Association of Accounting Technicians (AAT) Principles of Bookkeeping Controls (Level 2) Flashcards

24 sample cards from the Principles of Bookkeeping Controls (Level 2) deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is an error of reversal of entries?

   The correct accounts and amount are used but the debit and credit entries are reversed (the entry that should be debited is credited and vice versa). The trial balance still balances.

2. What are compensating errors?

   Two or more separate errors that cancel each other out, e.g. a debit total overstated by £100 and a credit total also overstated by £100. The net effect leaves the trial balance in balance.

3. Give three examples of errors that ARE disclosed by (cause a difference in) the trial balance.

   A single entry (only one side posted), posting different amounts to the debit and credit sides, posting two entries to the same side, casting/addition errors, transposition errors in one account, and balancing errors.

4. What is a transposition error and how can you spot it in a trial balance difference?

   Digits are reversed when recording a figure, e.g. £540 entered as £450. The resulting difference is always divisible by 9. $$540 - 450 = 90, \quad 90 \div 9 = 10$$

5. What is a suspense account?

   A temporary account opened to make the trial balance balance when the debit and credit totals disagree, or to hold an entry whose correct account is not yet known. It holds the difference until the error is found and corrected.

6. How is a suspense account cleared?

   By identifying the errors that caused the imbalance and posting correcting journal entries. Once all errors are corrected, the suspense account balance is reduced to nil and the account is closed.

7. If the trial balance debit total is £500 greater than the credit total, on which side is the suspense account opened?

   On the credit side. A credit entry of £500 is made in the suspense account to make the trial balance balance until the error is found.

8. What is the difference between the cash book and the bank statement?

   The cash book is the business's own record of bank transactions (a book of prime entry / ledger). The bank statement is the bank's record of the same account. They are compared during bank reconciliation.

9. Why might the cash book balance and the bank statement balance differ at a given date?

   Because of timing differences (unpresented cheques and outstanding lodgements not yet processed by the bank) and items appearing on the bank statement but not yet recorded in the cash book (e.g. bank charges, interest, direct debits, standing orders, BACS receipts), plus errors.

10. What is a timing difference in bank reconciliation?

    A difference caused because a transaction has been recorded in one record but not yet the other due to a time delay, e.g. cheques written but not yet cleared, or deposits banked but not yet credited by the bank.

11. What is an unpresented cheque, and how does it affect reconciliation?

    A cheque issued/paid by the business and recorded in the cash book but not yet presented for payment at the bank. In the bank reconciliation statement it is deducted from the bank statement balance.

12. What is an outstanding lodgement (uncleared deposit), and how is it treated?

    Money received and recorded in the cash book (banked) but not yet credited by the bank. In the bank reconciliation statement it is added to the bank statement balance.

13. Which items on the bank statement typically require the cash book to be updated?

    Bank charges and interest, direct debits and standing orders, BACS/automated receipts and payments, dishonoured cheques, and any bank errors or items the business had not yet recorded.

14. What is the correct sequence of steps to prepare a bank reconciliation?

    1) Compare the cash book with the bank statement and tick off matching items. 2) Update the cash book for items on the statement not yet recorded (charges, interest, direct debits, BACS). 3) Balance the updated cash book. 4) Prepare the bank reconciliation statement using the updated cash book balance and the bank statement balance, adjusting for timing differences.

15. When updating the cash book, how are bank charges and dishonoured customer cheques treated?

    They are credited (debit/payments side reduces the bank asset) in the cash book because they reduce the bank balance. Bank charges are an expense and a dishonoured cheque removes a previously recorded receipt.

16. When updating the cash book, how is bank interest received and a BACS receipt from a customer treated?

    They are debited in the cash book (receipts side) because they increase the bank balance.

17. What is the layout/purpose of the bank reconciliation statement?

    It reconciles the updated cash book balance to the bank statement balance. Typically it starts with the bank statement balance, adds outstanding lodgements, deducts unpresented cheques, and arrives at the (corrected) cash book balance, proving the two records agree.

18. Write the formula linking the bank statement balance to the updated cash book balance.

    $$\text{Cash book balance} = \text{Bank statement balance} + \text{Outstanding lodgements} - \text{Unpresented cheques}$$

19. The updated cash book shows £1,200 (debit). The bank statement shows £1,500. Unpresented cheques are £450 and outstanding lodgements are £150. Does the reconciliation agree?

    Yes. $$1{,}500 + 150 - 450 = 1{,}200$$ The reconciled figure equals the updated cash book balance of £1,200, so the reconciliation agrees.

20. Why is it important to update the cash book BEFORE preparing the bank reconciliation statement?

    Because items such as bank charges, interest and direct debits are genuine transactions the business simply had not yet recorded. They are not timing differences, so they must be entered in the cash book to give a corrected balance, leaving only true timing differences for the reconciliation statement.

21. What does the bank reconciliation help to detect or confirm?

    It confirms the accuracy of the cash book, identifies omitted or erroneous entries, detects unauthorised transactions or fraud, and ensures the bank balance reported in the financial statements is reliable and agrees with the bank's records.

22. In the SLCA, how are discounts allowed and irrecoverable debts written off treated, and why on that side?

    Both are credited in the sales ledger control account because they reduce the amount owed by customers (reducing the receivables asset). Discounts allowed reduce what the customer pays; irrecoverable debts remove an uncollectable balance.

23. In the PLCA, how are discounts received and purchases returns treated, and why on that side?

    Both are debited in the purchases ledger control account because they reduce the amount owed to suppliers (reducing the payables liability).

24. What is the journal entry to correct a transaction that was completely omitted from the books (assuming it does not require a suspense account)?

    Post the original double entry that was missed: debit the account that should have been debited and credit the account that should have been credited, with a narrative explaining the correction of the error of omission. No suspense account is needed because both sides were missing.

What this deck covers

Principles of Bookkeeping Controls (Level 2) flashcards FAQ