Navigation ⬅Previous Chapter | Next Chapter ➡️ Learning Objectives By the end of this chapter, students should be able to: Explain what assets are and why they are important in accounting Classify assets into current and non- current assets Account for cash, receivables , and allowances for doubtful debts Apply inventory valuation methods ( FIFO , LIFO , Weighted Average ) Account for Property, Plant and Equipment ( PPE ) Calculate and record depreciation using straight-line and reducing balance methods Present assets correctly in financial statements 7.1 Meaning of Assets An asset is a resource controlled by a business as a result of past events, from which future economic benefits are expected to flow to the business. This definition, based on the IASB Conceptual Framework , contains three essential criteria: control, past event, and future economic benefit. Examples of Assets Cash in hand and at bank Inventory (goods held for resale) Accounts receivable (trade debtors) B...
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5.1 Introduction
Accounting is built on accuracy and balance. Even with a well-designed accounting system, errors may occur during the recording and posting of transactions. The trial balance serves as a critical checkpoint in the accounting cycle, allowing accountants to verify the arithmetical accuracy of ledger entries before preparing financial statements.
This chapter explains the purpose and preparation of a trial balance, examines common accounting errors, and outlines systematic techniques for identifying and correcting errors, including the use of a suspense account.
5.2 Purpose of the Trial Balance
A trial balance is a statement that lists all ledger account balances at a particular date, with debit balances in one column and credit balances in another.
Objectives of Preparing a Trial Balance
- To check the arithmetical accuracy of ledger postings
- To ensure that total debits equal total credits
- To serve as a basis for preparing financial statements
- To assist in the detection of accounting errors
⚠️ Important: A balanced trial balance does not guarantee that the accounts are free from all errors.
5.3 Preparation of a Trial Balance
5.3.1 Steps in Preparing a Trial Balance
- Balance all ledger accounts
- Extract debit and credit balances
- List the balances in the trial balance format
- Total both columns
- Compare totals
5.3.2 Format of a Trial Balance (Ledger Style Presentation)
DEBIT BALANCES SECTION
- Cash and Bank: K18,500
- Accounts Receivable: K12,000
- Inventory: K25,000
- Equipment: K40,000
- Rent Expense: K8,500
TOTAL DEBIT BALANCES: K104,000
CREDIT BALANCES SECTION
- Accounts Payable: K15,000
- Capital: K60,000
- Sales Revenue: K32,000
TOTAL CREDIT BALANCES: K107,000
CHECK: The trial balance does NOT agree. Credits exceed debits by K3,000.
To temporarily balance the books, a Suspense Account is created with a debit balance of K3,000.
Adjusted Totals: Debits K104,000 + K3,000 = K107,000 = Credits K107,000
5.4 Common Types of Accounting Errors
Accounting errors may occur at various stages of the accounting process. These errors can be classified based on whether they affect the trial balance.
5.4.1 Errors That Do NOT Affect Trial Balance Agreement
These errors maintain the equality of debits and credits but still represent incorrect accounting:
- Error of Omission - Transaction completely omitted
- Example: A-cash sale is not recorded in any account.
- Error of Commission - Correct amount, wrong account of same type
- Example: Cash paid for electricity (K500) debited to Telephone Expense instead of Electricity Expense.
Electricity Expense Account (before correction)
———————————————————————
Debit Side Credit Side
Balance c/d
K0
——————————————————————
Telephone Expense Account (before correction)
———————————————————————
Debit Side Credit Side
Jun 30, Cash
K500 Jun 30, Balance c/d
K500
———————————————————————-
3. Error of Principle - Wrong account type
Example: Purchase of machinery (capital expenditure) recorded as a repair expense (revenue expenditure).
4. Compensating Errors - Two errors that cancel each other
Example: Sales overstated by K1,000 and Purchases overstated by K1,000.
5.4.2 Errors That DO Affect Trial Balance Agreement
These errors cause the trial balance totals to disagree:
- Partial Omission (Single Entry) - Only one side of entry recorded
- Wrong Casting - Incorrect totaling of ledger account
- Wrong Balancing - Ledger balance miscalculated
- Transposition Errors - Digits reversed (e.g., K540 recorded as K450)
- Slide Errors - Decimal misplaced (e.g., K100.00 recorded as K10.00)
5.5 Techniques for Identifying Errors
When a trial balance does not balance, systematic investigation is required.
Common Error-Detection Techniques
- Re-addition of trial balance columns
- Checking ledger balancing
- Verifying journal entries
- Confirming posting accuracy
- Checking for transposition and slide errors
- Dividing difference by 2 - May indicate a balance placed in wrong column
- Dividing difference by 9 - May indicate transposition or slide error
5.6 Rectification of Accounting Errors
Rectification depends on when the error is discovered and whether it affects the trial balance.
