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Advanced-Level
Correction of errors (With answers)
1
Errors NOT affecting trial balance agreement (six)Errors of commissionErrors of principleErrors of original entryErrors of omissionCompensating errorsComplete reversal of entries
Errors
Correction by DOUBLE ENTRYStep 1 Show
corrections using journal entries
Step 2 Post journal entries to relevant ledger accounts
Errors AFFECTING trial balance agreementThe following are EXAMPLES ONLY:Incorrect calculations in any accountMaking an entry on only one account, i.e. a debit but no credit OR a credit but no debit.Entering a different amount on the debit side
from the amount on the credit side, or vice versa.
… many other errors…
Suspense accountEnter the difference in the trial balance in the suspense account
Correction by DOUBLE ENTRYStep 1 Show
corrections using journal entries
Step 2 Post journal entries to suspense account AND/OR relevant ledger accounts
Advanced-Level
Errors Not Affecting Trial balance AgreementProcedure of Correction of Errors:
1. Errors of omission – where a transaction is completely omitted from the books.
Example one ~ Electricity accrued and rent prepaid amounted to $100 and $200 respectively were both omitted. In addition, stationery stock of $95 was found to be unrecorded in the final accounts.
Date Particular Dr CrProfit and Loss account – electricity 100 Accruals 100
Prepayments 200 Profit and Loss account – rent 200
Stationery stock 95 Profit and Loss account – stationery 95
Example Two ~ Trading stock of $1000 was omitted in the stock take.
Date Particular Dr CrStock 1000 Trading account – closing stock 1000
2. Errors of commission- a wrong account of the same class has been debited or credited although the amount is correct.
Example ~ A cheque for $40 received from J. Jordon had been posted to the account of I. Jordon. It was also found that the cheque related to a debit previously written off as irrecoverable. Step 1: Identify the Right Entries
Bank J. Jordon
J. Jordon 40 Bad debts Recovered 40 Bank 40Bad Debts Recovered
J. Jordon 40
Step 2: Identify the Wrong Entries
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Advanced-Level
Bank I. Jordon
I. Jordon 40 Bank 40
Step 3: Make Appropriate Adjustments
Date Particular Dr CrI. Jordon – debtors 40 J. Jordon – debtors 40
J. Jordon - debtors 40 Bad Debts Recovered 40
3. Errors of principle – where an item with correct amount has been entered in the wrong class of account.
Example one ~ A new van was purchased at $5400 for resale and this transaction had been entered in the Fixed Assets Register. The company’s policy was to depreciate at 10% on cost of the motor vehicles held at the year end.
Step 1: Identify the Right Entries
Purchases Bank
Purchases 5,400 Purchases 5,400
Step 2: Identify the Wrong Entries
Vans Bank
Bank 5,400 Vans 5,400
Step 3: Make Appropriate Adjustments
Date Particular Dr CrPurchases 5,400 Vans 5,400
Provision for depreciation ~ vans (overstated) 540 Profit and Loss Account - depreciation 540
4. Errors of original entry – where the original figure is wrong yet the accounts involved in the double entry are correct.
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Advanced-Level
Example one ~ A credit note received of $121 was wrongly treated as $212.
Step 1: Identify the Right Entries
Creditors Purchases Returns
P. Returns 121 Creditors 121
Step 2: Identify the Wrong Entries
Creditors Purchases Returns
P. Returns 212 Creditors 212
Step 3: Make Appropriate Adjustments
Date Particular Dr CrPurchases Returns (212-121) 91 Creditors 91
Example two ~ Repairs in the sum of $2 750 made to a flat occupied by the owner had been charged to the firm's maintenance expenses.
Step 1: Identify the Right Entries
Drawings Cash
Cash 2,750 Drawings 2,750
Step 2: Identify the Wrong Entries
Maintenance expenses Cash
Repairs 2,750 Maintenance 2,750
Step 3: Make Appropriate Adjustments
Date Particular Dr CrDrawings 2,750 Maintenance expense 2,750
5. Complete reversal of entries – where the correct accounts are used but each item is shown on the wrong side of the account.
Example one ~ A refund of $300 to a debtor was recorded as a receipt from him.
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Advanced-Level
Step 1: Identify the Right Entries
Debtors Bank
Bank 300 Debtors 300
Step 1: Identify the Wrong Entries
Debtors Bank
Bank 300 Debtors 300
Step 3: Make Appropriate Adjustments
Date Particular Dr CrDebtors 600 Bank 600
Example Two ~ A rent prepaid of $100 was erroneously treated as an accrual and entered as such.
