1. Financial Accounting

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3. 3 Section E: Preparing a Trial Balance Designed to give you knowledge and application of: E1. Trial Balance E2. Correction of errors E4. Bank reconciliations E5. Suspense account

4. 4 E1 and E2: Trial Balance and Correction of errors Learning outcomes  Extract ledger balances into a trial balance  Identify the types of errors which may occur in bookkeeping systems. [1]  Identify errors which would be highlighted by the extraction of a trial balance. [1]  Prepare journal entries to correct errors. [1]

5. 5 Steps involved in the preparation of Trial Balance Balance all the ledger accounts Calculate the totals of the balances in payables and receivables ledger accounts Prepare a trial balance Against the name of the respective accounts Write the names of all accounts one after the other Extract ledger balances into a trial balance Post Credit Balances In Credit Column Post Debit Balances In Debit Column Totals of both the columns should be equal

6. 6 Relationship of Trial Balance and Financial Statements Ledger book SalesPurchasesPlantWages Other Expenses Trial Balance Debit - Credit SOFP Balances from asset accounts and liability accounts SOCI Income Statement - Balance from income and expenses account Profit or Loss is calculated and transferred to SOFP

7. 7 Identify the types of error which may occur in bookkeeping systems Errors at Different Stages Recording Stage Posting Stage Preparation of Trial Balance Balancing Stage Errors of -  Omission  Commission  Principle Errors of -  Omission  Commission Posting 1.to wrong account 2.on the wrong side 3.of wrong amount Errors of -  omission  commission Taking 1.the wrong account 2.account to the wrong side 3. the wrong amount Errors of –  Totalling  Balancing

8. 8 Classification of Errors the debit and credit column of the trial balance are = the debit and credit column of the trial balance are = Errors that cannot be highlighted by preparing a trial balance Errors that can be highlighted by preparing a trial balance Classification of Errors

9. 9 1.Error of omission A transaction is completely omitted in the financial records Omission to record the transaction in – a)Sales day book b)Receivables ledger Since both the accounting effects (i.e. the credit in the sales account and the debit in The receivables ledger) of the transaction are not recorded there cannot be a difference in the trial balance. Sold Goods For $1,200 ICC Ltd Errors that cannot be highlighted by preparing a trial balance

10. 10 2.Error of Commission Clerical errors committed at the time of recording and / or posting the transactions As the entry has been made to the debit side of an account and the corresponding credit effect has been taken correctly, this error will not affect the trial balance. For $1,200 Sold Goods Recorded In Sales Day Book Debited But Alan a/c Peter a/c ICC Ltd Example Errors that cannot be highlighted by preparing a trial balance

11. 11 The transaction was recorded as follows : Dr Purchase account SOCI (Income Statement) $10,00 Cr Bank account (SOFP) $10,00 Being car purchased 3. Error of principle Resulting from the violation of generally accepted accounting principles Car Dealer Tick -Tick Ltd PurchasedPayment by This error cannot be detected by preparing a trial balance because there will be no difference in the trial balance as one account has been debited with the right amount and one account has been credited with the right amount. Example Errors that cannot be highlighted by preparing a trial balance

12. 12 At the same time, goods purchased from Bob for $1,000 were recorded in the purchase day book but not recorded in the Bob-payables account. The two accounting entries were as follows: a) Dr ________________ __ Cr Sales account $1000 b) Dr Purchase account $1000 Cr _________________ __ Goods sold Jay For $1,000 Sales Day Book Recorded in Jay-Receivables a/c Not recorded in 4. Compensating Error Two errors are committed in such a way that the total debit remains equal to the total credit in the trial balance Debit = CreditHence, the trial balance is not affected Errors that cannot be highlighted by preparing a trial balance

13. 13 Example A sales invoice of $1,400 was recorded as $1,600 in the sales day book and posted to the receivables ledger account as $1,600. 5. Errors of prime entry Committed while recording the transaction from the source document to the books of prime entry Example Red Ltd sold goods to John for $1,600. The correct accounting entry should have been: Dr John account $1,600 Cr Sales account $1,600 The wrong accounting entry recorded: Dr Sales account $1,600 Cr John account $1,600 6. Complete reversal of entry Transaction is recorded in exactly the reverse manner The trial balance will still balance, so this error cannot be detected by preparing a trial balance. This error will not result in any disagreement in the trial balance totals. Errors that cannot be highlighted by preparing a trial balance

14. 14 Example The term casting means adding up. This error affects the agreement of a trial balance When the month’s sales were totalled, they came to $40,000 instead of $50,000. The accountant Margaret had undercast the sales day book by $10,000. Sold Goods $10,000 $15,000 $25,000 Sales Day Book On JulyX6 1. Casting Error Errors which can be highlighted by the extraction of a trial balance

15. 15 Example Continuing the above example When the month’s sales were totalled, they came to $60,000 instead of $50,000. The accountant Margaret had overcast the sales day book by $10,000. Sold Goods $10,000 $15,000 $25,000 Sales Day Book On JulyX6 Errors which can be highlighted by the extraction of a trial balance

