Methods of Reconciliation & Verification (Cambridge (CIE) AS Accounting): Revision Note

Purpose of reconciliation & verification

What is the purpose of reconciliation and verification methods?

• The main purposes of reconciliation and verification methods are:

  • to assist in locating errors

    • This ensures financial statements represent a true and fair view

  • to prevent fraud

    • By making sure accounts are checked by different people

• A business can use documentation from internal sources to verify their ledger accounts

  • For example, they can use their sales invoices to check the total of the accounts in the sales ledger

• A business can also use documentation from external sources to verify their ledger accounts

  • For example, they can use bank statements to check their cash book

  • Or they can use a statement of account to check a ledger account in the purchases ledger

• A business can use an external auditor to verify the information

  • This reassures stakeholders that the financial statements are accurate

What are the methods used to reconcile and verify ledger accounts?

Trial balance

• A trial balance is a statement which lists all accounts and their balances on a particular date

  • Each balance is placed either in the debit column or in the credit column

• The totals of the debit and credit columns are calculated

  • The totals should be equal

• A trial balance is not part of the double entry system

• The balance for the inventory account will always be the opening balance

  • This is because the current inventory is contained within the purchases account

  • This is dealt with once the balances are transferred to the statement of profit or loss

Control accounts

• A control account is a summary of all balances and transactions for trade receivables or for trade payables

  • A sales ledger control account summarises all the transactions for trade receivables

  • A purchases ledger control account summarises all the transactions for trade payables

• The totals are found using the books of prime entry rather than the ledger accounts

  • This is so that errors in the ledger accounts can be easily identified

  • This also helps to reveal fraud

• The closing balance is found for the control account and compared to the sum of the closing balances in the sales ledger accounts or the purchases ledger accounts

  • If there are no errors, these figures will be equal

Bank reconciliation statements

• A bank reconciliation statement is produced If the balance on the bank statement is different to the bank balance in the cash book

• This is a statement which explains why the balances are different

• The cash book can be updated with missing transactions that are on the bank statement

  • This is very common these days as a lot of transactions are digital

• However, the business cannot update the bank statement with missing transactions that are in the cash book

  • A bank reconciliation statement is needed to show these

• It contains details of any:

  • Unpresented cheques

  • Uncredited deposits

  • Errors

Physical counts

• A business can physically count the number of units of inventory and compare to the information in the ledger accounts

• A business can count the amount of cash in hand and compare with the information in the ledger accounts

Benefits & limitations of reconciliation & verification

What are the benefits and limitations of reconciliation and verification procedures?

• Benefits include:

  • they help to keep the ledger accounts accurate and assist in the location of errors

  • they help to prevent fraud by acting as deterrents

  • they help to identify missing transactions

• Limitations include:

  • they increase expenses as there is a financial cost to using auditors or hiring additional employees

  • they do not identify all types of errors

  • it is possible that an auditor might understate the value of assets

• The table below shows the benefits and limitations of the most commonly used procedures