Step 1: Identify the Right Entries
Rent
Bal b/d 100
Step 2: Identify the Wrong Entries
Rent
Bal b/d 100
Step 3: Make Appropriate Adjustments
Date Particular Dr CrAccruals 100Prepayments 100 Rent 200
6. Compensating errors – where errors cancel out each other so that the totals of the trial balance still agree.
Example ~ Discounts allowed has been under-totaled by $35 and an item in the sales returns day book of the same amount has not been posted to the relevant account of the customer.
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Advanced-Level
Step 1: Identify the Right Entries
Discount allowed Debtors
+35 +35
Step 2: Identify the Wrong Entries
Discount allowed Debtors
-35 Sales Returns -35
Step 3: Make Appropriate Adjustments
Date Particular Dr CrDiscounts allowed 35 Debtors 35
Errors Affecting Trial balance Agreement
1. Errors in posting
Omission of posting ~ A payment of cheque of $146 for stationery had not been posted to the appropriate nominal account.
Date Particular Dr CrStationery 146 Suspense 146
Overstate (Understate) the amount of posting ~ A purchases of $200 from Mr. Lam was posted from purchases day book as $2000.
Date Particular Dr CrMr. Lam - creditors 1,800 Suspense 1,800
Post to the wrong side of the correct account ~ A return of $3000 from Mr. Au posted from sales returns day book to the wrong side of his account.
Date Particular Dr CrSuspense 6,000 Mr. Au – debtors 6,000
Post to the wrong side of a wrong account ~ The total, $660, of the discount column on the
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Advanced-Level
credit side of the three-column cash book was posted to the discount allowed account.
Date Particular Dr CrSuspense 1,320 Discounts allowed 660 Discounts received 660
2. Errors in casting
Overcast (Undercast) an account ~ the debit side of a creditor account was overcast by $60.
Date Particular Dr CrSuspense 60 Creditors 60
Overcast (Undercast) a day book ~ The purchases returns day book was overcast by $200.
Date Particular Dr CrPurchases returns 200 Suspense 200
Overcast (Undercast) the ending stock figure ~ The work sheet for the stock take at year end was overcast by $200.
Date Particular Dr CrTrading ~ closing stock 200 Stock 200
3. Errors in the carried down/brought down of the prepayments and accruals
Example one ~ The balance brought down at the beginning of the accounting year for prepaid insurance of $200 was omitted.
Date Particular Dr CrInsurance 200 Suspense 200
What if the above error was discovered at the year end of last year instead of the end of current year?
Date Particular Dr CrPrepayments - insurance 200 Suspense 200
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Advanced-Level
Example two ~ The balance brought down at the beginning of the accounting year for accrued rent of $500 was erroneously brought down as a prepayment of rent. (No error in the balance carried down at year end of last year.)
Date Particular Dr CrSuspense (500x2) 1,000 Rent 1,000
What if the above error was discovered at the year end of last year instead of the end of current year?
Date Particular Dr CrSuspense 1,000 Prepayments – rent 500 Accruals – rent 500
4. Errors in listing
Omission of a balance from a listing ~ A debit balance of $185 has been omitted from the schedule of debtors, the total of which has been entered in the trial balance.
Date Particular Dr CrDebtors – Trial Balance 185 Suspense 185
Place a balance on the wrong side of the trial balance ~ A bank overdraft of $1000 was listed as a debit balance in the trial balance.
Date Particular Dr CrSuspense 2000 Bank overdraft – Trial Balance 2000
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Advanced-Level
Simple exampleThe following is the Trial balance of Single Ltd as at 31 March 2001:
Single LtdTrial balance as at 31 March 2001
Dr. Cr.$ $
Salaries and wages 3 168Fixtures 10 000Bank 6 790Purchases 62 400Discount allowed 305General expenses 595Stock 12 490Debtors 8 120Drawings 4 520Sales 87 050Discount received 410Creditors 5 045Capital 17 017
108 388 109 522
As the debit side does not agree with the credit side, we need to open a suspense account to make it balance.
Single LtdTrial balance as at 31 March 2001
Dr. Cr.$ $
Salaries and wages 3 168Fixtures 10 000Bank 6 790Purchases 62 400Discount allowed 305General expenses 595Stock 12 490Debtors 8 120Drawings 4 520Sales 87 050Discount received 410Creditors 5 045Capital 17 017
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Advanced-Level
Suspense (b.f.) 1 134109 522 109 522
Suspense accountDifference per trial balance 1 134
After a detailed investigation, the accountant of Single Ltd discovered the following errors:(a) Sales journal overcast by $350.(b) Discounts allowed undercast by $100.(c) Fixtures, bought for $850, have been entered in the cash book but not the fixtures account.(d) Credit purchase of $166 was entered in the purchases journal only, but not in the creditors
account.(e) Cheque payment to a creditor of $490 had been debited to the drawings account in error.
