Trial balance, errors & suspense accounts
TERMS AND DEFINITION
■ Trial balance: This is a statement that lists all debits and credits in the double-entry accounts, in the ledger, at a particular date.
■ Errors and suspense: Suspense accounts are used when the trial balance balances do not agree. The suspense account is a general ledger account that holds accounts until the error is found.
■ Errors which do not affect the trial balance: i. Agreement:There are several errors that do not affect the trial balance agreement:
• Error of omission: Where transaction is completely omitted from the books.
• Error of commission – Where the class of account is correct but is listed in the wrong person’s account.
• Error of original entry – Where both entries of a transaction are overcast or undercast.
• Error of principle – Where transactions are recorded in the wrong class of accounts.
• Error of complete reversal – Where transactions are recorded on the wrong side of the account.
• Compensating error, the asset account, expense account and liabilities, revenue accounts are overcast or undercast at the same time.
■ Effects of errors on net profit: Trading, profit and loss items affect net profit. Balance sheet items do not affect net profit.
■ Trade creditors: Trade creditor is a supplier who credits goods or services to a firm with an agreement to be paid at a later date than the delivery date.
■ Purchases: Goods bought for resale are regarded as purchased goods. The temporary account used to record the goods bought for resale is the purchases book.
■ Bad debts: Bad debt is an expense. It is a debt that cannot be recovered.
■ Net profit: The is the actual profit after working expenses are taken from the gross profit.
■ Drawings: Drawings is the goods taken from the business by the owner for personal use.
■ Capital: Capital is a term financial asset used to start a business.
■ Trade debtors: This is a customer/debtor who has not yet paid for the goods or service taken on credit from the firm.
■ Expenses: This is the cost of operating the business.
■ Gross profit: This is the business revenue less the cost of goods sold. That profit is made before taking out the operating expenses.
Below is a worked example; pay keen attention to the principles applied.
WORKED EXAMPLE 12.1
Question:
Tony Lue prepared the following balance sheet at September 30, 2018:
The accountant checked the books and the differences were found:
1. Additional equipment costing $2,400 had been bought. It had been debited to the purchases account and credited to the bank account. [>1]
2. Debtors, $1,200 should be written off as bad debts. [>2]
3. Goods costing $800 had been sent to a customer on a ‘sale or return’ basis but had been treated in the account as a sale on credit. The customer decided not to buy them and sent back the goods during October. [>3]
4. The stock sheets on Sept 30, 2018, had been undercast by $400. [>4]
You are required to: a. Draw up a statement, starting with the given net profit of $40,800, to show the correct net profit on Sept 30, 2018
b. Prepared a corrected balance sheet as at Sept 30, 2018.
REASONING:
This cost should be capitalised, that is, added to equipment cost.
■ The cost was charged to purchase, hence a profit, it has to be added back to the profits.
■ Charge the bad debts to net profit and deduct from the debtors’ balance.
■ This must be subtracted from profit and trade debtors.
■ This understated the closing stock value, which led to a higher cost of goods sold and lowered gross profit.
■ Adjust by adding back to the profit.
SOLUTION WORKED EXAMPLE 12.1
a. Statement to ascertain corrected net profit for the year ended Sept 30, 2018. b. Balance sheet as at September 30, 2018
MULTIPLE-CHOICE QUESTIONS
1. Error of original entry occurs when:
A. An incorrect figure is entered on the correct sides of the correct ledger accounts.
B. Either the debit entry or credit entry for the particular transaction is recorded in the wrong class on account.
C. A correct figure is entered in the double-entry accounting records, once in the correct ledger and once in the wrong persons account.
2. Which of the following does not affect the trial balance agreement?
A. Sales, $909 to Raymond Mitchell entered in his account as $990.
B. Rent account added up to $1,000 surplus. C. Purchases, $698 from Carmen Wilson, completely omitted from the books.
D. None of the above.
Recommended response:
1. A
2. C
This is all we have time for this week, but always bear in mind that you must get up each morning with renewed determination if you want to go to bed with full satisfaction. Never let what you cannot do stand in the way of what you can. When the bank column has a debit balance, it means there is money in the bank. However, it there is a credit balance, it means that there is an overdraft.