FIA Paper FA1: Notes

FIA Paper FA1
Recording Financial Transactions

For exams in 2014

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ExPress Notes
FIA FA1 Recording Financial Transactions

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Contents

About ExPress Notes 3
1. Business transactions and documentation 7
2.
Financial statements and their elements
12
3.
Double entry bookkeeping: the debits and
credits
18
4.
Cash and bank
21
5.
Sales and credit transactions
24
6.
Purchases and credit transactions
29
7.
Payroll
32
8.
Control accounts and initial trial balance
34

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Chapter 1
Business transactions and
documentation

START
The Big Picture

Bookkeeping means recording appropriately classified monetary transactions in the
financial records of an entity. It can be done manually or using an accounting software.
It involves maintaining a chronological record of transactions as they occur. Every
transaction will be classified according to its type (sales, purchases, etc) and will be
recorded in the books of original entry.
Periodically a list of the results of all recorded transactions is produced. This is done by
extracting each account and its final balance. The list is called a trial balance and is the
basis from which financial statements are produced for both internal and external users.

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KEY KNOWLEDGE
Source documents

Every transaction is evidenced by a document showing all details of that particular
transaction. These documents are known as source documents. Some originate outside the
organization (invoices received from suppliers), other originate inside the organization (sales
invoices sent to customers).
Example of source document includes but not limited to:

Document Purpose Often feeds the
accounting information
on....
Quotation To give a potential customer an
indication of what a product or service
would be likely to cost. It may be a
binding quote or just an indicative
quote.
Nowhere. At this stage,
there has been no
transaction to record; its still
at the state of being a
prospective transaction.
Sales order To record an order from a customer.
Signing a booking form for an ExP
classroom course is a sales order that
ExP will then process.
Sales (revenue).
Purchase order To record an order placed with a
supplier. It may require pre-
authorisation to be valid.
Purchases, normally of
inventory for resale.
Goods received
note
To record that an order for inventory for
resale has been received. It will
normally only be produced once the
goods have been inspected at the point
of delivery to ensure that they are
correct in description and quality.
Purchases of inventory for
resale and payables.
Goods dispatched
note
To record that an order from a customer
has been sent out.
Sales (revenue) and possibly
also inventory management,
depending on how the
accounting system is set up.
Invoice A request for payment from a supplier.
Sent by the supplier to the customer.
Payables.
Statement A summary of transactions recorded by
a supplier with a customer, including
amounts received from the customer.
Sent by the supplier to the customer.
Does not generally instigate
any recording of a
transaction, since all
transactions on the
statement will have been
recorded when goods were

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ordered. But useful for
cross-checking our records
with the suppliers records.
Credit note Acknowledgement from a supplier that
the customer has overpaid and is
entitled either to a refund or free goods/
services in the future.
Payables.
Debit note To cancel a credit note that previously
existed, eg if goods were ordered, paid
for and then returned there would
initially be a credit note. The refund
made would be accompanied with a
debit note.
Receivables.
Remittance
advice
Normally included with an invoice. A
document that is included with the
payment (eg if paid by cheque) with
details that will allow the recipient of the
funds to match the payment to the
customers account.
Receivables.
Receipt Issued by the supplier for goods, to
acknowledge payment of a debt.
Receivables, payables and
purchases.

KEY KNOWLEDGE
Data sources / data capture

When a business transaction happens, it is essential that the source data is captured
immediately. This does not necessarily mean immediately writing up the books, but it does
involve some record being made of the transaction happening.

KEY KNOWLEDGE
Books of prime entry

Alternatively called books of prime entry, these will be the bridge between the raw data (eg
receipt for cash purchase of some building materials) and the accounting system. They may
be written up by the accountant, or by a semi-trained member of staff within the clients
business.