Suspense AccountBalance b/d 1,134 Discounts allowed 100Creditors 166 Sales 350
_ Fixtures _ 850 1300 1 , 300
Full example
After the extraction of the balances from the books of Bland, the totals of the trial balance failed to agree. The following items have subsequently been discovered.
1. The total, $1200, of the discounts received column in the cash book had been posted to debit side of the relevant account.
2. An old van with a net book value of $8192 was sold at $5000. The van was purchased six years ago and the depreciation had been provided at 60% p.a. by the reducing balance method. The sale proceed was entered as cash sales.
3. The payment of $265 for rent had been entered correctly in the cash book but had been credited to the rent expenses account in the nominal ledger as $256.
4. Invoices for $3000 for advertising expenses had been included in creditors when in fact they were related to the following period.
5. $1350 worth of goods, sold to a customer but not yet delivered had been included in the ending stock. On the other hand, goods costing $2000 were sent to an agent on a ‘sale or return’ basis. These goods had been invoiced at a gross profit margin of 20% and were included in the sales of the year irrespective of the fact that only $400 of these goods at cost had been sold to date.
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Advanced-Level
6. In arriving at the debtors figure in the trial balance an individual debtor’s balance of $1789 was incorrectly taken as $7189.
7. No entry had been made in the accounts to record the receipts of a cheque for $60 from White, a supplier. The cheque was a refund relating to previous overpayment for goods supplied.
8. The amount $200 had been paid on office stationery, but only stationery to the value of $150 had been used. It was discovered subsequently that $60 purchases of stationery was not yet paid and the unused stationery stock was omitted from the books.
9. A sales invoice of $966 was incorrectly entered in the sales day book as $996 and subsequently posted to the respective sales ledger account as $969.
10. An amount of $86 received from A. Blunt, a debtor, in settlement of his account had been treated as a cash sale.
You are required to:
(a) Prepare the journal entries to correct the above errors
(b) Prepare a statement to adjust the drafted profit figure of $11000.
(c) Prepare the suspense account to enter the corrections so as to restore the agreement of the trial balance.
Date Particular Dr Cr1 Suspense account 2,400
Discounts received account ($1,200x2) 2,400
2 Sales 5,000 Disposal account 5,000
Disposal account [8,192/(1-60%)6] 2,000,000 Van 2,000,000
Provision for depreciation (2,000,000-8192) 1,991,808 Disposal account 1,991,808
Profit and Loss account ~ Loss on disposal 3,192 Disposal account 3,192
3 Rent 521 Suspense account 521
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Advanced-Level
4 Creditors 3,000Advertising 3,000
5 Trading a/c 1,350 Stock 1,350
Sales (2,000-400)/80% 2,000 Debtors 2,000
Stock 1,600 Trading – closing stock 1,600
6 Suspense account 5400 Debtors (Trial Balance) 5400
7 Bank 60 Creditors – White 60
8 Stationery stock 110 Stationery 110
Stationery 60 Accruals 60
9 Sales account (996-969) 30 Suspense 27 Debtors 3
10 Sales 86 Debtors ~ A. Blunt 86
Statement for revised net profitNet Profit before adjustment 11,000Add: Discounts received understated (1) 2,400
Advertising overcharged (4) 3,000Stock held by an agent on a ‘sale or return’ basis (5) 1,600Stationery overcharged (8) 110 7,110
18,110
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Advanced-Level
Less: Cash sales overstated (2) 5,000Loss on disposal omitted (2) 3,192Rent expenses understated (3) (265+256) 521Stock sold but not yet delivered (5) 1,350Sales overstated (5) 2,000Stationery undercharged (8) 60Sales overstated (9) 30Cash sales overstated (10) 86 12,239
Net Profit after adjustment 5,871
Suspense Account$ $
Discounts received 2,400 Balance b/d (b.f.) 7,252Debtors 5,400 Rent 521Debtors 3 Sales 30
7,803 7,803
Exercise oneBalance Sheet of J Craig as a 31 December 19x1
Fixtures and fitting 12,500 Capital 10,000Stock 5,000 Net profit for year 8,650 Debtors 2,100 18,650Cash 50 Drawings 3,930
14,720Creditors 4,350Suspense account 580
19,650 19,650When the above balance sheet was prepared there was still a difference in the trial balance, and
it was necessary to open a suspense account for the amount show.Subsequently the following errors have been discovered:(a) The balance of $140 on E Jackson’s account in the sales ledger bad had been brought
forward as $14.(b) The sales day book had been undercast by $386.(c) A new cash register costing $310 had been debited to purchases account instead of fixtures
and fittings.(d) Depreciation of equipment had been entered in the profit and loss account as $1,724 instead
of $1,274.(e) Discounts allowed of $65 had been posted to the credit of discount received account.
