, or vice versa, the trial balance
- understand there must be errors in the accounts if trial balance fails to cannot be equal on both sides resulting in a difference between debit and
maintain balance. credit totals.
- use “Suspense Account” to maintain the balance of trial balance
temporarily. Total Debits ≠Total Credits
- identify and locate errors from source documents and accounting records.
- correct the errors in the ledger accounts.
- understand the effects of errors on profit of the company.

65 66
 Is this Trial Balance correct? What to do if the errors are not
Dragon Company
found out quickly?
Trial balance as at 31 December Year 8 Create “Suspense”
Account to
Dr Cr temporarily
$ $ maintain the books
Dr Totals
Dr Totals≠
in balance.
Building 100 =
Cr Totals?
Cash 150 Cr Totals If Total Debits > Total Credits If Total Credits > Total Debits
Capital
Capital 130
120 Ð Ð
Creditors 130 Suspense Account Suspense Account
Difference in books Difference in books
250 250
260
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 67 Learning and Teaching Example Bank Reconciliation and 68 Learning and Teaching Example
Correction of Errors Correction of Errors

In a manual accounting system, we may occasionally recklessly forget to The teacher tells students that accountants have to uncover the errors
follow the ‘Rules of Double Entry’ in the recording transactions. whenever the trial balance is not in balance.

The teacher asks students who have experienced a Trial Balance out of Because of the time factor, we may have inadequate time to ascertain errors.
balance. A Suspense Account could be temporarily created to represent the
difference before the errors and thus corrected.
The teacher reminds the students that if the trial balance is not in agreement,
errors can be located by referring to the source documents, such as Day A Suspense Account is created by placing the differences on the side of the
Books, pay-in slips, invoices, etc. to see if the Rule of Double Entry has been trial balance where the shortfall happens.
followed.

After investigation, the Accounting Officer of Dragon Company quickly

discovered that the accounting clerk had incorrectly recorded the capital
entry to the trial balance. Instead of copying capital of $120 from the ledger,
it was copied as $130. This resulted in the trial balance not being in balance.
So, the capital entry should be corrected to $120.

67 68
 Is this Trial Balance correct? Errors causing Disagreement
Dragon Company
in the Trial Balance
Trial balance as at 31 December Year 8
Why did I fall?
Dr Cr
$ $
1. One entry only
Debit OR Credit entry
Building 100 2. Two entries
Cash 150 Both on Debit side OR
Capital
Capital 130
120 Both on Credit side
nse ill be
pe
Creditors 130 Suscount awfter 3. Two entries
ac ed re
Suspense 10 s
clo rs a Debit ≠ Credit
o d
err recte
260
250
250 260
250
260 Æ cor

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 69 Learning and Teaching Example Bank Reconciliation and 70 Learning and Teaching Example
Correction of Errors Correction of Errors

After locating the errors, correction is performed by providing the correct The teacher reminds students of the reasons why the trial balance could be
entry in one account with the opposite entry entered in the Suspense unbalanced:
Account.
One entry only
Once all the errors are corrected, the Suspense Account is closed with the Under the double entry system, one debit must be followed by one credit.
trial balance now in agreement. Failing to enter either one of them causes the trial balance to be not in
balance. For example: Crediting cash account only for paying a creditor by
cash.

Two entries made on the same side

Making two entries on one side causes the trial balance to be not in balance.
For example, debiting both creditor account and cash account for paying a
creditor by cash.

Making two different entries

Debiting and crediting different amounts for paying a creditor by cash.

69 70
 2. Two entries
1. One Entry Only - Both on Debit side or
Debit or Credit entry Both on credit side

Example: Received cash of $700 from Example: Received custome returned

Lemon Ltd, a trade debtor. It was goods of $3,200 from Plum Ltd. Returns
correctly entered in the cash book but inwards account has been input
no other corresponding entry was correctly but Plum’
Plum’s account was
made.
made. debited.
debited.
Correction: Correction:
Dr Cr
Dr Cr $ $
$ $ Suspense account 6,400*
Suspense account 700 Plum Ltd 6,400
Lemon Ltd 700 * $6,400 = $3,200 x 2
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 71 Learning and Teaching Example Bank Reconciliation and 72 Learning and Teaching Example
Correction of Errors Correction of Errors

This type of error arises when only one debit or only one credit entry was This type of error arises when debit side / credit side of two accounts was
made. entered on the same side while no entry was made on the other
corresponding side.
It would make the trial balance imbalanced. In this case, a suspense account
was credited to temporarily maintain the balance of the trial balance. When the trial balance was not in balance and error was not yet found, the
Suspense Account was credited to balance temporarily.
Once the error was discovered, the accountant corrects the entry by debiting
the suspense account and crediting the debtor account, Lemon Ltd. Then, the error was identified. In this case, instead of crediting Plum Co
account, it was wrongly debited.
This correction affects the balance sheet only, there would be no impact on
profit. It would be corrected by debiting the Suspense Account and crediting the
Plum Ltd account by twice the amount of returns inwards.

As this correction affects the balance sheet only, there would be no impact
on profit.

71 72
 Steps for Errors correction
3. Two entries - Debit ≠ Credit Useof
Use ofSuspense
SuspenseAccount
Accountto
tobalance
balancethe
thetrial
trial
balancenot
balance notin
inagreement.
agreement.