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The most commonly used books of prime entry are:

Book of prime
entry:
Used to record data on: Data typically used to
feed:
Cash in book Cash received into the business bank
account.
All sorts of things! Anything
that may generate cash for
the business.
Cash payments
book
Cash paid from the business bank account. All sorts of things! Anything
that results in cash being
paid out of the business.
Petty cash book Cash in and out of the balance of cash
held in notes and coins by the business
(normally small). This is often controlled
using the imprest system (see later).
Typically, small expenses
(eg Friday cakes for staff!)
and sundry income.
Sales day book Sales on credit. Note that sales
immediately settled in cash will be
recorded in either the cash book (if paid
directly into the bank account) or petty
cash book (if received in notes and coins).
Sales revenue.
Purchases day
book
Purchases of inventory for resale on credit.
Note that purchases settled immediately in
cash will be recorded immediately in the
cash payments book or petty cash book.
Purchases of inventory for
resale.
Journal book Anything not covered by any of the other
books of original entry.
Often, this is the book
maintained by the
accountant, in which period
13 adjustments like
depreciation and bad debts
are recorded.

Books of prime entry may be recorded in paper form, or using a spreadsheet.

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KEY KNOWLEDGE
Journal book

The journal book is the book of prime entry that captures transactions not covered by other
books of original entry. Often, it includes adjustments and correction of errors and
omissions in the other books of original entry.
The journal book records double entry records (see later), with an explanation of the
reason. Well see an example of it after tackling double entry bookkeeping.

ExPress Notes

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Chapter 2
Financial statements and their
elements

START
The Big Picture

Whenever a business transaction takes place (payment of monthly salaries) it will be first
recorded into the books of prime entry. On a monthly basis the books are totaled and totals
are entered in the ledger accounts. From ledger accounts a trial balance is extracted (see
later chapter) and financial statements are produced.
A full set of financial statements produced each year comprises:
A statement of financial position, showing the assets controlled by the entity and
the liabilities owed and how the net assets are financed.
A statement of comprehensive income, showing the income earned, the
expenses incurred and the profit or loss for the year.
A statement of cash flows, which shows the cash receipts and payments for the
year.
Notes to the financial statements, which give further detail to readers who want
to know more than the summary story.

ExPress Notes

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Statement of financial position of Sole Trader X at 30 June 20x1

ASSETS $ $
Non-current assets
Licence to operate 10,000
Land and buildings 35,000
Office equipment 20,000
Motor vehicles 30,000
Fixtures and fittings 10,000
105,000
Current assets
Inventory 20,000
Trade receivables 13,000
Less: allowance for doubtful receivables (1,000)
12,000
Prepayments 4,000
Cash at bank 3,000
Cash in hand 2,000

Total assets 146,000

EQUITY AND LIABILITIES
Capital
Initial capital introduced 30,000
Total cumulative comprehensive income at 1 July 20x0 85,700

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Less: Cumulative withdrawals at 1 July 20x0 (24,000)
Total equity at 1 July 20x0 91,700
Total comprehensive income in the current period 16,000
Withdrawals in the current year (8,000)
Total equity at 30 July 20x1 99,700

Non-current liabilities
Bank loans 32,000

Current liabilities
Bank overdraft 3,300
Trade payables 8,000
Accruals 3,000
Total liabilities 46,300

Total equity and liabilities 146,000

A SOFP may be rearranged into a number of ways. IAS 1 shows a SOFP as given above:
Total assets = Equity + total liabilities.
Equally validly therefore:
Total assets total liabilities = Equity
Given that equity = capital + cumulative profit cumulative withdrawals, then the equation
could be written in any number of ways such as:
Total assets total liabilities = Capital + cumulative profit cumulative withdrawals
Or
Cumulative profit = Total assets total liabilities capital + cumulative withdrawals.
This is sometimes called the accounting equation.

