Chapter 6

Notes to teachers
1

Correction of Errors (I): Errors Not Affecting Trial Balance Agreement

Start with Chapters 5 and 6 of Frank Woods Introduction to Accounting and briefly explain to students the purpose of preparing a trial balance and the uses of the general journal (i.e., the journal). Students should know that some errors affect the agreement of a trial balance while others do not. It is not difficult to understand the correction of errors mentioned in this chapter. But students may have difficulty deciding whether a correcting entry affecting expenses/revenues should be made in the nominal account or the profit and loss account. The marking schemes of public examinations were rather confusing in the past. Teachers should remind students to check whether the question hints that the profit and loss account has already been opened. If this is the case, all nominal accounts would have been closed off and the correcting entry should be made in the profit and loss account. Errors in year-end adjustments are included for the first time. Teachers should go through Chapters 1 3 with students before teaching this section. Sale or return transactions are quite common in public examinations. Teachers are advised to teach the materials on pages 178 179 (Learn More).

3 4

Q1

Control accounts can help test the arithmetical accuracy of entries in certain ledgers (usually the accounts receivable ledger and the accounts payable ledger). The trial balance can help test the arithmetical accuracy of double entries made in all ledgers. Personal accounts are accounts of individuals and organisations trading with the firm. The general journal records transactions that do not fit into any of the other books of original entry. Capital expenditure is expenditure that generates long-term benefits for an entity. It usually refers to the money spent on: purchase or production of non-current assets extension or improvement to existing non-current assets Capital expenditure should not be wholly written off as an expense in the period in which it is incurred. Instead, it should be expensed over a number of periods by way of depreciation. Expenditures related to the running of motor vehicles; for example, petrol and motor repairs. No. A casting error in a book of original entry, say, the purchases journal, would only affect its corresponding account in the general ledger (i.e., purchases account). The creditors accounts in the accounts payable ledger would be unaffected as long as the individual entries in the purchases journal were correct. The same logic applies to the debtors accounts in the accounts receivable ledger.

Q2 Q3 Q4 Q5 Q6

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Q7 Q8

Nominal accounts are accounts that will be closed off at the end of an accounting cycle and whose balances will be transferred to the profit and loss account. Example 3 Dr Profit and loss Purchases $2,500 Cr T Hui $2,500 Example 4 Dr T Lo $200 Cr Profit and loss Sales $200 Example 6 Dr Profit and loss Sales $1,000 Cr Profit and loss Purchases $1,000

A1 A2 A3 A4

Error of principle The sale of a non-current asset was wrongly treated as a sale of goods. The required adjusting entries would be: Dr Sales $6,000 Dr Accumulated depreciation: Cars $90,000 Dr Profit and loss Loss on disposal $4,000 Cr Cars $100,000 Dr Sales $300 Cr T Lo $300 The correcting entry should be made in the capital account instead of the profit and loss account. If the overstated opening inventory had been transferred out of the inventory account to the profit and loss account for the year, the required adjusting entries would be: Dr Capital (for sole proprietorships) $500* Cr Profit and loss Opening inventory $500 If the overstated opening inventory had not been transferred out of the inventory account, the required adjusting entries would be: Dr Capital (for sole proprietorships) $500* Cr Inventory $500 * The debit entry would be made in partners capital/current accounts for partnerships or retained profits for limited companies. Refer to Chapter 8 for partnership accounts, and Chapter 13 of Frank Woods Financial Accounting 2 for the accounts of limited companies. Dr Expense (or the profit and loss account if the expense account had been closed off) (with an amount double the amount of the error) Cr Prepaid expenses Cr Accrued expenses

A5

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A6 A7 A8 A9

Dr Depreciation Cr Accumulated depreciation Dr Allowance for doubtful accounts $1,200 Cr Profit and loss $1,200 No. The adjusting entries would be: 1 Correction of overstated purchases: Dr Creditors account $12,000 Cr Purchases account $12,000 Correction of overstated closing inventory: Dr Profit and loss Closing inventory $12,000 Cr Inventory $12,000

For ordinary sales, goods can only be returned by the customer if the supplier agrees to accept them. For sale or return transactions, goods can be returned by the customer to the supplier unconditionally.