(1) Identify
(1) Identifythe
theerrors
errors
Example: Somy Corp extended a cashcash
discount of $1,300.
$1,300. Somy’
Somy’s account was (2) Make
(2) Makethe
thecorrection
correctionand
andeliminate
eliminatethe
the
entered correctly but only
only $1,200 was SuspenseAccount
Suspense Account
credited to the discounts received
account. (3) Check
(3) Checkififthe
thecorrections
correctionsaffect
affectprofit
profitand
andloss
loss
accounts(P/L)
accounts (P/L)or
orbalance
balancesheet
sheet(B/S)
(B/S)accounts
accounts
Correction:
Dr Cr (4) For
(4) Forthose
thoseaffecting
affectingP/L,
P/L,quantify
quantifythe
theeffect
effectand
and
$ $ makeadjustment
make adjustmenttotothe
thecompany
companyprofit,
profit,by
by
Suspense account 100* Debitingprofit
Debiting profitand
andloss
lossaccounts
accounts ÆÆProfit
ProfitÐÐ
Discounts received 100 OR
OR
* $1,300 - $1,200 = $100 Creditingprofit
Crediting profitand
andloss
lossaccounts
accountsÆÆProfit
ProfitÏÏ
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 73 Learning and Teaching Example Bank Reconciliation and 74 Learning and Teaching Example
Correction of Errors Correction of Errors

This type of error arises when debit side / credit side of the corresponding Teacher leads students through the steps as above to identify and correct
amounts were entered by different amounts in the accounts affected. the errors.

When the trial balance is not in balance and error was not yet found,
suspense account was credited to make it balance temporarily. Teacher leads students to understand the impact of errors on the company’s
profit and loss position.
Once the error is found, the accountant will make the correct entry by
debiting the Suspense Account and crediting the discounts received account.

73 74
 Effects on Profit and loss
STEP 1 STEP 2 STEP 3 STEP 4 Before discovering the errors, Dragon Company’s net
profit for the year ended 31 December Year 7 was
Types of Dr Cr $ Affect Quantify the $24,000.
Errors P/L effect on
a/c? profit Errors P/L accounts Debit / Credit ? + Profit or
1 One entry Suspense Lemon 700 No No
affected - Profit ?
only (B/S) Ltd (B/S) 3 Discounts received Credit + $100

2 Two entries Suspense Plum 6,400 No No Total effect on P/L + $100

both of Dr (B/S) Ltd (B/S)
or both of Cr
After adjustment, the profit would be $24,100.
3 Two entries Suspense Discounts 100 Yes + $100
Dr ≠ Cr (B/S) received
(P/L)

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 75 Learning and Teaching Example Bank Reconciliation and 76 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher leads students step by step to identify the errors, correct the errors The Dragon Company’s original profit for the year ended 31 December Year
and understand their effect on profit. 7 was $24,000. After the adjustment, profit is now $24,100 ($24,000 + $100).

75 76
 Activity 8: Problem
Activity 7:
Solving
Group Discussion

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 77 Learning and Teaching Example Bank Reconciliation and 78 Learning and Teaching Example
Correction of Errors Correction of Errors

Refer to Student Worksheet p. 24 - 27. Teacher pairs students to response Refer to Student Worksheet p. 28-44.
to the four Cases of errors by referring to the accounts given.
Teacher briefs the students on the background of the case in the following
Objectives of this activity: slide, and divides the class into 4 to 6 students per group with group
•Understand the relationship between errors with trial balance in members responsible for:
equality, and their effects on profit, and assets/liabilities.
•Ascertain a case for the occurrence of such errors with reasoning. •Pairing up bank statement and bank account entries.
•Work with suspense account. •Update the bank account and corresponding ledger accounts for the items
•Able to correct errors. in the bank statement only.
•Check posting in the ledger accounts from day books, opening balances,
receipt from vendor and correspondence with customer to identify errors
affecting and not affecting trial balance agreement.
•Update the ledger accounts for errors identified above.
•Prepare the corrected trial balance.

Objectives of the activity:

•Apply the principles in the preparation of bank reconciliation.
•Identify errors and their correction in the ledger accounts.
 Trial Balance Totals not Equal Trial Balance Totals not Equal

Errors Errors

Source Rule of Casting/Posting Source Rule of Casting/Posting

Documents/ Double Entry Errors Documents/ Double Entry Errors
Day Books Day Books
You have found/are assured the following: Step 1:
zRecords up to 31 December Year 18 are correct; Check the bank account entries against the Bank Statement
and source documents.
zEntries in Bank account are truly recorded the information in
pay-in-slips and cheques issued; Step 2:
zSales/Purchases/Returns are correctly itemised in the Day Update bank account for entries in Bank Statement only.
Books.
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 79 Learning and Teaching Example Bank Reconciliation and 80 Learning and Teaching Example
Correction of Errors Correction of Errors

Teacher can provide hints to the students: Step 1 : Bank account and Bank Statement
• Are all the opening balances brought into the books of accounts on Check the opening balance from the Balance Sheet of 31 December Year 18.
1.1.Year 19? Pair up the entries in the bank statement and bank account for January Year
• Are the total castings correct in the Day Books and properly posted in the 19.
ledger accounts? (Amount and Dr/Cr side; Name of Account) Note the implication of the Receipt from Fast Printing Ltd (Payment of
• Are the postings complete/correct in the Bank account? $678)(E), and the exchange of e-mail with Customer P (Remittance by
• Are the closing balances correct and complete? Debtor P would relate to the credit transfer of $10,000 on 12 January Year
19)(A).

Step 2:
Update for other entries shown in bank statement only, viz:
• IVE Club subscription for $250 (B);
• Dishonoured cheque $14,696 which matched the earlier deposit from
Debtor O (C); and
• OD Interest for $211(D)
 Trial Balance Totals not Equal Trial Balance Totals not Equal

Errors Errors

Source Rule of Casting/Posting Source Rule of Casting/Posting

Documents/ Double Entry Errors Documents/ Double Entry Errors
Day Books Day Books
Step 3: Step 4:
Locate the errors by checking against source documents, Balancing month end and prepare corrected Trial Balance.
opening balances and previous year’s financial statements.
Step 5:
Prepare the Bank Reconciliation Statement at month end.

Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 81 Learning and Teaching Example Bank Reconciliation and 82 Learning and Teaching Example
Correction of Errors Correction of Errors

Step 3: Locate the errors by checking against: Step 4: Balancing off on 31 January Year 19
• Opening balances: Are all accounts correctly and completely brought into the Recalculate the month end balances and ensure all accounts are properly
books on 1 January Year 19. Show the missing accounts, if any. accounted for on the Corrected Trial Balance.
• Day Books: Are the totals correct and correctly posted to the ledger accounts?
Show the missing accounts and correct the casting errors, if any.
• Bank Account: Are all items shown in Bank Statement reflected in the Bank Step 5: Prepare the Bank Reconciliation Statement
Account? Postings to the ledger accounts complete? Cast for an adjusted Start with the adjusted bank balance and list discrepancies shown in the
balance to be carried forward. Bank Account only.

(I) Errors affecting trial balance agreement

(1) Sales Day Book: undercast by $1,000 (Total $46,100, not $45,100)
(2) Opening Balances b/d: Machinery should be $254,000, not $245,000
(3) Opening Balances b/d: Accrued telephone being omitted
(4) Unadjusted bank balance: undercast by $90 (Should be $31,873, not
$31,783)

(II) Errors not affecting trial balance agreement

Check source documents, Day Books and their posting in the ledger.
(i) Posting from Bank account: Machinery repairs of $1,500 posted to Machinery
account – Error of principle
(ii) Posting from Purchases Day Book: Purchases from Creditor B for $2,800
entered in Creditor C’s account – Error of commission
(iii) Posting from Returns Outwards Day Book: Returns to Creditor C debited
Returns inwards and credited Creditor C’s account – Complete reversal of
entries.
(iv) Printing $678 paid by cheque was not entered into the books.
 Recap!! How would errors affect Trial
balance agreement
Two
Twoentries
entries––
both
bothonondebit
debit
OOnly
nly one
onedebit
debit or
orboth
bothonon
or Two
Twoentries
entries––
orone
onecredit
credit credit side
credit side
entry
entry Debit≠
Debit ≠
Credit
Credit

The End
Trial balance not
not in
balance and the creation of
Suspense account
Correct
Correct Close
Closethe
the
them
them
Find
Findthe
theerrors
errors SSuspense
uspense
through
through account
account
JJournal
ournal
Topic A03 BAFS Elective Part Topic A03 BAFS Elective Part
Bank Reconciliation and 83 Learning and Teaching Example Bank Reconciliation and 84 Learning and Teaching Example
Correction of Errors Correction of Errors

The teacher recaps with the students how errors would affect the balance of Teacher reviews key points taught in the lessons.
Trial balance.
We will be alerted of errors if the trial balance is not in agreement. However
The teacher reviews with students that suspense account should be created it is possible for a trial balance to be in agreement but still contain errors.
temporarily to make the Trial balance in balance.
Errors are corrected by means of journal entries:
The teacher reminds students that all the errors in the books must be found 1. Reverse the correct entry, if any.
out and corrected. Finally, the suspense account must be closed.
2. Reinstate the correct entry.
3. Record the opposite entry in the Suspense account if such error has
resulted inequality in trial balance agreement.

Errors found subsequent to the preparation of financial statements with

errors in the revenue/expense accounts will require an adjustment to the
net profit.

The process of reconciling the balance in the cash book and bank statement
may also help reveal undetected errors.

End of Lesson 3

83 84
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.1

BAFS Elective Part – Accounting Module – Financial Accounting

Topic A03: Bank Reconciliation Statement and Correction of Errors

Activity 1: Matching

Following are a list of the discrepancies which may appear in a bank reconciliation
statement.

Auto pay
Bank charges
Credit transfer
Deposits in transit/Uncredited items
Direct debit
Dishonoured cheques
Errors in bank statement
Errors in cash book
Standing order – Receipts or Payments
Unpresented cheques

(I) Complete the table below using the above list of discrepancies in cash book and bank
statement stating their originality.

Originality Items of Discrepancies

1.

2.

3.

Bank Statement 4.

5.

6.

7.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.2

1.

Cash Book
2.

3.

Which of the above item(s) should not be reflected in the cash book?

Why?

(II) Based on your findings, classify the items according to the effect on balances.

Category Items of Discrepancies

1.

2.

Resulting balance in cash book is

3.
greater than in bank statement

4.

5.

1.

2.
Resulting balance in bank
statement is greater than in
3.
cash book

4.

5.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.3

Activity 2 - Problem Solving

This is your first day as the new book-keeper for

the Dragon Company reporting directly to the
Manager. The Manager is surprised because he
received the company bank statement indicating
an overdrawn account despite the belief that the
company was in a strong financial position.

He suspects that the former book-keeper had

failed to record all in the cash book and possibly
stole money from the account.

On searching the files, you find the following

BAFS Learning and Teaching Example

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.4

Pay-in slips

CUSTOMER’S CREDIT ADVICE Date: Year 9/01/04

BANK OF HONG KONG LTD
A/C Dragon Company
Name
A/No. 006-012-0-21221-1 Currency HKD
Cheque No. Bank/Branch Amount Cheque No. Bank/Branch Amount
Please note the conditions printed on

787940 012813 21,780.00

the back of the customer

Remarks Cheque *******************21,780.00

S Credit advice.

Total
Transfer ***************************
Total
Cash Total ***************************

F00000127000 Year 9/01/04 13:01:04 20801 61841A 41293 00000 01234

CUSTOMER’S CREDIT ADVICE Date: Year 9/01/12

BANK OF HONG KONG LTD
A/C Dragon Company
Name
A/No. 006-012-0-21221-1 Currency HKD
Cheque No. Bank/Branch Amount Cheque No. Bank/Branch Amount
Please note the conditions printed

121921 007026 24,750.00

on the back of the customer

477478 010012 18,000.00

S Credit advice.