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Statement of comprehensive income for the year ended 30 June 20x1
$ $

Sales revenue 152,000
Cost of sales
Opening inventory 30,000
Purchases of inventory 80,000
Delivery costs inwards 10,000
Closing inventory (20,000)
(100,000)
Gross profit 52,000

Sundry income 3,000
Discounts received 2,000
57,000

Less: Expenses

Delivery costs outwards 3,000
Depreciation 6,000
Discounts allowed to customers 1,000
Electricity 4,000
Irrecoverable and doubtful debts 2,500
Mobile phones 500
Motor expenses 2,500
Rent 9,000
Telephone and internet 1,500

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Wages and salaries 12,000
(42,000)
Profit for the period before tax 14,000

Other comprehensive income:
Revaluation gain on property 2,000
Total comprehensive income in the period 16,000

You may be required in the exam to calculate revenue, cost of sales, gross profit and total
comprehensive income from given data.

KEY KNOWLEDGE
Elements of financial statements

There are five elements of financial statements, from which all financial statements are
produced. These definitions are very useful throughout your ACCA studies and could easily
be part of a question in paper FA1.

Elements of the statement of financial position:
An asset is a resource that is controlled by an entity as a result of past events and
from which future economic benefits are expected to flow to the entity.

A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.

Equity is the residual interest in the assets of the entity after
deducting all its liabilities.

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Elements of the statement of comprehensive income:
Income is an increase in economic benefits during the accounting
period in the form of inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than those relating to contributions from
equity participants.

An expense is a decrease in economic benefits during the
accounting period in the form of outflows or depletions of assets or incurrence of
liabilities that result in decreases in equity, other than those relating to distributions
to equity participants.

Note that income and expenditure are defined effectively as the reason that a change in net
assets happened.

KEY KNOWLEDGE
Relationship between the statements: the business
equation

An increase in net assets of a business will come from a mixture of these sources:
Total comprehensive income made in the period (a profit will
increase net assets)
New capital introduced by the owner (will always increase net
assets)
Withdrawals made in the period (will always reduce net assets).

This is sometimes called the accounting equation or the business equation. It is a frequent
exam question and can be summarised:

Closing net assets = Opening net assets + total comprehensive income in the period +
new capital introduced in the period withdrawals in the period.

Remember that net assets = equity + liabilities, by definition. So net assets may be
given in a question separately as equity and liabilities.

ExPress Notes

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Chapter 3
Double entry bookkeeping: the
debits and credits

START
The Big Picture

Bookkeeping is the technique of recording financial transactions as they occur so that
summaries can be made and presented as a report to the users of the accounts.
There are two main systems for keeping the accounts:
Single entry bookkeeping (for small businesses only)
Double entry bookkeeping.
Their names really explain the difference between the two. In the double entry bookkeeping
for every transaction is in fact recorded twice.

ExPress Notes

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KEY KNOWLEDGE
So why debits and credits?

Double entry bookkeeping is the term used to describe how businesses record transactions
in their books or accounts. The concept is based upon the fact that every financial
transaction involves the simultaneous receiving and giving of value, and is therefore
recorded twice. One who receives is a debtor (Dr) and one who gives is a creditor (Cr).
Under the double entry accounting system, both the aspects of giving and receiving are
recorded in terms of accounts. The account which receives the benefit is debited and the
account which gives the benefit is credited.
For example if a florist buys flowers, he receives the flowers and gives away the money.
When later he makes a sale, he receives money and gives away the flowers. The opposite
entries are expressed as debit and credit entries in the records.
Money coming in is always a debit. If every debit entry has a credit, the logic dictates that
must be a reason for this increase in cash. The reason is that theres been some income
from the sale of flowers. This cant be a debit, as what were trying to do is explain where
the debit came from. The explanation is arbitrarily called a credit.

KEY KNOWLEDGE
Building up the rules

Here are the core concepts that you need to be happy with:

An asset, or an increase in an asset, is a debit.
The opposite of an asset is a liability. The opposite of a debit is a credit. So a
liability is a credit.
If you have more assets (debit assets), the explanation will be to credit income.

