The following are the ledger accounts of Ali's business for the year ended 31 May 20X5.
| Bank | ||
|---|---|---|
| Date | Details | $ |
| Capital | 10,000 | |
| Van | 2,400 | |
| Loan | 5,000 | |
| Purchases | 700 | |
| Sales | 200 | |
| Expenses | 600 | |
| A Singh | 1,200 | |
| K James | 400 | |
| Drawings | 400 |
Prepare the journal entries necessary to correct the following errors in the general ledger (narrative not required).
(a) A payment of $150, which was initially posted to suspense account was, in fact, to meet a personal expense of the proprietor.
(b) The proceeds from the sale of an old computer, $500, had been credited to the equipment cost account.
(c) An invoice received for the purchase of a replacement computer for office use, which cost $2,500, had been omitted from the accounting records.
The trial balance below does not balance.
| Trial balance as at [date] | Account | Debit $ | Credit $ |
|---|---|---|---|
| 25,800 | |||
| Motor vehicles | 16,600 | ||
| Bank | 45,100 | ||
| 23,200 | |||
| Receivables | 21,400 | ||
| Payables | 47,000 | ||
| 47,000 | |||
| Capital | 8,000 | ||
| Loans | 41,100 | ||
| Sales | 21,400 | ||
| Purchases | 21,400 | ||
| Expenses | 4,300 | ||
| Drawings | 5,000 | ||
| Petty cash | 200 | ||
| Total | 128,500 | 109,200 |
You have been asked to check for errors in the calculation of account balances and in the preparation of the trial balance itself. Upon checking the ledger account balances, you find that the bank account and the payable account have been balanced off as follows:
1. Which of the following items would appear on opposite sides of a trial balance?
A. Capital and sales
B. Purchases and discounts received
C. Inventory and expenses
D. Motor vehicles and cash
2. Which of the following would be identified as an error by a trial balance?
A. Overstating the balance on the receivables ledger account and the payables ledger account by $100
B. Omitting an invoice which had fallen behind a filing cabinet from the general ledger
C. Recording a cash purchase in bank and inventory accounts
D. Recording $100 commission received as commission paid
3. A purchase of goods has been posted to motor vehicles account. What kind of error is this?
A. Error of commission
B. Compensating error
C. Error of principle
D. Transposition error
4. Which of the following indicates a complete reversal of entries?
A. Dr Sales; Cr Bank
B. Dr Purchases; Cr Cash
C. An invoice for $50 has not been posted to the general ledger
D. Crediting $100 discount received in the sales general ledger account
You have prepared a draft initial trial balance, with total debits of $267,109 and total credits of $295,133. The calculation of the account balances and the trial balance itself are checked, but no errors were found in the preparation of the trial balance. The error or errors are therefore somewhere in the ledger accounting entries. As the first step in the process of identifying and correcting the errors, open up a suspense account.
1. B - Total payables $82,200 - total receivables $53,200 = $29,000.
2. C - Of the options, this is the one which leads to a difference between debit and credit columns in a trial balance.
3. D - The entry to the purchases account should be debited.
4. B - The error is a reversal of entries. Therefore the error needs to be removed, and the correct entries recorded. In effect, the total of the adjustment is twice the value of the original transaction.
5. C - The original entry in the suspense account is a debit to match the credit correctly posted to the payables account. To clear the suspense account requires a credit, with the debit recorded in the repairs expense account. It is not a non-current asset as the cost maintains, rather than improves, operational efficiency of the machine.
6. D - The correct accounting entries are: Debit purchases $250 ($275/1.1), Debit sales tax $25 ($275/1.1 x 0.1), and Credit payables $275 (the gross amount). The payables account entry is correct. The correction required is to reduce purchases by $25 with a credit entry and record a debit in the sales tax account for input tax recoverable.