ASSESSMENT

Short Questions
1
(a) (b) (c) (d) Error of commission Error of omission Error of principle Error of original entry
The Journal
Details (a) H Lin H Lui (b) Machinery L Po (c) Vans Motor expenses Dr $ 6,780 43,900 43,900 38,000 38,000 90 90 Cr $ 6,780

(d) C Fung ($2,210 $2,120) Sales

2X

(a) (b) (c) (d)

Error of commission Error of principle Error of original entry Complete reversal of entries 71

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The Journal
Details (a) H Wong K Wong (b) Cash Bank (c) K Li ($9,900 $8,900) Purchases Dr $ 6,990 1,890 1,890 1,000 1,000 16,000* 16,000 Cr $ 6,990

(d) H Kwong Cash

* The adjustment for item (d) is double the amount ($8,000 2) first to cancel out the error and then replace it with the correct amount. (a) Dr Inventory $800 Cr Profit and loss Closing inventory $800 (b) Dr Accumulated depreciation: Office furniture $2,000 Cr Profit and loss Depreciation $2,000 (c) Dr Profit and loss Allowance for doubtful accounts $1,800 Cr Allowance for doubtful accounts $1,800 (d) Dr Profit and loss Expenses $1,400 Cr Prepaid expense $700 Cr Accrued expense $700 (a) Dr Profit and loss $3,600 Cr Inventory $3,600 (b) Dr Computers $10,000 Cr Profit and loss Purchases $10,000 Dr Profit and loss Depreciation $2,000 Cr Accumulated depreciation: Computers $2,000 (c) Dr Profit and loss Bad debts $4,000 Cr Accounts receivable $4,000 Dr Profit and loss $1,125 Cr Allowance for doubtful accounts $1,125 (d) Dr Profit and loss $1,600 Cr Accrued revenue $800 Cr Accrued expense $800

3 4X

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(a) No entry is required. (b) Dr Drawings $1,600 Cr Capital $800 Cr Profit and loss Purchases $800 (c) Dr Profit and loss Returns inwards $780 Cr Debtors account $780 (d) Dr Profit and loss Sales $12,000 Cr Debtors account $12,000 Dr Inventory $10,000 Cr Profit and loss Closing inventory $10,000 (e) Dr Profit and loss Sales $32,000 Cr Disposal $32,000 Dr Disposal $80,000 Cr Vans $80,000 Dr Accumulated depreciation: Vans $32,000 Cr Disposal $32,000 Dr Profit and loss Loss on disposal $16,000 Cr Disposal $16,000 or simply as: Dr Profit and loss Sales $32,000 Dr Accumulated depreciation: Vans $32,000 Dr Profit and loss Loss on disposal $16,000 Cr Vans $80,000

Application Problems
6X
(a)
Details (i) (ii) Office expenses Office equipment Correction of error: Repairs of office equipment wrongly entered in the office equipment account. Sales Purchases Correction of error: Purchases and sales both overcast by $200.

The Journal
Dr $ 500 200 200 100 100 Cr $ 500

(iii) Sundry expenses Accrued expenses Correction of error: Sundry expenses of $100 not accrued.

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(b)

F Mok Corrected Trial Balance as at 31 December 2009

Dr $ 3,000 9,800 9,500 20,000 6,000 3,600 4,500 2,600 59,000 Cr $

Inventory as at 1 January 2009 Purchases ($10,000 $200) Sales ($22,000 $200) Office equipment (net) ($10,000 $500) Furniture and fittings (net) Bank Accounts receivable Accounts payable Accrued expenses Office expenses ($4,000 + $500) Sundry expenses ($2,500 + $100) Capital