You are required13
Advanced-Level
(i) To provide journal entries necessary to correct the errors;
(ii) To produce a corrected balance sheet showing the amended balance on the suspense account.
(i)
Date Particular Dr Cra E Jackson 126
Suspense 126
b Suspense 386 Sales (Profit and Loss) 386
c Fixture and fitting 310 Purchases 310
d Suspense 450 Profit and Loss ~ depreciation 450
e Discounts received 65Discounts allowed 65 Suspense 130
(ii)
Suspense AccountSales (Profit and Loss) 386 Balance b/d 580Profit and Loss 450 E Jackson 126
Discounts allowed 65Discounts received 65
836 836
Balance Sheet of J Craig as a 31 December 19x1Fixed Assets Capital 10,000Fixtures and fitting (12500 + 310) 12,810 Add: Net profit for year 9,666
(8650 + 386 + 310 –130 + 450) 19,666Current Assets Less: Drawings 3,930 Stock 5,000 15,736Debtors (2100 + 126) 2,226 Current LiabilitiesCash 50 Creditors 4,350
20,086 20,086
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Advanced-Level
Statement for revised net profit
Net Profit before adjustment 8,650Add: Sales undercast 386 Purchases overcast 310 Depreciation overcast 450 1 , 146
9,796Less: Discounts allowed undercast 65 Discounts received overcast 65 130 Net Profit after adjustment 9 , 666
Exercise Two(a) An inexperienced book-keeper has drawn up a trial balance for the year ended 30 June
19X7:Dr Cr
$ $Provision for doubtful debts 200Bank overdraft 1,654Capital 4,591Creditors 1,637Debtors 2,983Discount received 252Discount allowed 733Drawings 1,200Office furniture 2,155General expenses 829Purchases 10,923Returns inwards 330Rent and rates 314Salaries 2,520Sales 16,882Stock 2,418Provision for depreciation of furniture 364 __ __
24,938 25,002
Required:(a) Draw up a ‘corrected’ trial balance, debiting or crediting any residual error to a suspense
account.(b) Further investigation of the suspense account, ascertained in (a) above, reveals the following
errors:
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Advanced-Level
(i) Goods bought from J.Jones amounting to $13 had been posted to his account as $33.(ii) Furniture which had cost $173 had been debited to the general expense account.(iii) An invoice from Suppliers Ltd for $370 had been omitted from the purchase account, but
credited to Suppliers Ltd’s account.(iv) Sales on credit to A. Hope Ltd for $450 had been posted to the sales account, but not to the
debtors ledger.(v) The balance on the capital account had been incorrectly brought forward in the ledger, and
should have been $4,291.(vi) An amount of $86 received from A. Blunt, a debtor, in settlement of his account had been
treated as a cash sale.(vii) Discount allowed has been undertotalled by $35.
Required:Prepare journal entries correcting each of the above errors and write up the suspense account.
Trial Balance for the year ended 30-6-19X7Dr Cr
Provision for doubtful debts 200Bank Overdraft 1,654Capital 4,591Creditors 1,637Debtors 2,983Discounts received 252Discounts allowed 733Drawings 1,200Office furniture 2,155Provision for depreciation ~ Furniture 364General expenses 829Purchases 10,923Returns inwards 330Rent and Rates 314Salaries 2,520Sales 16,882Stock 2,418Suspense 1,175 25,580 25,580
(b)16
Advanced-Level
Date Particular Dr Cr(i) J Jone (creditors) 20
Suspense 20To correct the error of overstate the amount of posting
(ii) Furniture 173 General expenses 173To correct the error of principle
(iii) Purchases 370 Suspense 370To correct the omission of posting
(iv) A Hope Ltd (debtors) 450 Suspense 450To correct the omission of posting
(v) Capital (4591-4291) 300 Suspense 300To correct the brought down balance of capital
(vi) Sales 86 A Blunt (debtors) 86To correct the error of principle
(vii) Discounts allowed 35 Suspense 35To correct the error of undercasting
(c)
Suspense Acocunt19-7 $ 19-730/6 Balance b/d 1,175 30/6 J Jones 20
Purchases 370A Hope Ltd 450Capital 300Discounts Allowed 35
1,175 1,175
Exercise ThreeAfter completing a draft profit and loss account for the year ended 30 April 19X0 of A.B.C.
