Mastering Correction of Accounting Errors

If you find another company's canceled check for $450 recorded on your bank statement, you correct the error by:

adding $450 to the end-of-month bank balance

Prior period errors are errors found

after the income statement accounts have been closed for the year in which the errors were made.

What recognizes a revenue or expense before cash is received or paid?

an accrual

The accountant forgot to record annual interest expense. This is...

an accrual error

The company never needs to record adjusting entries for adjustments to the ______________ balance, but may need to record them for adjustments to the ____________balance.

bank; book

How are current period errors corrected?

by adjusted the inaccurate account balances.

What kind of bank memorandum shows an amount added by the bank to the company's checking account?

credit memoranda

Errors made and found before the books for the period has been closed are called....

current period errors

Asset accounts have a ________________ balance?

debit

What kind of bank memorandum shows an amount subtracted by the bank from the company checking account?

debit memoranda

In the revenue section of the trial balance, you shouldn't see a balance in the _______________________ column, unless it's for a revenue _____________________ ________________________.

debit; contra account

The balance of an account is the side of the account -- whether debit or credit---on which a(n) _______________ is recorded.

increase

Step 3 to find trial balance error: Check the ____________ ____________ and _______________ for errors.

journal entries; postings

Step 2 to find trial balance error: See if the ____________ ____________ ____________ have been calculated correctly.

ledger account balances

A contra account has a(n) _________________________ balance from its related account.

opposite

On the trial balance, total debits are $38,200 and total credits are $41,800. This error may have been caused by a transposition in....

overstated credits by $3,600

Errors discovered after books for the previous have been closed are called....

prior period errors

A post-closing trial balance should not include a(n) ____________________ account or a(n) _______________________ account.

revenue; expense

The post closing trial balance should not include

temporary accounts such as revenue and expense accounts.

The end-of-month bank balance and cash account are rarely equal because of _____________________ ____________________.

timing differences

What is the purpose of an accrual

to recognize a revenue or expense before cash is received or paid

If trial balance total debits are $70 more than credits, there may be an error of $ __________________, caused by listing the $35 balance in the _________________________ column.

$35; debit

The bank statement balance of $7,000 does not include a check outstanding of $1,000, a deposit in transit of $325, but does include a bank service charge of $25 and another company's $100 check erroneously charged against your firm's account (not recorded in the Cash account). The reconciled bank balance is:

$6,425

List the discrepancies from receipts and disbursements recorded by the bank but not yet recorded on the company books.

*Credit memoranda: wired funds, notes collected by the bank, interest earned, cash transfers from company credit line. *Debit memoranda: bank service charges, NSF checks, and fees such as certified checks and safe-deposit boxes.

List the discrepancies from receipts & disbursements recorded on the company books but not recorded on the most recent bank statement.

*Deposits in transit: mailed deposits or night lock box *Undeposited cash: receipts recorded in company books but not deposited at the bank yet. *Outstanding checks: checks issued by company but not yet received/paid by the bank

List the types of accounting errors

*Omission: failing to record and event *Accrual or deferral error: recording a wrong amount or failing to record the deferrals/accruals *Classification error: posting an entry to an incorrect account *Arithmetic mistake: incorrect totals *Use of an incorrect accounting principle: eg. expensing and equipment purchase instead of capitalizing *Use of improper estimate: such as understating Allowance for Doubtful Accounts *Transposition: reversal of two digits in a number *Slide: the decimal point has been put in the wrong place *Posting error: eg. crediting Cash for a sale instead of debiting

Handling trial balance corrections include:

*correct inaccurate postings directly on trial balance *include note explaining error corrections in ledger account *make correcting journal entries

List the ways in which accounting errors are found.

*monthly bank reconciliation *preparation of the trial balance *review of periodic adjustments to the accounts *routine internal audits *Year-end financial audit *By chance

What types of errors will not be revealed by the trial balance?