Remarks Cheque Total **************42,750.00

Transfer Total **********************
Cash Total **********************

F00000338751 Year 9/01/12 11:36:01 20801 61841A 42115 00000 01234

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.5

CUSTOMER’S CREDIT ADVICE Date: Year 9/01/28

BANK OF HONG KONG LTD
A/C Name Dragon Company
A/No. 006-012-0-21221-1 Currency HKD
Cheque No. Bank/Branch Amount Cheque No. Bank/Branch Amount
Please note the conditions printed

327831 009106 8,000.00

on the back of the customer
S Credit advice.

Remarks Cheque Total **************8,000.00

Transfer **********************
Total
Cash Total **********************

F00000147481 Year 9/01/28 14:17:16 10223 72284A 27116 00000 01234

CUSTOMER’S CREDIT ADVICE Date: Year 9/01/31

BANK OF HONG KONG LTD
A/C Name Dragon Company
A/No. 006-012-0-21221-1 Currency HKD
Cheque No. Bank/Branch Amount Cheque No. Bank/Branch Amount
Please note the conditions printed

477539 010012 35,640.00

on the back of the customer
S Credit advice.

Remarks Cheque Total *************35,640.00

Transfer **********************
Total
Cash Total **********************

F00000670219 Year 9/01/31 16:58:03 20801 61841A 11168 00000 01234

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.6

Cheque counterfoils

BANK OF HONG KONG LTD BANK OF HONG KONG LTD

DATE DATE
3/1/Year 9 4/1/Year 9
TO TO
Somy Corporation OK Furniture Co
BAL B/F BAL B/F

AMT DEPOSITED AMT DEPOSITED

AMT DEPOSITED AMT DEPOSITED

TOTAL TOTAL

AMT THIS CHECK AMT THIS CHECK

30,500.00 17,250.00
BAL C/F

CH NO. 285701 CH NO. 285702

Camrecorder (PO A370) Conference table and
chairs (Invoice IF 3031)

BANK OF HONG KONG LTD BANK OF HONG KONG LTD

DATE DATE
5/1/Year 9 7/1/Year 9
TO TO
H K Electric Co Ltd
BAL B/F BAL B/F

AMT DEPOSITED AMT DEPOSITED

AMT DEPOSITED AMT DEPOSITED

TOTAL TOTAL

AMT THIS CHECK AMT THIS CHECK

19,000.00 285.00
BAL C/F

CH NO. 285703 CH NO. 285704

Electricity for
Dec Year 8

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BANK OF HONG KONG LTD BANK OF HONG KONG LTD

DATE DATE
10/1/Year 9 23/1/Year 9
TO TO
Kowloon Real Realty Somy Corporation
Ltd
BAL B/F BAL B/F

AMT DEPOSITED AMT DEPOSITED

AMT DEPOSITED AMT DEPOSITED

TOTAL TOTAL

AMT THIS CHECK AMT THIS CHECK

16,000.00 36,500.00
BAL C/F

CH NO. 285705 CH NO. 285706

Rent for Jan Year 9 Camrecorder (PO A371)

BANK OF HONG KONG LTD

DATE
30/1/Year 9
TO
Mary Kwan
BAL B/F

AMT DEPOSITED

AMT DEPOSITED

TOTAL

AMT THIS CHECK

10,000.00
BAL C/F

CH NO. 285707
Salary for Jan Year 9

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.8

Supplementary Documents:

Sales invoices

Dragon Company
Unit 373, 25 Kwun Tong Road, Kowloon, Hong Kong Tel 2727 1111 Fax 2727 2222
e-mail: sales@dragon.com.hk

INVOICE
Blueberry Ltd Invoice No. A21221
Date 28 Dec Yr 8
Term* 1/5, N10

PO No. Description Quantity U/Price Amount

(HK$) (HK$)
09-103 Somy XP DC 22 pc 1,000.00 22,000.00
22,000.00

TOTAL: HONG KONG DOLLARS TWENTY-TWO THOUOSAND ONLY

Received the above goods in order and For and on behalf of

good condition Dragon Company

E&OE
Chop and Sign Authorised Signature

*
Payment Term:
N10 – the debt should be settled within 10 days.
1/5 – 1% cash discount is allowed if the debt is settled within 5 days.

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Dragon Company
Unit 373, 25 Kwun Tong Road, Kowloon, Hong Kong Tel 2727 1111 Fax 2727 2222
e-mail: sales@dragon.com.hk

INVOICE
Cherry Co Invoice No. A21222
Date 3 Jan Yr 9
Term 1/5, N10

PO No. Description Quantity U/Price Amount

(HK$) (HK$)
3701 Somy XP Camrecorder 20 pc 1,000 20,000.00
Less: 10% trade discount 2,000.00
18,000.00

TOTAL: HONG KONG DOLLARS EIGHTEEN THOUOSAND ONLY

Received the above goods in order and For and on behalf of

good condition Dragon Company

Chop and Sign E&OE Authorised Signature

Dragon Company
Unit 373, 25 Kwun Tong Road, Kowloon, Hong Kong Tel 2727 1111 Fax 2727 2222
e-mail: sales@dragon.com.hk

INVOICE
Plum Ltd Invoice No. A21223
Date 6 Jan Yr 9
Term 1/5, N10

PO No. Description Quantity U/Price Amount

(HK$) (HK$)
7001 Somy XP Camrecorder 25 pc 1,000.00 25,000.00
25,000.00

TOTAL: HONG KONG DOLLARS TWENTY-FIVE THOUOSAND ONLY

Received the above goods in order and For and on behalf of

good condition Dragon Ltd

Chop and Sign E&OE Authorised Signature

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Dragon Company
Unit 373, 25 Kwun Tong Road, Kowloon, Hong Kong Tel 2727 1111 Fax 2727 2222
e-mail: sales@dragon.com.hk

