Trial balance, errors and suspense account
BELOW IS a question I ask that you attempt to answer on your own, under examination condition. You should work within no more than 35 minutes to come up with your answer. I will present the solution; be sure to match the answer with mine.
QUESTION
Vincent Levy drew up a trial balance from the following list of balances on Sept 30, 2016: As the trial balance did not agree, a suspense account [>1] was opened for the amount of the difference.
After investigation, the following errors were discovered:
1. The purchases day book was under-added by $800. [>2]
2. Goods costing $1,400 bought from Sam were credited to the account of Sammy. [>3]
3. An item of $480 was debited twice in the sundry expense account. [>4]
4. A purchase from Smutty was correctly entered in the purchases day book as $$860 but wrongly entered in Smutty’s account as $680. [>5]
5. The debtors total of $24,800 [>6] was wrongly listed as $24,600.
6. Goods worth $560 taken for own use by Levy were debited to his drawings account, but no credit entry was made in any other account. [>7]
7. A banker’s standing order for $360 for payment to Levy’s insurance was entered on the wrong side of the bank account. [>8]
After the necessary amendments were made, the suspense account was brought to a nil balance.
You are required to: a. Write up the suspense account, including your calculation of the opening balance.
b. Prepare the trial balance as it will appear after the corrections have been made. Do you remember: i. The purpose for preparing a trial balance? ii. Three different types of errors which a trial balance will NOT reveal?
iii. Three errors of bookkeeping which could cause the trial balance to disagre?
Here is the reminder:
The purpose of preparing a trial balance:
The purpose of extracting a trial balance at the end of the accounting period of the business is to check the arithmetic accuracy of the entries made in the ledger.
THREE different types of errors which a trial balance will NOT reveal:
These are: i. Complete omission of a transaction, so there is no debit or credit entry.
ii. Entry of a transaction on both sides, but in the wrong account or accounts.
iii. Errors in original entry where the original figures were incorrectly entered although the correct double-entry principle has been observed.
THREE errors of bookkeeping which could cause the trial balance to disagree. These are:
1. Wrong addition in any account in the general ledger. E.g., sales account under-added by $250.
Result: The credit side will be less than debit side of the trial balance by $250.
2. Omission of either the debit or credit entry of a transaction. E.g., Cash payment of $750 received from Tom Jolly, a debtor, was recorded in the cash book only.
Result: The error of omitting the posting of the amount on the credit side of Tom Jolly’s account will result in a higher debit total of trial balance by $250.
3. Entry on the wrong side of the account.
E.g. Interest paid $150 was credited to the cash book but was wrongly credited to Interest received account.
Result: An expense paid $150 but posted wrongly to the credit side of an income account will make the credit side of the trial balance be more than the debit side by $300.
This is where we end for this week. Join me next week as we continue to complete the syllabus. Grasp the concepts and retain them; you will need them as you progress to excellence. See you next week.