*transactions never recorded on company books *an incorrect amount recorded in the debit and credit of an entry *amount recorded in the wrong account

List the steps of Part II of the Bank Reconciliation

1) Begin with the end-of-month ledger Cash account balance 2) Add credit memoranda: wired funds; amts received from bank and not recorded by company; notes collected on company behalf; interest earned; cash from credit line that was activated 3) Deduct debit memoranda fro amounts not recorded by the company such as: bank service charges; NSF; certified check fees; safe deposit box fees; other bank fees 4) ADD/DEDUCT from the Cash account balance the amount of any errors made by the company. eg. numerical error, check/deposit not recorded or recorded with wrong amount. 5) Record journal entries for each adjustment to cash and for any book errors 6) Notify the bank of any bank errors.

When recording prepaid expenses you credit cash and debit either of what two accounts?

1) Expense account 2) Prepaid asset account

You issued a check for $457 but recorded it at $475. In your bank reconciliation, you will:

Add $18 from the end-of-month book balance

When recording a year-end adjustment for deferred revenue, what question(s) need to be asked to determine the right approach?

1) If the advance revenue was recorded to a revenue account: "What amount must the revenue acct balance be reduced to show only the revenue earned in the current period?" 2) If the advance revenue was posted to a liability account: "How much of the liability account balance must be transferred to the revenue account to show the amount earned in the current period?"

When recording a year-end adjustment for deferred (prepaid) expenses, what questions should you ask?

1) If the deferral was recorded to an expense account: "what amount must the expense account balance be reduced to show only the expense used up in the current period?" 2) If the deferral was a prepaid asset account: "How much of the prepaid asset account balance must be transferred to the expense account to show the amount used up in the current period?"

Name the steps to locating trial balance errors.

1) Make sure the ledger account balances were correctly transferred to the trial balance. [from GL to TB] 2) Verify that ledger balances were calculated properly 3) Check the journal entries and postings for errors [from journal to the ledger]

When an organization receives revenue in advance of performing the service or providing the goods, the Cash account will be debited and either of what two accounts will be credited?

1) Revenue account 2) Liability account

List the steps of part I of the Bank Reconciliation

1) put cancelled checks in numerical order 2) Examine each canceled check: confirm it's company check, signed and for correct amount; List outstanding checks 3) Verify that deposit amounts on the bank statements tie with deposit amounts on the deposit slips and company cash account: confirm prior month outstanding deposits cleared the current bank statement. 4) Begin with the end-of-month bank balance. 5) ADD: cash on hand/awaiting deposit; deposits in transit 6) DEDUCT: checks outstanding 7) Add OR Deduct from the bank statement balance the amount of bank errors. eg. check from another company deducted from your account, numerical error, or wrong amount listed for a deposit or check.

What three purposes does the bank reconciliation serve?

1) to review information needed to bring company accounting records up to date at the end of the month or other period 2) to verify that the ledger Cash account balance at the end of the month or other period is accurate and to correct any errors 3) to verify that the checking account balance at the end of the month or other period is accurate and to alert the bank of any errors

What is a deferral?

Cash received or paid before it is recognized as a revenue or expense.

Revenues received for services that it will perform or for goods that it will deliver over more than one accounting period are referred to as...

Deferred or unearned revenues

What is a prepaid expense?

Expenses a organization pays in advance for services or goods it will use over more that one accounting period.

If there is a Notes Payable balance on the adjusted trial balance, you would also expect to see what two other accounts?

Interest Payable; Interest Expense

How is the correction of an error determined?

Review which accounts are affected and when the error was found (which year?)

What is the bank reconciliation?

The process of bringing the bank and Cash accounts into balance.

What is the purpose of internal controls?

To ensure the reliability of accounting information

Your company's payment of $500 was debited to Cash. This is...

a posting error

Step 1 to find trial balance errors: Make sure the _____________ ____________ were correctly transferred to the ________________ __________________.

account balances; trial balance