21,800

2,400 100

34,700 59,000

(a) See text, Sections 6.2 6.7. (b) When any of the above errors are made, the same amount is entered on the debit side and the credit side. Therefore, the totals of all debit and credit balances will equal and the trial balance will agree. (a) (Dates and narratives omitted)
The Journal
Details (i) (ii) F H Ltd (creditor) Returns outwards Drawings Purchases Dr $ 148 333 333 168 168 30 30 Cr $ 148

(iii) T Hui T Ho (iv) Discounts allowed ($94 $64) K Young (debtor)

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(b)

T Sung Corrected Trial Balance as at 31 March 2010

Dr $ 21,400 650 187,667 2,200 140,000 30,000 14,200 22,570 33,200 18,333 470,220 Cr $

Inventory as at 1 April 2009 Discounts allowed ($620 + $30) Discounts received Allowance for doubtful accounts Purchases ($188,000 $333) Returns outwards ($2,800 + $148) Sales Returns inwards Buildings at cost Accumulated depreciation: Buildings Motor vehicles at cost Accumulated depreciation: Motor vehicles Capital Bank Account receivable ($22,600 $30) Accounts payable ($15,200 $148) General expenses Drawings ($18,000 + $333)

900 1,920 2,948 264,200

7,000 9,000 169,200

15,052

470,220

(c) The above errors did not affect the agreement of a trial balance. This is because either no entry had been made in any account (i and ii), or the entries made on the debit side and credit side of thev accounts were of the same amount (iii and iv). Whenever all the double entries in ledger accounts are of equal amounts, the trial balance will agree. (a)
Details (i) (ii) Furniture and fittings Profit and loss Purchases Correction of error: Purchases of fittings wrongly entered in the purchases account. Profit and loss Depreciation Accumulated Depreciation: Motor vehicles Correction of error: Depreciation on motor vehicles not provided.

9X

The Journal
Dr $ 1,400 Cr $ 1,400

2,800 2,800 410 410 1,240 1,240

(iii) Profit and loss Bad debts Accounts receivable Correction of error: Bad debt not written off. (iv) Profit and loss Inventory Correction of error: Closing inventory overvalued.

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(b)
Non-current assets Furniture and fittings ($15,400 + $1,400) Motor vehicles Less Accumulated depreciation C urrent assets Inventory ($27,240 $1,240) Accounts receivable ($12,410 $410) Bank

R Tse Balance Sheet as at 30 September 2009

$ 29,800 (2,800) 26,000 12,000 12,350 $ 16,800 27,000 43,800 Capital Balance as at 1 October 2008 Add Net profit Less Drawings Current liabilities Accounts payable $ 76,900 27,350 104,250 (28,600) 75,650 18,500

50,350 94,150

94,150

(c) None of the above errors affected the agreement of a trial balance. This is because either the entries made on the debit side and credit side were of the same amount (i and iv), or no entry had been made in any account (ii and iii). Whenever all the double entries made in ledger accounts are of equal amounts, the trial balance will agree.

10X (a)
Details (i) (ii) Inventory [($12 $1.2) 200] Profit and loss Profit and loss Expenses Prepayment Accrual

The Journal
Dr $ 2,160 820 410 410 2,280 2,280 580 420 160 5,500 5,500 Cr $ 2,160

(iii) Accumulated depreciation [$12,000 ($120,000 $34,800 + $12,000) 10%] Profit and loss Depreciation (iv) Profit and loss Allowance for doubtful accounts ($8,400 5%) Allowance for discounts allowed [($8,400 $420) 2%] (v) Other receivables Insurance company Profit and loss Insurance compensation

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(b)

Tiger Co Corrected Balance Sheet as at 31 March 2010

Capital Balance as at 1 April 2009 Add Net profit Less Drawings Current liabilities Accounts payable Accruals $ 6,480 1,830 $ 80,000 39,990 119,990 (12,000) 107,990

$ $ $ Non-current assets Cost 120,000 Less Accumulated depreciation (32,520) 87,480 Current assets Inventory 11,780 Accounts receivable 8,400 Less Allowance for doubtful accounts (420) Allowance for discounts allowed (160) 7,820 Other receivables 5,500 Bank 3,720 28,820 116,300

8,310

116,300

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