INVOICE
Grape Ltd Invoice No. A21224
Date 18 Jan Yr 9
Term 1/5, N10

PO No. Description Quantity U/Price Amount

(HK$) (HK$)
23401 Somy XP Camrecorder 24 pc 1,000.00 24,000.00
24,000.00

TOTAL: HONG KONG DOLLARS TWENTY-FOUR THOUOSAND ONLY

Received the above goods in order and For and on behalf of

good condition Dragon Company

Chop and Sign E&OE Authorised Signature

Dragon Company
Unit 373, 25 Kwun Tong Road, Kowloon, Hong Kong Tel 2727 1111 Fax 2727 2222
e-mail: sales@dragon.com.hk

INVOICE
Lemon Inc Invoice No. A21225
Date 28 Jan Yr 9
Term COD†

PO No. Description Quantity U/Price Amount

(HK$) (HK$)
- Somy XP Camrecorder 8 pc 1,000.00 8,000.00
8,000.00

TOTAL: HONG KONG DOLLARS EIGHT THOUOSAND ONLY

Received the above goods in order and For and on behalf of

good condition Dragon Company

Chop and Sign E&OE Authorised Signature

†
COD: Cash on Delivery

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.11

Dragon Company
Unit 373, 25 Kwun Tong Road, Kowloon, Hong Kong Tel 2727 1111 Fax 2727 2222
e-mail: sales@dragon.com.hk

INVOICE
Cherry Ltd Invoice No. A21226
Date 26 Jan Yr 9
Term 1/5, N10

PO No. Description Quantity U/Price Amount

(HK$) (HK$)
3721 Somy XP Camrecorder 40 pc 1,000.00 40,000.00
Less 10% trade discount 4,000.00
36,000.00
TOTAL: HONG KONG DOLLARS THIRTY-SIX THOUOSAND ONLY

Received the above goods in order For and on behalf of

and good condition Dragon Company

E&OE
Chop and Sign Authorised Signature

Dragon Company
Unit 373, 25 Kwun Tong Road, Kowloon, Hong Kong Tel 2727 1111 Fax 2727 2222
e-mail: sales@dragon.com.hk

PRO-FORMA INVOICE
Green Trees (Macau) Ltd Invoice No. A21227
Date 28 Jan Yr 9
Term Prepaid‡

PO No. Description Quantity U/Price Amount

(HK$) (HK$)
G201 Somy XP Camrecorder 13 pc 1,000.00 13,000.00
13,000.00

TOTAL: HONG KONG DOLLARS THIRTEEN THOUOSAND ONLY

Received the above goods in order and For and on behalf of

good condition Dragon Company

E&OE
Chop and Sign Authorised Signature

‡
Payment is made before delivery of the goods.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.12

Bank Statement for January Year 9 was received on 4 February Year 9 showing an
overdraft of $7,315.00.

BANK OF HONG KONG LTD

KWUN TONG BRANCH
DRAGON COMPANY A/C NO. 006-012-0-21221-1
Unit 373, 25 Kwun Tong Road CURRENCY HKD
KLN
STATEMENT OF ACCOUNT
DATE DETAILS WITHDRAWALS DEPOSITS BALANCE
Year 8/12/31 15,830.00
BALANCE BROUGHT FORWARD
Year 9/01/04 Deposit 21,780.00 37,610.00
Year 9/01/04 Cheque #285701 30,500.00 7,110.00
Year 9/01/07 Cheque #285702 17,250.00 (10,140.00)
Year 9/01/10 Cheque #285704 285.00 (10,425.00)
Year 9/01/12 Deposit 42,750.00 32,325.00
Year 9/01/13 Cheque #285705 16,000.00 16,325.00
Year 9/01/23 Cheque #285706 36,500.00 (20,1750.00)
Year 9/01/28 Deposit 8,000.00 (12,175.00)
Year 9/01/29 Bank interest 140.00 (12,315.00)
Year 9/01/30 Returned cheque 8,000.00 (20,3150.00)
Year 9/01/31 TT§ 13,000.00 (7,315.00)

Total no. of withdrawals 7 amounting to As at Year 9/1/31 Balance (7,315.00)

108,675.00
Total no. of deposits 4 amounting to
85,530.00

Please examine and verify each and every entry regarding the transaction(s) set out in this
statement and notify the Bank immediately in writing of any entry which you consider
wrong, irregular and/or unauthorised. Unless the Bank receives such notice within 90
days of the date of this statement, each and every entry concerning the transaction(s) set
out in this statement shall be conclusively binding on you and you shall not be entitled
to dispute any entry recorded in this statement on whatever ground. Please advise the
Bank immediately of any change of correspondence address.

§
TT Telegraphic Transfer

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.13

The bank balance in the audited accounts for the year ended 31
December Year 8 matches with that on the bank statement.

Task:

Advise the Manager if any funds have been misappropriated by the former employee.

Use the following table for your presentation:

Step 1: Write up the Bank account based on the pay-in slips and cheque counterfoils.

Bank

Year 9 $ Year 9 $

Step 2: Pair off the entries in the bank account with the bank statement.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.14

Step 3: Update the Bank account for the following discrepancy items.
e.g. bank interest, dishonoured cheques, telegraphic transfers

Bank

Year 9 $ Year 9 $

Step 4: Analyse the following unpaired items and find their financial effects on the
bank statement.