16. 16 Posting the wrong amount Omission to post either credit or debit entry Posting to the wrong side of the correct ledger 2. Posting Errors 1. Here, instead of debiting $1,000 to bad debts, if only $800 is posted this will show a difference of $200 in the trial balance. 2. If bad debts account is not at all debited, the trial balance will show a difference of $1000. 3. If, instead of debiting the bad debts account, the account is credited, the trial balance will show a difference of $2,000 (double effect) However if, instead of debiting the bad debts account, the interest account is wrongly debited, the error will not be highlighted by the trial balance. Errors which can be highlighted by the extraction of a trial balance Example ICC Ltd Journal entry Bad debts to be written of were $1,000 Dr Bad debts account $800 Cr AAl account $1,000 Being bad debts written off

17. 17 Ledger account balances are wrongly recorded in the trial balance 3. Figures incorrectly carried over to the trial balance Refer to Example on page 375 4. Transposition error Example A sale to Alan for $5,100 is recorded as $1,500 in the Alan-receivable account and as $5,100 in the sales account. The error results from the transposition of the numbers 1 and 5. As a result, the totals of the debit and credit balances in trial balance will not agree. Errors which can be highlighted by the extraction of a trial balance This type of error occurs when a transaction is recorded in the books of original entry with the figures interchanged.

18. 18 Preparing journal entries to correct errors 1. Error of omission ICC Ltd sold goods to Alan for $1,200 but omitted to record the transaction in both the sales day book and the receivables ledger. The transaction was not recorded Record in the Sales Day Book Correction Correction entry Dr Alan’s account $1,200 Cr Sales account $1,200 Being goods sold to Alan, omitted from the books of accounts, now recorded

19. 19 Recorded entry (wrong) DrPeter’s account$1,200 Cr Sales account $1,200 Correct entry Dr Alan’s account$1,200 Cr Sales account $1,200 Move to the correct ledger Correction Correction entry Dr Alan’s account $1,200 Cr Peter’s account $1,200 Being sale of goods to Alan, wrongly debited to Peter’s account now recorded in Alan’s account 2. Error of Commission ICC Ltd sold goods to Alan for $1,200 but wrongly debited Peter’s account. Preparing journal entries to correct errors

20. 20 3. Error of Principle Recorded entry (wrong) Dr Purchases account $10,000 Cr Bank $10,000 Correct entry Dr Car (Asset) account $10,000 Cr Bank $10,000 Move to the correct ledger Correction Accounting entry Dr Car (Asset) account $10,000 Cr Purchases account $10,000 Being purchase of car (a non-current asset), wrongly debited to purchases (expenses) now rectified. Tick-tick Ltd purchased a car for $10,000 but debited the purchases account Preparing journal entries to correct errors

21. 21 4. Compensating error Goods sold to Jay for $1,000 were recorded in the sales day book correctly but were not recorded in the Jay recievables account. At the same time, goods purchased from Bob for $1,000 were recorded in the purchase day book but were not recorded in the Bob- payable account. Make entry toaccounts which wereomitted Correction Correction entry Dr Jay-Receivable account $1,000 Cr Bob-Payable account $1,000 Being goods sold to Jay recorded in the sales day book but not recorded in Jay’s ledger, now recorded. Similarly purchases from Bob, recorded in the purchase day book but not recorded in Bob’s ledger account, now recorded Dr----------- -- Cr Sales account $1,000 Dr Purchase account$1,000 Cr ------------------ -- Preparing journal entries to correct errors

22. 22 5. Error of prime entry ICC Ltd sold goods to Alan for $1,200 but recorded them as $1400. Eliminate thedifference Correction Correction entry Dr Sales account $ 200 Cr Alan’s account $200 Being sale of $1,200 recorded as $200 now rectified. Recorded entry (wrong) DrAlan’s account$1,400 Cr Sales account $1,400 Correct entry DrAlan’s account$1,200 Cr Sales account $1,200 Preparing journal entries to correct errors

23. 23 6. Complete reversal of entry ICC Ltd sold goods to Alan for $1,200 but debited the sales account and credited Alan’s account Recorded entry (wrong) Dr Sales account $1,200 Cr Alan account $1,200 Correct entry Dr Alan account $1,200 Cr Sales account $1,200 Make an entry for the double amount previously recorded. Correction Accounting entry Dr Alan account $2,400 Cr Sales account $2,400 Being goods sold to Alan for $1,200, wrongly recorded, now rectified by passing an entry for an amount double the previously recorded amount Preparing journal entries to correct errors

24. 24 7. Transposition Error Recorded entry (wrong) Dr Alan account $1,200 Cr Sales account $2,100 Correct entry Dr Alan account $1,200 Cr Sales account$1,200 Make an entry for the difference throughsuspenseaccount as T.B. isaffected Correction Accounting entry Dr Sales account $900 Cr Suspense account $900 Being sale to Alan $1,200 recorded as $2,100, now rectified ICC Ltd sold goods to Alan for $1,200 but recorded them as $2,100. Preparing journal entries to correct errors

25. 25 RECAP  How to prepare a trial balance out of ledger balances ?  Identify the error?  Understand the recorded entry i.e. wrong entry ?  Visualise the correct entry?  Make an entry to cancel the wrong entry and record the correct entry i.e. rectification entry?  Record omitted transaction, if it is an error of omission? 25

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