Heres a table to summarise the rules. Review this and then try to produce is yourself, using
the logic of explaining movements in net assets and things being opposites (eg a liability is a
credit because an asset is a debit).

ExPress Notes

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Debits mean Credits mean
What happens to net assets:
An increase in assets A decrease in assets
A decrease in liabilities An increase in liabilities

And the reason for that increase in net assets:
An item of expenditure An item of income

If youre asked to record a transaction, the first step is to identify what assets and/ or
liabilities are in question. Decide one of these first (its often easiest at first to start with
cash if its a cash transaction) and decide if this is a debit or a credit. Then work out the
other side of the transaction.
Lets apply these rules to the sale of flowers for cash mentioned above. Cash is coming in
(i.e. an asset is increased) therefore debit cash. This means that the other side of the
transaction should be a credit, which could be either a decrease in assets, an increase in
liabilities or an income. In our case the later applies, therefore credit income (revenue
from sale of flowers).

ExPress Notes

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Chapter 4
Cash and bank

START
The Big Picture

According to English common law, a bank has traditionally been characterized as an
institution which holds current accounts for depositors, pays cheques which are drawn upon
it, and collects cheques on behalf of customers.

In addition to chequing accounts, banks offer an increasingly broad range of services,
including overdraft and loan facilities, foreign exchange, trade finance (bills of exchange and
promissory notes) and investment management.

Banks in the UK are licensed by the Financial Services Act, which has over time extended its
reach to other types of financial institutions, such as Building Societies, which traditionally
specialized in offering mortgage loans.

UK banking clearing system

There are different systems designed to clear payments within the UK. These include:

London Bankers Clearing House A cheque-clearing system operated by members,
designated as clearing banks; the use of cheques remains an important payment method
in the UK, particularly for small businesses. The clearing system works on a 3-day cycle:
(1) Sending the item to the clearing center;

ExPress Notes

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(2) Sorting of items submitted;
(3) Debit to the bank on which the item is drawn.

Other systems:

Bankers' Automated Clearing Services (BACS) A system for the electronic transfer of
payments between banks; 3-day clearing of funds, therefore slow but cheap;

Clearing House Automated Payment System (CHAPS) This is for Sterling payments within
the UK; beneficiaries receive same day funds; relatively expensive;

Responsible for supervising the above payment systems is the Association for Payment
Clearing Services (APACS), an industry association of major banks and building societies.

Different forms of payment

Todays banking system is highly automated with very few transactions processed manually.
Common methods of transactions through a bank account are as follows:
1. Cheques the drawer (payer) makes out a cheque to the payee (the person being
paid). The cheque is entered into drawers accounts and sent to the payee. The
payee, using a paying-in slip, record the details into his books and presents the
cheque to its bank. The bank clearing system passes it to the drawers bank for
approval and payment. Until the cheque is accepted by the drawers bank, it is
considered to be uncleared and the bank has the right to return it as dishonoured if
there are insufficient funds in the drawers bank account.

2. BACS (bankers automated clearing system) involves making the payment by
a bank transfer. Suitable for immediate transfer of funds both within the country
and outside the country.

3. Direct debit agreement with the bank by which the payment beneficiary can
collect an amount directly from another bank account. Suitable for recurring
payments like credit card or utility bills.

4. Standing order agreement with the bank to pay a set amount at regular
intervals. Suitable for fixed regular payments like rent or mortgage.

5. Bank initiated transactions suitable for bank charges, interest received/paid on
overdrawn balances, etc.

ExPress Notes

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KEY KNOWLEDGE
Documentation

Good record-keeping and a formalized documentation retention policy are critical to the
integrity of an organisations processes and working practices.

By providing a well-organised documentary trail, a disciplined approach to documentation
retention can protect a company against lawsuits and other challenges, while effectively
preserving its ability to enforce claims against others. It can also provide secondary benefits,
such as ensuring a smooth service to customers, identify new marketing opportunities, and
save storage space.