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Advanced-Level
Limited the following balances remained and a suspense account entry was required for the difference which had arisen:
$ $Fixed assets: at costProvision for depreciationOrdinary share capitalRetained earningsStock in trade, at costSales ledger control accountPurchases ledger control accountBalance at bankDifference on balances suspense account
60,000
14,0009,600
1,640
31,00035,00012,000
6,500
740
85,240 85.240
After investigation the following discoveries were made:(a) A rent payment of $350 in March 19X0 had been debited in the sales ledger control account.(b) Although instructed to do so, the accounts clerk had not set a debt due from B. Bell of $1,560
in the sales ledger control account against an amount due to B. Bell in the purchases ledger control account.
(c) Discounts allowed of $500 during the year ended 30 April 19X0 had not been recorded in the company’s accounts.
(d) No entry had been made for refund of $2,620 made by cheque to L. Green in March, 19X0, in respect of defective goods returned to the company. Note: The correct entries had been made previously for the return of the goods to A.B.C. Limited.
(e) The purchases day book for February 19X0 had been undercast by $300.(f) A payment of $1,000 to K. Bloom in January 19X0 for cash purchases had been debited in the
purchases ledger control account. Note: The company does not maintain a credit account with K. Bloom>
(g) No entries had been made in the company’s books for cash sales of $2,450 on 30 April 19X0 and banked on that date.
(h) No entries had been made in the company’s books for bank charges of $910 debited in the company’s bank account in December 19X9.
(i) The company’s cash book (bank debit column) had been overcast by $1,900 in March 19X0.(j) A cheque payment of $8,640 for new fixtures and fittings in April 19X0 had not been recorded
in the company’s books.(k) A payment by cheque of $1,460 in June 19X9 for stationery had not been posted to the
appropriate nominal account.Required:(a) The journal entries for items (a) – (k) above. Note: Narratives are required.(b) The corrected list of balances at 30 April 19X0.
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Advanced-Level
Date Particular Dr Cr
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Advanced-Level
(a) Profit and Loss ~ Rent 350 Sales Ledger Control 350To correct the error of principle
(b) Purchases Ledger Control 1,560 Sales Ledger Control 1,560To set-off the amount due from B. Bell
(c) Profit and Loss ~ Discounts allowed 500 Sales Ledger Control 500To correct the error of omission
(d) Sales Ledger Control 2,620 Bank 2,620To correct the error of omission
(e) Profit and Loss ~ Purchases 300 Purchases Ledger Control 300To correct the error of under casting
(f) Profit and Loss ~ Purchases 1,000 Purchases Ledger Control 1,000To correct the error of principle
(g) Bank 2,450 Profit and Loss ~ Sales 2,450To correct the error of omission
(h) Profit and Loss ~ Bank Charges 910 Bank 910To correct the error of omission
(i) Suspense 1,900 Bank 1,900To correct the error of over casting
Date Particular Dr Cr(j) Fixture and fitting 8,640
Bank 8,640To correct the errors of omission
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Advanced-Level
(k) Profit and Loss ~ Stationery 1,460 Suspense 1,460To correct the error of omission of posting
List of balance as at 30-4-19X0Fixed Assets: at cost 68,640Fixed Assets: provision for depreciation 31,000Ordinary share capital 35,000Retained earnings 9,930Stock in trade, at cost 14,000Sales ledger control 9,810Purchases ledger control 6,240Balance at bank (O/D) 9,980Suspense 300
92,450 92,450
Exercise FourSharples and Syvret are partners in a business producing ornaments in pottery. Syvret was in
charge of sales and it was agreed that she be paid a commission of 2% on sales before distribution of profits. The profit sharing ration is 2:1.
Stokes, a partly qualified accountant, kept the books. The following errors had been made and a suspense account had been opened to effect a balance on completing the draft accounts:
1. A new van was purchased for $5,400 and this amount had been entered in the Purchases Day Book, and charged to the Purchases Account.
2. The new van replaced the firm’s two other vehicles costing $2,700 each which had been depreciated by 10% per annum on a reducing balance for three years and two years respectively, and which were sold for $3,600 in total, cheques for which amount had been posted to the sales account. No other entries were made in the account.
