Study tips: applying the Foundation Certificate in Accounting to a business scenario (part 3)

This is the third article in this series, where we are exploring some of the trickiest areas at Foundation level.

We are working through a business scenario to illustrate how the AAT Foundation Certificate in Accounting can be applied, in practice, to the typical day-to-day tasks of an accounts assistant.

In the last article Zairah found an error whist reconciling the sales ledger control account (SLCA) to the sales ledger. Therefore her next task is to correct it.

JDB Supplies use journals to make corrections to its accounts by removing incorrect entries and then recording the correct entries so that there is a clear audit trail. Journals are instructions to make double entry postings into accounts in the general ledger only. This is because double entry only takes place in the general ledger. Posting to individual customer and supplier accounts in the sales and purchase ledgers are memorandum postings and their purpose is simply to keep track of individual customer and supplier information.  Therefore any errors in those accounts will be corrected by a memorandum posting and not a journal.

JDB Supplies has noticed that accounts assistants often find correcting errors challenging. So, they encourage their staff to draw up T accounts to see what has been entered and then visualise what entry is required to correct the error. A good understanding of double entry principles is vital in order to do that so it is useful to ask a number of questions:

What’s happened?

Zariah discovered a sales invoice for £501 had been correctly posted in the general ledger but not entered into JU Weavers’ account in the sales ledger.

This means that the double entry in the general ledger accounts is correct. However, the memorandum posting in the customer’s account in the sales ledger is missing, which is why the SLCA balance did not reconcile with the total of the sales ledger.

What should have happened?

A memorandum posting should have been made in the customer’s account in the sales ledger.

How can the error be corrected?

In this case the error will not be corrected with a journal as the posting is not missing from a general ledger account. There is also no error to reverse as the problem is an omission. Therefore JU Weavers’ account just needs a debit entry to be made for £501.

Let’s look at another error Zairah has been asked to correct.

What’s happened?

A bank receipt from a credit customer has been transposed and entered as £1,567 instead of £1,576.

 

How can the error be corrected?

By comparing what happened with what should have happened, Zariah can see that the entries have been made in the correct accounts and entered on the right sides of those accounts but that the figures are incorrect.

As the SLCA and Bank are both general ledger accounts she needs to use journals to correct the error.

Journal 1 – reverse what happened

Tip – when writing journals start by putting the figures in with the debit(s) coming first. Remember total debits must equal total credits. Then look back at your workings to see which account(s) should be debited and which should be credited.

Zariah has a final slightly more complicated error to correct so is going to work through the same process but ask some extra questions:

What’s happened?

A payment for wages had been correctly recorded in the Bank account as £1,277 but entered into the Wages accounts on the credit side.

Are total debits equal to total credits?

No – therefore the suspense account will be used to make the transaction balance:

Now the debits and credits match and Zariah can see the full picture of what has happened.

What should have happened?

How can the error be corrected?

By comparing what happened with what should have happened Zariah can see that the bank account posting is correct – it’s the right account and the right amount has been entered on the correct side. The wages account is also the correct account to use for this transaction and the right amount has been entered. However, it is on the wrong side, reducing the balance on the account rather than increasing it, as it should for the wages expense.

As the Bank, Wages and Suspense accounts are all general ledger accounts she needs to use a journal to correct the error:

Step 1 – reverse what happened

When a figure is posted to the wrong side of an account the error is in effect doubled. This is why the suspense account was debited with £2,442 to make the transaction balance and why the combined result of the journal will correct the error in the Wages account and clear the balance on the Suspense account.

Zairah used to find correcting errors really hard as there is no set answer. This is because mistakes can be made anywhere and in a variety of ways and combinations. Since she has used JDB Supplies’ method to compare what happened with what should have happened, she has been able to work out the right corrections more successfully.

A related two-part article on balancing a trial balance and correcting errors with journal is available if you would like to read further.

In the final instalment of this series we’ll see how Zairah gets on when she puts her calculator down and has to write a report instead.

Gill Myers has taught AAT qualifications since 2005.

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