(a) Money deposited after the cheque clearing cut-off time

_______________________________________________________________.

Cash book has recorded the receipt but not so for the bank. This would then result
to a smaller/greater* balance in bank statement compared to the Cash Book (Bank
account).

(b) Cheque issued but not presented for payment by payee is called

_______________________________________________________________.

Cash book has recorded the payment but bank has not. This would then result to a
smaller/greater* balance in bank statement compared to the Cash Book (Bank
account).

* Delete as appropriate.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.15

Step 5: Formalise the explanation in a proper statement.

Conclusion: Prima facie, there is/is not* a misappropriation of funds by the former

employee because ____________________________________________________

____________________________________________________________________________.

* Delete as appropriate.

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Activity 3: Group Discussion

What are the possible measures to avoid misappropriation of funds to protect the
company’s cash assets in small businesses such as the Dragon Company?

Hints for discussion:

Payments: When to pay? To whom? Any legitimate payment?
Receipts: Is it safe to keep cash in the office?
Consider the source documents for receipts/payments generated by the company.
What is the chance for omission/duplication of accounting records?

Suggest 5 measures to avoid misappropriation of funds:

1.

2.

3.

4.

5.

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.17

Theme: Errors which do not cause disagreement in trial balance

Activity 4: Identify the errors

As the bookkeeper of Dragon Company, you have uncovered the following errors
from the company books. You are asked by your manager to identify the type of
errors.
(A) Company cash of $600 was used privately by Mr. Lung, the owner of
the company, to pay the electricity bill but has been recorded in the
purchases account.
(B) Payment of $200 by cheque to settle amount due to OK Furniture
Co. - Cash book was debited and OK Furniture Co’s account was
credited.
(C) A debtor, Plum Ltd, paid the company $500 cash. It was correctly
debited to the cash book, but was mistakenly credited to Blueberry
Ltd.
(D) Sales of $30,000 to Cherry Co were entered as both a debit and a
credit of $12,000.
(E) Rent of $15,000, due and payable to Property Co Ltd, was not
recorded in the book.
(F) Both the purchase journal and sales journal were overcast by $300.

A. __________________________________

B. __________________________________

C. __________________________________

D. __________________________________

E. __________________________________

F. __________________________________

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Do you know why these errors do not affect the trial balance?

1. _____________________________________________________________

_____________________________________________________________

2. _____________________________________________________________

_____________________________________________________________

3. _____________________________________________________________

_____________________________________________________________

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Discuss with your members to suggest one possible way to uncover errors in (A) to (F)
of Activity 4A.

An example:
(A) An electricity bill addressed to the owner was found in the company
business payment voucher file. Give one more instance for (A).

A. ________________________________________________________________
________________________________________________________________

B. ________________________________________________________________
________________________________________________________________

C. ________________________________________________________________
________________________________________________________________

D. ________________________________________________________________
________________________________________________________________

E. ________________________________________________________________

________________________________________________________________

F. ________________________________________________________________

________________________________________________________________

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Activity 5: Help your boss

Your boss, the manager of Dragon Company, would like you to correct the errors
identified in Activity 4A by means of journal entries.
Journal
Date Particulars Dr. Cr.
$ $
(A)
Year 8/12/31

(B)
Year 8/12/31

(C)
Year 8/12/31

(D)
Year 8/12/31

(E)
Year 8/12/31

(F)
Year 8/12/31

* Provide narratives and state the type of error for each correction made.

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Activity 6: Profit Bingo

Your manager would like to know the impact of the errors identified in Activity 4 on
the company’s profit and loss. He had provided you the income statement of the
Dragon Company as follows:

Dragon Company
Income statement for the year ended 31 December Year 8
$ $

1,109,850
Sales
Less: Returns inwards 3,600
1,106,250
Cost of goods sold:
Opening stock 23,650
Purchases 540,730
564,380

Less: Closing stock 548,580

15,800
Gross profit 557,670

Less expenses:
Electricity 18,750
Rent 165,000
Salaries 411,500
Other operating expenses 200 595,450
Net loss (37,780)

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.22

Please help the manager to determine changes in the company’s profit/loss

position by completing the following table.

Errors Profit Amount

Circle:
Fill in the accounts affected and circle if Affect (3) + $ /
Date they are to profit and loss (P/L) account or - $ /
balance sheet account (B/S). Not ~
Affect(X)
(A) Dr.
Year 8/12/31 P/L ; B/S

Cr.
3/ X
P/L ; B/S
(B) Dr.
Year 8/12/31 P/L ; B/S

Cr.
3/ X
P/L ; B/S
(C) Dr.
Year 8/12/31 P/L ; B/S

Cr.
3/ X
P/L ; B/S
(D) Dr.
Year 8/12/31 P/L ; B/S

Cr.
3/ X
P/L ; B/S
(E) Dr.
Year 8/12/31 P/L ; B/S

Cr.
3/ X
P/L ; B/S
(F) Dr.
Year 8/12/31 P/L ; B/S

Cr.
3/ X
P/L ; B/S

Total effect on Profit / loss: $____________________( Increase / Decrease * in

Profit)

* Circle the correct answer.

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The Income Statement

After adjusting the errors, your manager would like you to complete the following
income statement for Dragon Company.

Dragon Company
Income Statement for the year ended 31 December Year 8
$ $

Sales
Less: Returns inwards

Cost of goods sold:

Opening stock
Purchases

Less: Closing stock

Gross profit

Less expenses:
Electricity
Rent
Salaries
Other operating expenses

Net loss

BINGO !!

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Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.24

Theme: Errors causing disagreements between the Trial Balance and Suspense
Accounts

Activity 7: Group Discussion

Below are extracts of the Dragon Company’s accounting records. Assume errors
were found in each of the following four independent cases.

(a) Do we need to create a Suspense Account? (Dr or Cr?)

