Accounting (9215) | Verification of the double entry records

Welcome to Verification of Double Entry Records!

Hello future accountants! This chapter is incredibly important because it moves us past just *recording* transactions and into the vital task of *checking* our work. Think of it like proofreading a crucial essay—we need to make sure all our numbers are accurate and that the fundamental rule of Double Entry (Debit = Credit) has been followed perfectly.

Don't worry if this seems tricky at first. We will break down every type of mistake and learn the simple, logical steps accountants use to fix them!

SECTION CONTEXT: Verification of Accounting Records

The core goal of verification is to ensure the arithmetical accuracy of the ledger accounts before preparing the final financial statements.

1. The Trial Balance: The First Check

The Trial Balance (TB) is the first major step in verifying the double entry system. It is a list of all the balances remaining in the ledger accounts (both debit and credit) on a specific date.

What is the purpose of the Trial Balance?

• Primary Purpose: To test the arithmetical accuracy of the double entry records.
• If the total of the Debit balances equals the total of the Credit balances, it suggests (but doesn't guarantee!) that the double entry rule has been correctly applied throughout the recording period.

Analogy: Imagine you have two identical stacks of building blocks—one stack represents all your Debit entries, and the other represents all your Credit entries. If the stacks are the same height, your Trial Balance balances.

What if the Trial Balance does NOT balance?

If the Debit total does not match the Credit total, it means an error has occurred where a debit was recorded without a corresponding credit (or vice versa). You must find the error before proceeding!

2. Errors Revealed by the Trial Balance

These are the errors that cause the TB totals to be unequal, meaning the system worked mathematically incorrectly. They are usually 'single-sided' errors.

• Error 1: Single Entry: Recording a transaction on only one side (either debit or credit), ignoring the other side entirely. Example: Posting a $100 purchase debit to Purchases Account, but forgetting the credit entry to the Creditors Account.
• Error 2: Incorrect Addition: Mistakes when totalling the debit or credit sides of the individual ledger accounts (or when totalling the TB columns).
• Error 3: Incorrect Balancing: Errors when calculating the final balance carried down (c/d) in an account.
• Error 4: Partial Transposition: Recording an amount incorrectly when transferring it to the TB (e.g., writing $450 in the TB when the account balance was $540).
• Error 5: Posting the Same Amount Twice: Accidentally crediting (or debiting) the same account twice for the same transaction.

Key Takeaway: If the Trial Balance doesn't balance, we know immediately that the double entry equation (Debit = Credit) was broken somewhere.

3. Errors NOT Revealed by the Trial Balance (The Six Tough Ones)

These errors are much harder to spot because they involve compensating mistakes—a wrong debit is matched by an equal and opposite wrong credit. The TB will still balance, giving us a false sense of security.

Don't worry, there's a simple mnemonic to remember these six types of errors!

The Mnemonic: C.O.P. P.O.R.

(Remembering that these errors occur when a "COP" might make a mistake, or simply use the letters C O P P O R.)

1. Commission
2. Omission
3. Principle
4. Original Entry
5. Reversal
6. Compensating

Detailed Look at the Six Errors

1. Error of Omission (The Forgetful Error)

This occurs when an entire transaction is completely missed and not recorded anywhere in the ledger accounts. Since both the debit and credit sides were missed equally, the TB still balances.
Example: Selling $200 goods for cash but forgetting to record the sale and the cash receipt entirely.

2. Error of Commission (The Wrong Account of the Right Type)

This involves posting an amount to the correct *type* of account (e.g., a creditor) but the wrong person’s account. The account type is correct (Liability is credited), so the TB balances.
Example: Paying Supplier A $500, but mistakenly debiting Supplier B’s account instead.

3. Error of Principle (The Wrong Type of Account)

This is a serious error where an entry violates fundamental accounting rules by posting to the wrong class of account (e.g., treating an asset like an expense, or vice versa).
Example: Purchasing a new computer (an Asset) for $800, but mistakenly debiting the Repairs and Maintenance (Expense) Account instead of the Equipment (Asset) Account. The TB balances because an $800 debit was recorded, just in the wrong place.

4. Error of Original Entry (The Wrong Start)

The initial amount recorded in the source document or book of prime entry is wrong, and this error is carried through to both the debit and credit entries.
Example: A cash sale was $720, but the accountant mistakenly recorded it as $270 in the Cash Book. This $270 is then correctly posted to the Sales Account, balancing the TB, but using the wrong amount.

