Reconciliation and Error Correction Drill
Key Takeaways
- A reconciliation separates timing differences, bank or third-party errors, and book-side items that require journal entries.
- The adjusted bank balance must equal the adjusted book balance before the cash account is supportable.
- Subledger-to-control reconciliations test completeness because individual customer or vendor balances must tie to the general ledger.
- Prior-period errors are corrected differently from current-period estimate changes and ordinary current-period adjustments.
- A workpaper should identify the error type, affected period, pretax amount, tax effect if given, and financial statement correction.
Reconciliation and Error Correction Drill
Reconciliation questions test whether you can explain why two reliable records differ. FAR simulations may give a bank statement, cash general ledger, accounts receivable aging, accounts payable listing, fixed asset detail, or prior-year comparative statements. The goal is not to force agreement. The goal is to classify every difference and record only the entries needed in the accounting records.
Bank Reconciliation Workpaper
Client: Mica Foods, December 31, 2026. The bank statement shows $126,400. The general ledger cash account shows $119,860.
| Bank-side reconciliation | Amount |
|---|---|
| Bank statement balance | 126,400 |
| Add deposit in transit | 18,200 |
| Less outstanding checks | (22,750) |
| Add bank error charged to company | 1,500 |
| Adjusted bank balance | 123,350 |
| Book-side reconciliation | Amount |
|---|---|
| General ledger cash balance | 119,860 |
| Less bank service charge | (90) |
| Less NSF customer check | (2,400) |
| Add note collected by bank | 5,800 |
| Add interest earned | 180 |
| Adjusted book balance | 123,350 |
Both columns must reach the same adjusted balance of $123,350; if they did not, an item would be on the wrong side or missing. Only the book-side items require entries by Mica. The deposit in transit and outstanding checks are timing differences the bank has not yet processed. The bank error is corrected by the bank, not by Mica, unless Mica had also recorded the wrong amount.
Required Entries
| Item | Entry |
|---|---|
| Service charge | Dr Bank service charge expense 90, Cr Cash 90 |
| NSF customer check | Dr Accounts receivable 2,400, Cr Cash 2,400 |
| Note collected by bank | Dr Cash 5,800, Cr Notes receivable or related receivable 5,800 |
| Interest earned | Dr Cash 180, Cr Interest revenue 180 |
If the note collection includes interest and principal, split the credit between notes receivable and interest revenue. The exhibit wording controls the split. An NSF check reverses a deposit that bounced, so cash falls and the customer again owes the company, which is why accounts receivable is debited rather than an expense.
Subledger Tie-Out
A customer aging schedule is another reconciliation. Suppose accounts receivable control is $412,600, but the customer subledger totals $410,100, a $2,500 difference. A credit memo issued December 30 was posted to the customer account but not the general ledger. The correcting entry is debit sales returns and allowances (or a revenue adjustment) $2,500 and credit accounts receivable $2,500, assuming the return relates to current-period sales. If instead the memo was posted to the general ledger but not the subledger, the fix is not a journal entry; it is a subledger posting correction.
This distinction tests the completeness assertion: the control account and the detail must agree.
Error Correction Matrix
| Issue | Accounting treatment | FAR clue |
|---|---|---|
| Current-period accrual missed before issuance | Record current adjusting entry | Books still open |
| Change in estimate | Prospective treatment | New information changes estimate |
| Prior-period material error | Restate prior periods or adjust opening retained earnings | Error existed in issued statements |
| Classification error with no income effect | Reclassify affected balances | Wrong statement line |
| Counterbalancing error | May self-correct, but comparative statements may still need correction | Inventory or accrual timing error |
Mini Workpaper: Prior-Period Error
In 2026, a company discovers that 2025 depreciation expense was understated by $24,000. The 2025 statements have already been issued, the error is material, and the prompt says to ignore income taxes. This is not a 2026 change in estimate. It is a prior-period error. If comparative 2025 statements are presented, restate 2025 depreciation and accumulated depreciation. If the response grid asks for the 2026 opening retained earnings correction, debit opening retained earnings $24,000 and credit accumulated depreciation $24,000.
Drill Workflow
- Reconcile independent records to an adjusted balance.
- Circle items that require book entries.
- Separate posting corrections from journal entries.
- Identify whether an error affects current-year income, prior-year income, assets, liabilities, or classification only.
- Record the smallest entry that corrects the books and leaves a clear tie-out.
The exam rewards candidates who resist plugs. If the adjusted bank and adjusted book balances do not agree, one item is classified incorrectly or missing. Find it before writing an entry.
Accounts Payable Tie-Out Example
Vendor reconciliations work the same way as receivable tie-outs but test the completeness of liabilities. Suppose the accounts payable control shows $96,000 while the vendor subledger totals $99,500. A $3,500 vendor invoice for goods received before year-end was recorded in the subledger but not the general ledger; the correcting entry is debit purchases or inventory $3,500 and credit accounts payable $3,500 so the control catches up. Understated payables overstate income, so FAR favors recording the missing liability when goods or services were received by the cutoff date, regardless of when the invoice arrives.
This is the unrecorded-liability search, a recurring cutoff issue in FAR simulations.
A bank reconciliation includes a $4,600 deposit in transit, $7,200 of outstanding checks, a $125 bank service charge, and a $900 NSF customer check. Which items require journal entries by the company?
In 2026, before issuing the 2026 financial statements, a company discovers a material 2024 inventory error that caused 2024 income to be overstated. The 2024 statements were already issued. How should the error generally be treated?