3. Depreciation of furniture and fittings of $1,440 had been overlooked.4. Discount allowed of $24 had been correctly entered in personal accounts but had been
treated in the general ledger as discount received.5. Goods returned inwards, value $360 had been entered in the general ledger correctly but
had not been posted to the debtor’s personal account. Control accounts are not maintained.
6. A cheque for $40 received from J.Gillies had been posted to the account of I.Giles. The cheque related to a debt previously written off as irrecoverable.
7. Stock costing $200 was sent from the shop in Bournemouth to Syvret’s mother in Jersey
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Advanced-Level
on sale or return. Only $40 of this stock at cost had been sold to date.The gross profit is 20% of sales.
Required:(a) Prepare journal entries necessary to correct the accounts.(b) Produce the adjusted suspense account.(c) Prepare a statement showing the adjustments to net profit and to partners’ shares of profit.
(a)
Date Particular Dr Cr1 Motor van 5,400
Profit and Loss ~ Purchases 5,400To correct the error of principle
Profit and Loss ~ Depreciation 540 Provision for depreciation – motor van 540To correct the error of omission
2 Profit and Loss ~ Sales 3,600Provision for depreciation 1,245Profit and Loss ~ Loss on disposal 555 Motor van 5,400To correct the error of principle and omission
3 Profit and Loss ~ depreciation 1,440 Provision for depreciation 1,440To correct the error of omission
4 Profit and Loss ~ Discounts Allowed 24Profit and Loss ~ Discounts Received 24 Suspense 48To correct the error of the wrong side of a wrong account
Date Particular Dr Cr5 Suspense 360
Debtors 360To correct the error of omission of positng
6 I Giles - debtors 40
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Advanced-Level
J Gillies - debtors 40To correct the error of commission
J Gillies - debtors 40 Profit and Loss ~ Bad Debts Recovered 40To enter the bad debts recovered.
7 Stock 160 Trading ~ Closing stock 160To correct the error of omission
Profit and Loss ~ Sales 200 Debtors 200To correct the error of omission
(b)
Suspense AccountDebtors 360 Balance b/d (Balancing fig.) 312
Discounts allowed 24Discount received 24
360 360
(c)
Statement showing the adjustment to net profitItems added to the net profit $ $ Purchases overstated 5,400 Bad debts recovered 40 Closing stock understated 160 5,600
Less: Items deducted from net profit Sales overstated 3,600 Loss on disposal 555 Discounts allowed understated 24 Discounts received overstated 24 Depreciation of furniture and fitting understated 1,440 Depreciation of motor van understated 540 Sales overstated 200 6,383The decrease in net profit (783)
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Advanced-Level
Commission to partner (3,600 + 200) x 2% = 76Adjustment to the share of profit –$783 + $76 = -$707
Decrease in the sharing of profitSharples: 707 x 2/3 = 471.33Syvret: 707 x 1/3 = 235.67
Exercise FiveWyre and Holmes
Balance Sheets as at 31 December 19-1$ $ $ $ $
Fixed assets (at cost less depreciation ) Capital accountsPremises 6,000 Wyre 7,000Vehicles 1,090 Holmes 7,000 14,000Equipment and tools 2,480
9,570Current assets Current accountsStock 4,526 Wyre (credit) 641DebotrsLess: provision for bad debts
2,339 233 2,106
Holmes (debit) 432 209
Current liabilitiesPrepayments 144 Creditors 2,508Bank and cash 1,940 8,716 Accruals __128 2,636
18,286 16,845
The balance sheet of the partnership of Wyre and Holme, electrical contractors, was drawn up as shown above. The totals failed to agree and the difference was put into suspense account pending investigation. The investigation subsequently disclosed that:
(i) The purchase returns daybook had been correctly entered and totaled at $616 but had not been posted to the ledgers.
(ii) Discounts received, $132, had been debited to discounts allowed.(iii) The sales account had been under-added by $1,000.(iv) A credit sale of $147 had been debited to a customer’s account as $174.(v) A vehicle bought originally for $700 four years ago and depreciated at 20 per cent by
the straight line method on an assumed residual value of $100, had been sold as surplus to requirements for $150 but no entries, other than in the bank account, had been passed through the books.