(b) What is the effect on profit? (Over/Understated) Why?
(c) What is the effect on assets/liabilities? (Over/Understated) Why?
(d) How to correct the error(s)?

Case 1:

Sales Day Book

is understated.

Which account(s) is/are affected? What is the effect?

What can be done to rectify the error(s)? Write your answers in the table provided.

(a)

(b)

(c)

(d)

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Case 2:

Year-end stock valuation is

overstated. Error is found
after Trading Account has
been drawn up.

Which account(s) is/are affected? What is the effect?

What can done to rectify the error(s)?

(a)

(b)

(c)

(d)

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Case 3

Machinery repairs being

recorded in Machinery
Account.

What account(s) is/are affected? What is the effect?

What can done to rectify the error(s)?

(a)

(b)

(c)

(d)

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Case 4

Debit Bank and credit Salaries

for payroll cheque issued.

What account (s) is/are affected? What is the effect?

What can be done to rectify the error(s)?

(a)

(b)

(c)

(d)

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Activity 8: Problem Solving

You are the Accounting Officer of the Dragon Company.

Your assistant, John has recorded January Year 19
transactions for the month to date and completed the trial
balance whose debit total disagrees with the credit total.
He approaches you for assistance. John is known to be a
careless person who consistently makes errors.

The Day Books of the company show:

Sales Day Book Purchases Day Book

Year 19 $ Year 19 $

Jan 10 Debtor - M 20,300 Jan 13 Creditor - B 2,800

Jan 17 Debtor - O 25,800 Jan 22 Creditor - A 22,000
Transfer to
Jan 30 Transfer to Sales 45,100 Jan 31 24,800
Purchases

Returns Outwards Day Book

Year 19 $
Jan 3 Creditor - C 300
Jan 31 Transfer to Returns outwards 300

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You are also given the ledger accounts of Dragon Company:

Machinery 1

Year 19 $ Year 19 $

Jan 1 Balance b/d 245,000

Jan 20 Bank 1,500

Furniture 2

Year 19 $ Year 19 $

Jan 1 Balance b/d 150,000

Stock 3

Year 19 $ Year 19 $
Jan 1 Balance b/d 15,800

Debtor – M 4

Year 19 $ Year 19 $
Jan 1 Balance b/d 25,304 Jan 25 Bank 25,304
Jan 10 Sales 20,300

1
Balance per ledger at 31.1.Year 19 $246,500
2
Balance per ledger at 31.1.Year 19 $150,000
3
Balance per ledger at 31.1.Year 19 $15,800
4
Balance per ledger at 31.1.Year 19 $20,300

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Debtor – N 5

Year 19 $ Year 19 $

Jan 1 Balance b/d 90,000 Jan 26 Bank 87,000

Debtor – O 6

Year 19 $ Year 19 $

Jan 1 Balance b/d 14,696 Jan 28 Bank 14,696

Jan 17 Sales 25,800

Debtor – P 7

Year 19 $ Year 19 $

Jan 1 Balance b/d 10,000

5
Balance per ledger at 31.1.Year 19 $3,000
6
Balance per ledger at 31.1.Year 19 $25,800
7
Balance per ledger at 31.1.Year 19 $10,000

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Bank8
Year 19 $ Year 19 $

Jan 1 Balance b/d 29,573 Jan 3 Purchases (#302288) 19,100

Jan 4 Sales 20,000 Jan 7 Electricity (#302289) 1,300

Jan 25 Debtor - M 25,304 Jan 12 Rent (#302290) 15,000

Jan 26 Debtor - N 87,000 Jan 19 Purchases (#302291) 100

Jan 28 Debtor - O 14,696 Jan 20 Machinery Repairs (#302292) 1,500

Jan 27 Creditor - A (#302294) 27,200

Jan 27 Creditor - B (#302295) 2,500

Jan 27 Creditor - C (#302296) 45,000

Jan 30 Salary - Chan (#302297) 18,000

Jan 30 Salary - Lee (#302298) 15,000

Loan 9

Year 19 $ Year 19 $

Jan 1 Balance b/d 200,000

8
Corrected balance at 31.1.Year 19 $26,038
9
Balance per ledger at 31.1.Year 19 $200,000

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.32

Creditor – A 10

Year 19 $ Year 19 $

Jan 27 Bank 27,200 Jan 1 Balance b/d 27,200

Jan 22 Purchases 22,000

Creditor – B 11

Year 19 $ Year 19 $

Jan 27 Bank 2,500 Jan 1 Balance b/d 2,500

Creditor – C 12

Year 19 $ Year 19 $

Jan 27 Bank 45,000 Jan 1 Balance b/d 48,300

Jan 3 Returns inwards 300

Jan 13 Purchases 2,800

10
Balance per ledger at 31.1.Year 19 $22,000
11
Balance per ledger at 31.1.Year 19 Nil
12
Balance per ledger at 31.1.Year 19 $6,400

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.33

Capital 13

Year 19 $ Year 19 $

Jan 1 Balance b/d 311,235

Purchases 14

Year 19 $ Year 19 $

Jan 3 Bank 19,100

Jan 19 Bank 100

Jan 31 Creditors 24,800

Sales 15

Year 19 $ Year 19 $

Jan 4 Bank 20,000

Jan 31 Debtors 45,100

Electricity 16

Year 19 $ Year 19 $

Jan 7 Bank 1,300

13
Balance per ledger at 31.1.Year 19 $311,235
14
Balance per ledger at 31.1.Year 19 $44,000
15
Balance per ledger at 31.1.Year 19 $65,100
16
Balance per ledger at 31.1.Year 19 $1,300