Categories of documents include:

(1) Legal documents (contracts and agreements);
(2) Transaction documents (invoices and receipts);
(3) Other correspondence (with clients, suppliers, etc.)

KEY KNOWLEDGE
Cash book and petty cash book

All transactions involving cash at bank are recorded in the cash book. Usually the cash book
is divided into: cash receipts book and cash payments book and is kept in columnar
form.
All transactions involving small amounts of cash are recorded in the petty cash book. It
usually operates on an imprest system where an agreed balance of cash is held by the
cashier. At regular intervals (usually weekly) the amount paid out of petty cash is
reimbursed from the bank to restore the imprest (balance) to its agreed level.
Tight control of cash and bank balances is vital and therefore proper procedures regarding
payment authorization, signatory rights etc should be instated. Cash itself should be counted
on regular basis and compared with the balance in the petty cash book.

ExPress Notes

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Chapter 5
Sales and credit transactions

START
The Big Picture

Sales form the basis of every companys existence and business owners spend time creating
products and services customers want and are willing to pay for it. Each time the company
makes a sale the following entry is made:

Dr Cash $1,000
Cr Sales $1,000 for cash transactions
or
Dr Receivables $2,000
Cr Sales $2,000 for credit transactions

ExPress Notes

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Credit sales are often made to encourage sales. The problem with extending credit is that
not all receivables will pay. This means that some will become irrecoverable. Before being
written off as irrecoverable, some will also look like they may not pay (perhaps by being a
month overdue for payment). These are doubtful debts.
Remember that an asset is a resource that is expected to give an inflow of benefits.
Logically therefore if a receivable is not expected to pay, it cannot be shown as an asset.

KEY KNOWLEDGE
Irrecoverable debts

If a debt is not going to pay, for example if a person has died bankrupt, then it must be
written out of the accounting records as the receivable is no longer an asset. Removing an
asset reduces net assets and so generates an expense, which is normally called
irrecoverable debts expense, hence:

Dr Irrecoverable debts expense $800
Cr Receivables $800

KEY KNOWLEDGE
Recovery of debts written off

If a debt is unexpectedly paid having previously been written off, it is likely that the cash
received will initially be recorded in the cash received book as a receipt from a debtor. This
means that the journal to record the cash will be automatically generated thus:

Dr Bank $800
Cr Receivables $800

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However, the balance is no longer in receivables, as it was written off. In order for the
journal to work, it is then necessary to reinstate the balance that was previously written off.
This is a change in accounting estimates, since the estimate last period was there was no
realistic chance of the debt being recovered:

Dr Receivables $800
Cr Irrecoverable debt expense $800.

There is no attempt to change the previous years figures, which include an expense for the
write off of the debt, since this was a fair estimate at the time. There will be an expense
recorded for the write off in the year when it was written off and a credit to profit or loss
when the cash was received.
Depending on how the initial cash receipt has been recorded, it may be possible to simplify
the above two journals, because there is a debit and credit of the same amount to
receivables, thus:

Dr Bank $800
Cr Irrecoverable debt expense $800.

KEY KNOWLEDGE
Doubtful debts

It is likely that some receivables will not pay, even if they have not yet been written off.
The business will continue to chase the receivables for full payment and may eventually
even sue for the full balance. The amount cannot be written out of debtors, as credit
control will need the records of the debt in full to know how much to chase for payment.
However, if its estimated that there is a 20% chance that a debt will not pay, an allowance
will be made, which reduces the value of net receivables, without corrupting the records of
the actual debtor balance that will be needed to try to obtain payment.
Creating, or increasing, an allowance will reduce net assets. This therefore creates an
expense.

ExPress Notes

Page | 27

Dr Bad debt expense $500
Cr Allowance for receivables $500.