5. Compensating Errors (Two Wrongs Make a Balance)

This happens when two or more separate, unrelated errors cancel each other out. One mistake on the debit side is exactly matched by an unrelated mistake on the credit side.
Example: The Purchases Account was overstated by $50 (a debit error), and simultaneously, the Sales Account was overstated by $50 (a credit error). The total debits and credits still match.

6. Complete Reversal of Entries (The Flip)

The correct accounts are used, but the debit and credit entries are completely swapped.
Example: Paying Rent ($100). The correct entry is Debit Rent, Credit Cash. The accountant incorrectly posts: Debit Cash, Credit Rent. The TB still balances because both sides are affected equally.

4. The Suspense Account

If, after thoroughly searching, the Trial Balance still does not balance, the accountant cannot simply stop working. They need to proceed with preparing the final accounts.
To force the TB to balance temporarily, the difference is placed into a temporary holding account called the Suspense Account.

What is the purpose of the Suspense Account?

Its only purpose is to record the difference required to make the Debit and Credit columns of the Trial Balance equal.

• If the Debit side of the TB is too low, the Suspense Account will be debited with the difference.
• If the Credit side of the TB is too low, the Suspense Account will be credited with the difference.

A Suspense Account is therefore opened with a debit or credit balance that exactly equals the error amount. Once the individual errors are found and corrected, the Suspense Account balance must eventually be zero (or 'cleared').

Example of Opening a Suspense Account

The Trial Balance totals are: Debits $10,000; Credits $10,150.

The Credits are $150 too high. To balance the TB, we need to add $150 to the Debit side.

Action: Open a Suspense Account and debit it with $150.

5. Correcting Errors Using Journal Entries

The process of correcting errors in the ledger accounts is done formally using the Journal. You must never use an eraser or tippex to manually change entries—all corrections must be documented in the Journal, maintaining the double entry system.

The Golden Rule for Corrections

Every correction requires a Journal entry that follows a simple logic:

1. Identify the error: What accounts were used incorrectly?
2. Determine the correction: What needs to be reversed or added?
3. Post the Journal Entry: Create a new debit and credit entry that fixes the mistake.

Corrections that DO NOT affect the Suspense Account

If the error was one of the Six Errors Not Revealed by the TB (COP POR), the correction involves adjusting two or more existing ledger accounts only. Since the original error maintained the Debit = Credit balance, the correction must also maintain it, meaning the Suspense Account is not used.

Example: Correction of Error of Principle (Debited Repairs, should have been Equipment).

• We need to decrease the Repairs Account (Expense): Credit Repairs.
• We need to increase the Equipment Account (Asset): Debit Equipment.

Journal Entry:

Debit Equipment $800

Credit Repairs $800

Corrections that DO affect the Suspense Account (Clearing the Suspense)

If the error was a single-sided error (a transposition, incorrect posting of one amount, or single entry), the correction will involve the Suspense Account. The other side of the entry will be the specific account that was incorrectly posted.

Example: When posting $300 discount received, the Cash Book was correctly credited, but the Discount Received Account (Credit balance) was mistakenly credited with only $30. The Trial Balance was $270 off, and the Suspense Account was opened with a $270 Debit balance.

Correction Needed: The Discount Received Account needs an additional $270 Credit to make the balance correct ($30 + $270 = $300).

Journal Entry to Correct and Clear Suspense:

Debit Suspense Account $270 (This removes the original debit balance of $270, clearing the account)

Credit Discount Received $270 (This correctly adjusts the Discount Received account)

Did you know? Once all errors are corrected, the entries in the Journal are posted to the ledgers, and the Suspense Account balance should become zero. If it doesn't, it means another error still exists!

6. Verification Using Other Methods (Bank Reconciliation)

While the Trial Balance verifies the internal mathematical accuracy of the ledger, external verification methods are also necessary to ensure account balances reflect reality.

Bank Reconciliation Statement (BRS)

The Bank Reconciliation Statement is a crucial verification tool used to check the accuracy of the Bank Account balance in the firm's Cash Book against the balance shown on the Bank Statement.

• They usually don't match on a given date due to timing differences (e.g., unpresented cheques, or deposits in transit).
• The BRS process often reveals errors made by the business (e.g., incorrect entry in the Cash Book) or errors made by the bank.
• Any error found in the Cash Book through the reconciliation process must be corrected in the ledger using a Journal entry (Debit or Credit the Bank Account, and Debit or Credit the specific expense/revenue account).