FA1 Chapter 6 Eng

7/29/2019 FA1 Chapter 6 Eng

1/9

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

M01_FWFA_TB_HKG_9645_C06.indd 69 2009/11/4


2/9

70

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



3/9

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



4/9

72

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



5/9

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


Cr Disposal $16,000

or simply as:

Dr Profit and loss Sales $32,000

Dr Accumulated depreciation: Vans $32,000


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



6/9

74

(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



7/9

(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



8/9

76

(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



9/9

(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

FA1 Chapter 6 Eng

Documents

Transcript of FA1 Chapter 6 Eng