KEY KNOWLEDGE
Discounts

There are two types of discount that you may encounter: trade discounts and
settlement discounts. Trade discounts are those given to customers at the point of sale,
perhaps because the customer buys in large volumes or is a member of staff. These
discounts are not subject to any uncertainty at the time of sale it is known for sure that
the customer will never pay the list price of the goods or services.
The accounting is therefore very simple: they are simply ignored. The sale is recorded at
the amount net of the trade discount.
A settlement discount is an incentive for customers to pay you earlier than they otherwise
naturally would. For example, a discount of 5% may be offered on the invoice sent to
customers if payment is received within seven days of the invoice being sent. If payment is
not received within that period, the offer of the discount lapses.
Settlement discounts are uncertain at the point of sale. The actual amount of the debt is
gross of the settlement discount, ie before its deduction, since this is the amount that the
customer will eventually be chased for if they dont pay early.
If the settlement discount is allowed to the customer, this is similar to the treatment of
irrecoverable debts. It is simply a debt that we are voluntarily choosing to write off as
partially irrecoverable because of the cash flow advantage of receiving the cash quickly.
Settlement discounts are sometimes also called cash discounts for this reason and are
recorded as follows:
Dr: Discounts allowed (expense) $200
Cr: Receivables $200
Discounts allowed are settlement discounts that we allow to customers. They are
therefore partial write off of debts receivable by us. They are therefore an expense in our
books.

ExPress Notes

Page | 28

KEY KNOWLEDGE
Sales tax

In many countries certain organisations are required to charge a sales tax or Value Added
Tax (VAT). The sales tax rate varies between countries and also varies between the nature
of goods and services supplied.

The sales tax collected does not belong to the organisation that collects it and therefore
must be remitted to the tax authorities on a regular basis.

Sales tax received can be referred to as output sales tax. The double entry bookkeeping
records need to show the goods sold and the sales tax value separately.

If the above cash transaction is subject to 20% sales tax the following entries will be made:

Dr: Cash $1,200
Cr: Sales $1,000
Cr: Sales tax $ 200

If the above credit transaction is subject to 10% trade discount, sales tax should be charged
on the reduced amount as follows:

Trade discount: 10%*2,000 =200

Dr: Receivables $2,160
Cr: Sales $1,800
Cr: Sales tax $ 360

ExPress Notes

Page | 29

Chapter 6
Purchases and credit transactions

START
The Big Picture

For most businesses, inventory will be a very short lived asset, which is expected to be sold
(or possibly thrown away or stolen!) by the end of the accounting period.
When inventory is received, purchases account is used to record this transaction. Based on
whether the transaction is settled immediately or not the following journal entries are made:

Dr Purchases $1,000
Cr Cash $1,000 for cash transactions
or
Dr Purchases $2,000
Cr Payables $2,000 for credit transactions

ExPress Notes

Page | 30

It is normal for businesses to return unwanted goods to suppliers. The double entry arising
will depend on whether or not the goods or acquired for cash:
Dr Cash $200
Cr Purchases returns $200, for cash transactions
or
Dr Payables $300
Cr Purchases returns $300, for credit transactions

KEY KNOWLEDGE
Discounts

As explained in the previous chapter, there are two types of discounts: trade and settlement
discounts.
Trade discounts are deducted at the point of sale and therefore purchases are recorded
net. Settlement discounts received from suppliers is recorded as follows:
Dr: Payables $100
Cr: Discount received (income) $100.
Discounts received are settlement discounts that our suppliers allow to us. They are
therefore partial forgiveness of debts that we owe to other people. They are therefore a
source of income in our books.

KEY KNOWLEDGE
Sales tax

The organisation may also have to pay sales tax itself on goods and services bought. This
sales tax paid can normally be reclaimed. Even though the organisation has to pay the
supplier the full amount, if the sales tax is reclaimable then it does not affect the value of
the item purchased.

ExPress Notes

Page | 31

The sales tax paid is referred to as input sales tax. The double entry bookkeeping
records need to show the goods sold and the sales tax value separately.

Assuming a tax rate of 20% the above cash transaction will be recorded as follows:

Dr: Purchases $1,000
Dr: Sales tax $ 200
Cr: Payables $1,200.