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Advanced-Level
(vi) An accrual of $56 for telephone charges had been completely omitted.(vii) The partners’ current accounts had been credited with interest on capital at 10 per cent
instead of at the agreed rate of five per cent.(viii) A bad debt of $152 had not been written off and provision for had debts should have
been maintained at 10 per cent of debtors.(ix) Wyre’s current account had been credited with a partnership salary of $800 which
should have been credited to Holmes’ current account.(x) On one stock sheet at 31 December 19-1 a sub-total of $2,983 had been carried forward
as $2,938 and another sheet had been overcast by $100.(xi) Tools bought for $120 had been inadvertently debited to purchases.(xii) Holmes had withdrawn, for personal use, goods to the value of $196. No entries had
been made in the books.
The partners shared profits and losses as follows: Wyre 3/5, Holmes 2/5.
Required: (All workings must be shown.)(a) Prepare a statement of adjustments to net profit for the year.(b) Redraft the corrected balance sheet as at 31 December 19-1.
Workings:
Date Particular Dr Cr(i) Creditors 616
Purchases returns 616
(ii) Suspense 264 Discounts allowed 132 Discounts received 132
(iii) Suspense 1,000 Trading ~ sales 1,000
(iv) Suspense 27 Debtors 27
(v) Suspense 150Provision for depreciation (700x20%x4yr.) 560 Profit and Loss – profit on disposal 10 Vehicles 700
(vi) Telephone 56 Accruals – telephone 56
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Advanced-Level
(vii) Current – Holmes 70 Current – Wyre 70
ORCurrent - Wyre 350Current – Holmes 350
Current - Wyre 420Current – Holmes 280
(viii) Bad debts 152 Debtors 152
Provision for bad debts 233-(2,339-152-27)x10% 17 Profit and Loss 17
(ix) Current – Wyre 800 Current – Holmes 800
(x) Trading ~ Closing stock 55 Stock 55
(xi) Tools 120 Purchases 120
(xii) Drawing ~ Holmes 196 Purchases 196
(a)
Statement of adjustments to the net profit for the year ended 31-12-19-1Items added to net profit $ $ Discounts received understated 132 Discounts allowed overstated 132 Sales understated 1,000 Profit on disposal 10 Decrease in provision for bad debts 17 Purchases overstated 120 Purchases overstated 196 Purchases returns understated 616 2,223
Less: Items deducted from net profit
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Advanced-Level
Electricity understated 56 Closing stock overstated 55 Bad debts understated 152 263 Increase in net profit 1,960
Share of net profit: Wyre = $1,960 x 3/5 = $1,176 Holmes = $1,960 x 2/5 = $784
(b)
Balance Sheet as at 31-12-19-1Fixed Assets $ $ Capital $ $Premises 6,000 Wyre 7,000Vehicles (1,090 – 700 + 560) 950 Holmes 7,000 14,000Equipment and tools (2,480+120) 2,600 9,550
Current accountCurrent Assets Wyre (641-800+70+1,176) 1,087Stock (4,526-55) 4,471 Holmes 886 1,973Debtors (2,339-152-27) 2,160 (-432-70+800-196+784)Less: Provision for bad debts (216)Prepayments 144 Current LiabilitiesBank & Cash 1,940 8,499 Creditors (2,508-616) 1,892
Accruals (128+56) 184 2,076 18,049 18,049
Exercise SixAt the end of the financial year the totals of the trial balance of Chilford failed to agree and the
difference, $213, was credited to a suspense account pending investigation.Subsequently, the following errors were discovered:
1. Rates, $240, paid in advance at the end of the previous year had not been brought down on the rates account as an opening balance.
2. A new machine (cost $1100) acquired for use in the business had been debited to purchases.
3. The sales daybook had been under-added by $500.4. Surplus items of machinery (held as fixed assets) had been sold at their book value of
$400 on credit and this transaction had been recorded as a normal sale in the sales book.5. Goods, bought from a supplier for $15, had been credited to his account as $51.6. Discount allowed, $9, had been correctly recorded in the cash book but had not been
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Advanced-Level
posted to the customer’s account.7. An amount of $60, owed by a customer, had been missed off he schedule of debtors
balances used as the debtors figure in the trial balance.8. Goods returned by a credit customer had been correctly recorded in the sales return
daybook as $20, but had been debited to that customer’s account.