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.34

17
Rent
Year 19 $ Year 19 $

Jan 12 Bank 15,000

Salaries 18

Year 19 $ Year 19 $

Jan 30 Bank 18,000

Jan 30 Bank 15,000

Returns inwards 19

Year 19 $ Year 19 $

Jan 31 Creditor – C 300

Year 19 $ Year 19 $

17
Balance per ledger at 31.1.Year 19 $15,000
18
Balance per ledger at 31.1.Year 19 $33,000
19
Balance per ledger at 31.1.Year 19 $300

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.35

Year 19 $ Year 19 $

Year 19 $ Year 19 $

Year 19 $ Year 19 $

Year 19 $ Year 19 $

Year 19 $ Year 19 $

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.36

A trial balance was extracted from the ledger balances as follows:

Dragon Company
Trial Balance as at 31 January Year 19
$ $
Machinery 246,500
Stock at 1 January Year 19 15,800
Furniture 150,000
Debtor - M 20,300
Debtor - N 3,000
Debtor - O 25,800
Debtor - P 10,000
Bank 31,783
Loan 200,000
Creditor - A 22,000
Creditor - C 6,400
Capital 311,235
Purchases 44,000
Sales 65,100
Electricity 1,300
Rent 15,000
Salaries 33,000
Returns inwards 300
596,783 604,735

The Trial Balance does not

balance!
What has gone wrong?

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.37

In addition, the bank statement for January Year 19 received on 4 February

Year 19 is as follows:

Bank Statement
Year 19 Deposit (Cr) Balance
Withdrawals (OD)
$ $
Jan 1 Balance forward 25,573
Jan 3 Deposit 6,000 Cr 31,573
Jan 5 Deposit 20,000 Cr 51,573
Jan 8 Cheque #302289 1,300 50,273
Jan 8 Cheque #302288 19,100 31,173
Jan 12 Credit transfer 10,000 Cr 41,173
Jan 13 Cheque # 302290 15,000 26,173
Jan 18 Auto pay - IVE Club subscription 250 25,923
Jan 20 Cheque #302292 1,500 24,423
Jan 20 Cheque #302291 100 24,323
Jan 22 Cheque #302293 678 23,645
Jan 27 Cheque #302296 45,000 21,355 OD
Jan 28 Deposit 112,304 Cr 90,949
Jan 29 Deposit 14,696 Cr 105,645
Jan 30 Cheque #302295 2,500 103,145
Jan 30 Cheque #302294 27,200 75,945
Jan 31 Returned cheque 14,696 61,249
Jan 31 OD interest 211 61,038

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.38

For investigation, you have checked and verified the following papers / documents which
are correct.

Dragon Company Dragon Company

Balance Sheet as at Bank Reconciliation Statement as at
31 December Yr 18 31 December Yr 18
Assets $ $
Machinery 254,000 Balance per Cash Book 29,573
Furniture 150,000 Add Unpresented cheque (#302287) 2,000
Stock 15,800 31,573
Debtors (Schedule 1) 140,000 Less Deposit in transit 6,000
Bank 29,573 Balance per bank statement 25,573
589,373
Liabilities and Capital
Loan 200,000
Creditors (Schedule 2) 78,000
Accrued Telephone 138
Capital 311,235
589,373

Notes to Accounts
Schedule 1 $ Schedule 2 $
Debtor – M 25,304 Creditor – A 27,200
Debtor – N 90,000 Creditor – B 2,500
Debtor – O 14,696 Creditor – C 48,300
Debtor – P 10,000 78,000
140,000

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.39

Fast Printing Ltd

Receipt
No. 1356 22 January Year 19

Received from Dragon Company in settlement of Invoice

No. V489 the sum of $678

From: P
Sent: Monday, February 2, Year 19 12:00 PM
To: Dragon Company
Subject: Settlement of account

In reply to your enquiry of 31 Jan Year 19, we wish to inform you that we
have remitted the money on 12 January Year 19.

Regards,
P
--------------------------------------------------------------------------------------------
Year 19/1/31 Manager <accounts@dragon.com.hk>:
Dear Customer P,

Attached please find the Statement of Accounts for your action.

Best regards,
Dragon Company

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.40

You have found/are assured the following:

z Records up to 31 December Year 18 are correct;
z Entries in Bank account reflect the information in pay-in-slips and cheques issued;
z Sales/Purchases/Returns are correctly itemised in the Day Books.

Task

Prepare:
(a) Bank Reconciliation Statement and
(b) Corrected trial balance as at 31 January Year 19.

Step 1:
Pair up the entries in the bank statement and bank account.
Identify the entries shown in the bank statement only.

Step 2:
Update the Bank Account and complete the corresponding double entries as follows:

Journal
Dr Cr
$ $
(1)

(2)

(3)

(4)

(5)

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.41

Step 3:
Check the entries against the source documents such as Day Books, opening balances
from previous year’s financial statement, etc.
Identify the errors and make correction entries. Number the errors found using (1),
(2), (3), (4), (5), etc.

(I) Errors affecting trial balance agreement.

No. $

Show the journal entries to correct the errors.

Journal
Dr Cr
$ $
(1)

(2)

(3)

(4)

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.42

(II) Errors not affecting trial balance agreement.

No. Amount Name of the Error

Show the journal entries to correct the errors.

Journal
Dr Cr
$ $
(i)

(ii)

(iii)

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.43

Step 4:

Write up the corrected trial balance as at 31 January Year 19.

Dragon Company
Trial Balance as at 31 January Year 19
$ $

BAFS Learning and Teaching Example

As at April 2009
Topic A03: Bank Reconciliation Statement & Correction of Errors Student Worksheet P.44

Step 5:
Prepare the bank reconciliation statement.

Dragon Company
Bank Reconciliation Statement as at 31 January Year 19
$ $

Balance per bank statement on 31 January Year 19

BAFS Learning and Teaching Example

As at April 2009