If the above credit transaction is subject to 10% trade discount, sales tax should be charged
on the reduced amount as follows:

Trade discount: 10%*2,000 =200

Dr: Purchases $1,800
Dr: Sales tax $ 360
Cr: Payables $2,160

ExPress Notes

Page | 32

Chapter 7
Payroll

START
The Big Picture

Its a fact of business, if a company has employees it has to account for payroll and benefits.
Payroll and benefits include:
Wages;
Salaries;
Bonuses and commissions;
Overtime;
Payroll taxes
Employer paid benefits such as holiday pay.
A clear distinction should be made between gross and net pay. From gross pay of an
employee statutory deductions are made by the employer for items like personal income
tax and employee social security contributions. However, the employee may authorise his
employer to make other deduction from their salaries called voluntary deductions- for
items like sports club membership fee, pension contribution, trade union subscription, etc.

ExPress Notes

Page | 33

Ledger entries for below pay details are as follows:
Payroll details:
Gross pay $1500
Social security tax employee 6% of gross pay
Pension 5% of gross pay
Income tax $200
Social security tax employer 10% of gross pay
Trade union subscription $25

Dr: Wages expense account $1500 (gross pay)
Dr: wages expense account $150 (employers social security)
Cr: Tax payable account $ 150 (employers social contribution)
$ 200 (income tax)
$ 90 (employees social contribution)
Cr: Pension payable account $ 75
Cr: Trade union payable account $ 25
Cr: Wages payable account $1,110

KEY KNOWLEDGE
Payroll processing

There are three common methods of payroll processing:
1. Cash usually suitable for temporary employees;
2. Cheque
3. Automated payments -suitable for companies with large
number of employees.

ExPress Notes

Page | 34

Chapter 8
Control accounts and initial trial
balance

START
The Big Picture

A control account contains exactly the same information as in individual account in the
ledger that it controls, using totals rather than individual transactions. They are sometimes
referred to as total accounts.

Common control accounts include the sales/receivable ledger control account and
purchase/payables ledger control account.

Receivables and payables accounts are always kept up to date, with transactions entered
immediately as they arise. The daybooks are totaled periodically and can be used as a
control mechanism.

ExPress Notes

Page | 35

KEY KNOWLEDGE
Reconciling control accounts

The control account must be checked on a regular basis against the total of balances in the
relevant ledger and any arising difference between the two must be investigated.

Any discrepancies found may be due to:
errors in the individual ledger accounts;
errors in the control account;
errors in both the control account and ledger account.

KEY KNOWLEDGE
Reconciling the cash book

The business records all transactions with the bank in the cash book. The bank records all
transactions with the business in the bank statement. Therefore the content of the cash
book should be exactly the same as the bank statement.

Bank reconciliation should be performed at least monthly as part of control procedures over
cash. When performing the reconciliation there are three main differences:

unrecorded items like bank charges;
timing differences like outstanding cheques;
errors either in the cash book or in the bank statement.

KEY KNOWLEDGE
Initial trial balance

After all transactions are recorded in the ledger accounts an initial trial balance is extracted.
Since the balances in the ledger accounts are results of double entries the total of debit
balances should equal the total credit balances. If this is not the case a suspense account is
opened to make the debits and credits equal. The balance on this account is cleared after all
errors are identified and corrected.

Typical errors where the trial balance does not balance are:

single sided entry: a credit has been entered without a corresponding debit;
debit and credit entry have been made for different amounts;

ExPress Notes

Page | 36

two entries have been entered on the same side;
miscasting;
opening balances ignored;
extracting errors.

Deliberate creation of suspense accounts
A suspense account may be used deliberately where a transaction has happened but the
bookkeeper is uncertain what it relates to. By recording the transaction in suspense, it can
ensure that the records are at least partially correct, but can then be corrected fully when
the information necessary is known.

(end of ExPress notes)

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