The trial balance, before the errors were corrected, was:Dr Cr
Discounts allowed 320Discount received 410Purchases 41 700Purchases returns 600Sales 72 300Sales returns 1 500Carriage outwards 4 130Wages and salaries 23 500Stock (opening) 19 200Heating and lighting 7 800Rent, rates and insurance 5 600General expenses 6 100Buildings 10 000Machinery 9 330Debtors 8 059Creditors 4 972Bank and cash 5 676Capital (opening) 64 420
142 915 142 702Suspense (difference) 213
142 915 142 915Required:(a) Rewrite the trial balance correcting the errors.(b) State by how much the profit or loss for the period was affected by the errors.(c) Post the appropriate correcting entries in the suspense account in order to eliminate the
balance.Workings (the journal entries to correct the errors) :
Date Particular Dr Cr1 Rates 240
Suspense 240
2 Machinery 1,100
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Advanced-Level
Purchases 1,100
3 Suspense 500 Sales 500
4 Sales 400 Machinery 400
5 Creditors (51-15) 36 Suspense 36
6 Suspense 9 Debtors 9
7 Debtors – Trial Balance 60 Suspense 60
8 Suspense 40 Debtors 40
(a)
Trial Balance as at the end of the financial yearDr Cr
Discounts allowed 320Discounts received 410Purchases 40,600Purchases returns 600Sales 72,400Sales returns 1,500Carriage outwards 4,130Wages & salaries 23,500Opening stock 19,200Heating & lighting 7,800Rent, rates and insurance 5,840General expenses 6,100Buildings 10,000
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Advanced-Level
Machinery 10,030Debtors 8,070Creditors 4,936Bank & cash 5,676Capital (opening) _______ __64,420
142,766 142,766
(b)
Effects on the net profitItems added to the net profit $ $ Purchases overstated 1,100 Sales understated 500 1,600
Less: Items deducted from the net profit Rates understated 240 Sales overstated 400 640 Net increase in net profit 960
(c)
Suspense Account$ $
Sales 500 Balance b/d 213Debtor – discounts allowed 9 Rates 240Debtor – discounts received 40 Creditors 36
Debtor 60 549 549
Exercise SevenThe first draft of the final account of Wilmot for the year ended 31 December 19-1 disclosed
that capital employed was $27,053 and net profit for the year was $6,874. The books of account had, however, been written up by Wilmot’s daughter, a student, and contained a number of errors.
After a lengthy check of all the entries, the following errors were identified:(i) Sales on credit had been over-added by $730 in the sales daybook.(ii) A credit purchase of $450 had been debited to a supplier’s account as $540.(iii) Some office furniture bought five years age for $300 and depreciated by $270 had been
sold for $100 but no entries had been made except to record the receipt of the proceeds
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Advanced-Level
in the bank account.(iv) New office equipment, $500, bought on 1 January 19-1 had been debited to the
purchases account. Depreciation should have been provided at 20 per cent using the straight line method.
(v) No entry had been made for goods withdrawn by Wilmot for personal consumption, $210.
(vi) Discounts allowed $90 had been credited to discounts received.(vii) An accrual for power, $23, and an insurance prepayment, $90, had both been
completely omitted.
Required:(a) A statement amending the net profit and capital employed figures for each of the items (i) to
(vii) above.(b) State by how much the draft balance sheet failed to balance.
Workings (the journal entries to correct the errors):
Date Particular Dr Cr(i) Sales 730
Suspense 730
(ii) Suspense 990 Creditors (450+540) 990
Date Particular Dr Cr(iii) Suspense 100
Provision for depreciation 270 Office furniture 300 Profit and Loss Account ~ profit on disposal 70
(iv) Office equipment 500 Purchases 500
Profit and Loss Account ~ depreciation 100 Provision for depreciation 100
(v) Drawings 210 Purchases 210
(vi) Discounts allowed 90Discounts received 90 Suspense 180
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Advanced-Level
(vii) Prepayments ~ insurance 90Profit and Loss ~ power expense 23 Accruals ~ power 23 Profit and Loss ~ insurance 90
(a)
Statement to correct the net profit$ $
Adjustments for net profit 6,874Add: Profit on disposal ~ Furniture 70 Purchases overstated – wrong debit to purchases 500 Purchases overstated – unrecorded drawing of goods 210 Overstated insurance expense 90 870
7,744Less: Sales overstated 730 Provision for deprecation – equipment 100 Adjustments for discounts allowed & received 180 Accruals omitted – understated power 23 1,033
6,711
(a)
Statement of correcting the capital employed$ $
Original capital employed at year end 27,053Less: Decrease in net profit 163 Drawing 210 373 Adjusted capital employed at year end 26,680
(b)
Suspense Account$ $
Creditors 990 Balance b/d (b.f.) 180Disposal of office equipment 100 Sales 730
Discounts received 90Discounts allowed 90
1,090 1,090
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Advanced-Level
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