fa1 chapter 6 eng
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Chapter 6 Correction of Errors (I): Errors NotAffecting Trial Balance Agreement
Notestoteachers
1 Start with Chapters 5 and 6 ofFrank Woods Introduction to Accountingand briefly explain to studentsthe 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.
2 It is not diff icult 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 theprofit 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.
3 Errors in year-end adjustments are included for the first time. Teachers should go through Chapters 1 3with students before teaching this section.
4 Sale or return transactions are quite common in public examinations. Teachers are advised to teach the
materials on pages 178 179 (Learn More).
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 arithmeticalaccuracy of double entries made in all ledgers.
Q2 Personal accounts are accounts of individuals and organisations trading with the firm.
Q3 The general journal records transactions that do not fit into any of the other books of original entry.
Q4 Capital expenditure is expenditure that generates long-term benefits for an entity. It usually refers to themoney 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.
Q5 Expenditures related to the running of motor vehicles; for example, petrol and motor repairs.
Q6 No. A casting error in a book of original entry, say, the purchases journal, would only affect itscorresponding 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.
o es o
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Q7 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.
Q8 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 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
A2 Dr Sales $300
Cr T Lo $300
A3 The correcting entry should be made in the capital account instead of the profit and loss account.
A4 If the overstated opening inventory had been transferred out of the inventory account to the profit andloss 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 ofFrankWoods Financial Accounting 2 for the accounts of limited companies.
A5 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
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A6 Dr Depreciation
Cr Accumulated depreciation
A7 Dr Allowance for doubtful accounts $1,200
Cr Profit and loss $1,200
A8 No. The adjusting entries would be: 1 Correction of overstated purchases:
Dr Creditors account $12,000
Cr Purchases account $12,000
2 Correction of overstated closing inventory:
Dr Profit and loss Closing inventory $12,000 Cr Inventory $12,000
A9 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 QuestionsShort Questions
1 (a) Error of commission
(b) Error of omission
(c) Error of principle
(d) Error of original entry
The Journal
Details Dr Cr
(a) HLin
HLui
(b) Machinery
LPo
(c) Vans Motorexpenses
(d) CFung($2,210$2,120)
Sales
$
6,780
43,900
38,000
90
$
6,780
43,900
38,000
90
2X (a) Error of commission
(b) Error of principle
(c) Error of original entry
(d) Complete reversal of entries
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The Journal
Details Dr Cr
(a) HWong KWong
(b) Cash Bank
(c) KLi($9,900$8,900)
Purchases
(d) HKwong
Cash
$
6,990
1,890
1,000
16,000*
$
6,990
1,890
1,000
16,000
* 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.
3 (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
4X (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
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5 (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 Problems6X (a)
The Journal
Details Dr Cr
(i) Officeexpenses
Officeequipment
Correctionoferror:Repairsofofficeequipmentwronglyenteredinthe
off iceequipmentaccount.
(ii) Sales
Purchases Correctionoferror:Purchasesandsalesbothovercastby$200.
(iii) Sundryexpenses Accruedexpenses
Correctionoferror:Sundryexpensesof$100notaccrued.
$500
200
100
$
500
200
100
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(b) F MokCorrected Trial Balance as at 31 December 2009
Dr Cr
$ $
Inventoryasat1January2009 3,000Purchases($10,000$200) 9,800
Sales($22,000$200) 21,800Officeequipment(net)($10,000$500) 9,500
Furnitureandfittings(net) 20,000Bank 6,000
Accountsreceivable 3,600
Accountspayable 2,400
Accruedexpenses 100Officeexpenses($4,000+$500) 4,500
Sundryexpenses($2,500+$100) 2,600
Capital 34,700
59,000 59,000
7 (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 creditside. Therefore, the totals of all debit and credit balances will equal and the trial balance will agree.
8 (a) (Dates and narratives omitted)
The Journal
Details Dr Cr
(i) FHLtd(creditor)
Returnsoutwards
(ii) Drawings Purchases
(iii) THui
THo
(iv) Discountsallowed($94$64)
KYoung(debtor)
$148
333
168
30
$
148
333
168
30
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(b) T SungCorrected Trial Balance as at 31 March 2010
Dr Cr
$ $
Inventoryasat1April2009 21,400Discountsallowed($620+$30) 650
Discountsreceived 900Allowancefordoubtfulaccounts 1,920
Purchases($188,000$333) 187,667Returnsoutwards($2,800+$148) 2,948
Sales 264,200
Returnsinwards 2,200
Buildingsatcost 140,000Accumulateddepreciation:Buildings 7,000
Motorvehiclesatcost 30,000
Accumulateddepreciation:Motorvehicles 9,000
Capital 169,200Bank 14,200
Accountreceivable($22,600$30) 22,570
Accountspayable($15,200$148) 15,052
Generalexpenses 33,200
Drawings($18,000+$333) 18,333 470,220 470,220
(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 areof equal amounts, the trial balance will agree.
9X (a)The Journal
Details Dr Cr
(i) Furnitureandfittings ProfitandlossPurchases Correctionoferror:Purchasesoffittingswronglyenteredinthepurchases
account.
(ii) ProfitandlossDepreciation
AccumulatedDepreciation:Motorvehicles
Correctionoferror:Depreciationonmotorvehiclesnotprovided.
(iii) ProfitandlossBaddebts
Accountsreceivable
Correctionoferror:Baddebtnotwrittenoff.
(iv) Profitandloss Inventory
Correctionoferror:Closinginventoryovervalued.
$
1,400
2,800
410
1,240
$
1,400
2,800
410
1,240
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(b) R TseBalance Sheet as at 30 September 2009
$ $ $Non-current assets Capital
Furnitureandfittings Balanceasat1October2008 76,900 ($15,400+$1,400) 16,800 Add Netprofit 27,350
Motorvehicles 29,800 104,250Less Accumulateddepreciation (2,800) 27,000 Less Drawings (28,600)
43,800 75,650Current assets Current liabilities
Inventory($27,240$1,240) 26,000 Accountspayable 18,500
Accountsreceivable
($12,410$410) 12,000Bank 12,350 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 madein 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)The Journal
Details Dr Cr
(i) Inventory[($12$1.2)200]
Profitandloss
(ii) ProfitandlossExpenses
Prepayment
Accrual
(iii) Accumulateddepreciation[$12,000($120,000$34,800+$12,000)10%]
ProfitandlossDepreciation
(iv) Profitandloss
Allowancefordoubtfulaccounts($8,4005%) Allowancefordiscountsallowed[($8,400$420)2%]
(v) OtherreceivablesInsurancecompany ProfitandlossInsurancecompensation
$2,160
820
2,280
580
5,500
$
2,160
410
410
2,280
420160
5,500
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(b) Tiger CoCorrected Balance Sheet as at 31 March 2010
$ $ $ $ $Non-current assets Capital
Cost 120,000 Balanceasat1April2009 80,000Less Accumulateddepreciation (32,520) 87,480 Add Netprofit 39,990
119,990Current assets Less Drawings (12,000)
Inventory 11,780 107,990Accountsreceivable 8,400 Current liabilitiesLess Allowancefor Accountspayable 6,480
doubtfulaccounts (420) Accruals 1,830 8,310
Allowancefor discountsallowed (160) 7,820
Otherreceivables 5,500
Bank 3,720 28,820
116,300 116,300
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