Correction of Errors one approach Gabrielle Moran 17th April 2010

Sequence of topics Double Entry including accruals/prepayments to simple P&L and Balance Sheet Incomplete Records Control Accounts – Subsidiary Books Depreciation and Disposal Clubs, Service, Farm Manufacturing Correction of Errors Bank Reconciliations

Sequence of topics Departmental CVP Cash Flow Product Costing Ratio Analysis Budgeting Published Tabulars

Double Entry Two aspects to all transactions Matching of Debits and Credits

Double Entry Accounts Purpose Asset Record what the firm owns and what is owed to the firm. e.g. Vans A / C, Premises A / C, Cash A / C, Debtors A / C Liability Record what the firm owes. e.g. Loan A / C, Bank Overdraft A / C, Creditors A / C Expense Record the firm’s day to day running expenses. e.g. Wages A / C,, Insurance A / C, Purchases A / C Revenue Record day to day income earned by the firm e.g. Sales A / C, Rent Received A / C, Commission A / C

Summary of possible entries DebitCredit  Asset  Asset  Liability  Liability  Expense  Expense  Revenue  Revenue

4 Questions Thus with every transaction you come across you need to decide: 1. What are the two accounts involved? 2. Which type of account is each one? 3. Does the transaction cause an increase or decrease in each account? 4. Therefore is it a Dr or Cr? Finally make the entry in the relevant accounts (Handout)

Stage 1Stage 2Stage 3Stage 4 Source DocumentsSubsidiary BooksLedger Double Entry Final Accounts Balance Sheet Invoices [credit purchases and sales] Sales Book Purchases Book Post these transactions using Double Entry Rules Transfer from the Ledger to ascertain Profit for the Year and the Net Worth of the Company at a point in time Credit Notes Sales Returns Book Purchases Returns Book Cheque Payments Cheque Payments Book Receipts Cash Receipts Book Anything ElseGeneral Journal Recording Transactions

Subsidiary Books Source documents List Reduce entries in accounts in nominal ledger (Handout)

Trial Balance Arithmetical check on double entry before preparation of Final Accounts and Balance Sheet Obvious there are errors Hidden errors Material amounts Minor discrepancies

Suspense Trial Balance doesn’t work – make it work temporarily by putting in Suspense A / C Prepare final accounts including errors while somebody searches for errors Correct the errors through double entry NOT by crossing out (illegal!)

Errors Don’t show up Original Entry Omission Compensating Commission Principle Reversal Do show up Half double entry Twice on same side Figures different Totting errors New information

Types of Errors Read and Explain Pairs Read a little -- Talk a little (Handout)

Approaching the Question 1. What Happened 1. What should have happened 2. Correction = JOURNAL ENTRY

Journal Entries Transfer Suspense Items Highlight Profit & Loss items Highlight Balance Sheet items

Suspense Account As per Journal Entries Transfer balance to what buried in – follow double entry rules

Adjusting the Profit Debits in Journal => Increasing expenses or Reducing Revenue Credits in Journal => Increasing Revenue or Reducing Expenses Profits

Adjusting the Profit Profit as per draft accounts Add Less Corrected Net Profit

Balance Sheet Items ItemOriginal Figure ChangesNew Figure Premises Debtors Bank(xxxxx) Creditors Capital Loan

Sample questions From past exam papers

Watch for Nature of business Unseen items Switching figures English!