5.6.1 Rectification Before Final Accounts
Errors are corrected using journal entries.
Example: Error of Principle
Error: Purchase of machinery K12,000 debited to Purchases Account.
Incorrect Original Entry:
Purchases Account
————————————————————————
Debit Side Credit Side
Jun 30, Cash
K12,000 Jun 30, Balance c/d
K12,000
———————————————————————-
Correction Journal Entry:
- Dr Machinery K12,000
- Cr Purchases K12,000
After Correction:
Machinery Account
————————————————————————
Debit Side Credit Side
Jun 30, Correction
K12,000 Jun 30, Balance c/d
K12,000
———————————————————————-
Purchases Account
————————————————————————-
Debit Side Credit Side
Jun 30, Correction
K12,000
Jun 30, Balance c/d
K0
———————————————————————-
5.6.2 Rectification After Final Accounts
Errors affecting profits require adjustment through the Profit and Loss Adjustment Account.
5.7 Suspense Account
5.7.1 Meaning and Purpose
A suspense account is a temporary account used to balance the trial balance when the cause of the difference is not immediately known.
5.7.2 Opening a Suspense Account
Situation: Trial balance shows debit total K100,000, credit total K103,500. Difference: K3,500 (credits higher).
Entry to Open Suspense Account:
- Dr Suspense Account K3,500
- [Various accounts credited to balance]
Suspense Account (when opened)
———————————————————————-
Debit Side Credit Side
Jun 30, Balance
K3,500 Jun 30, Balance c/d
K3,500
———————————————————————-
5.7.3 Clearing the Suspense Account
When errors are found, correction entries are made and posted to the suspense account until it has a zero balance.
Example Error Found: Rent K3,500 debited correctly but not credited to cash.
Correction Entry:
- Dr Suspense Account K3,500
- Cr Cash K3,500
Cash Account (after correction)
————————————————————————
Debit Side Credit Side
Jun 30, Suspense
K3,500
Balance c/d
[Remaining balance]
————————————————————————-
Suspense Account (after correction)
————————————————————————
Debit Side Credit Side
Jun 30, Balance b/d
K3,500 Jun 30, Cash
K3,500
————————————————————————
BALANCE: K0
5.8 Worked Numerical Example
Question
A trial balance showed a debit excess of K2,000. The following errors were discovered:
- Cash sale K1,200 posted to sales account only (single entry)
- Discount received K800 debited to Discounts Allowed instead of credited to Discounts Received
Solution & Journal Entries
1. Correction for single entry error:
- Dr Suspense Account K1,200
- Cr Sales K1,200
2. Correction for wrong posting of discount:
Original incorrect entry was:
- Dr Discounts Allowed K800
- Cr Cash K800
Correction requires:
- Cancel the incorrect debit to Discounts Allowed
- Create correct credit to Discounts Received
- Adjust suspense for net effect
Combined correction entry:
- Dr Suspense Account K1,600 (K800 × 2)
- Cr Discounts Allowed K800
- Cr Discounts Received K800
Suspense Account after corrections
————————————————————————
Debit Side Credit Side
Jun 30, Balance
K2,000
Jun 30, Sales (1)
K1,200
Jun 30, Discounts (2)
K1,600 Jun 30, Balance c/d
K4,800
————————————————————————
Total: K4,800 Total: K4,800
————————————————————————-
Jul 1, Balance b/d
K4,800
The suspense account still shows a balance of K4,800, indicating additional errors must be found.
5.9 Importance of Trial Balance and Error Correction
- Ensures reliability of financial statements
- Enhances accuracy and credibility of accounting records
- Facilitates internal control procedures
- Reduces audit adjustments
- Strengthens financial decision-making based on accurate data
5.10 Chapter Summary
- The trial balance checks arithmetic accuracy but does not detect all errors
- Errors are classified as those affecting and not affecting trial balance agreement
- Systematic techniques must be used to identify errors
- Suspense accounts are temporary tools used when trial balance differences cannot be immediately resolved
- All suspense account balances must be cleared before preparing final financial statements
- Correction entries follow the principle of cancelling incorrect entries and posting correct entries
5.11 End-of-Chapter Review Questions
- State five objectives of preparing a trial balance.
- Distinguish between errors that affect trial balance agreement and those that do not, giving two examples of each.
- Explain the purpose of a suspense account and describe the circumstances under which it is used.
- Identify and correct accounting errors using appropriate journal entries.
- Explain why a balanced trial balance does not guarantee complete accounting accuracy.
5.12 Examination-Style Question
Question
The trial balance of Modern Traders failed to agree, and a suspense account was opened with a credit balance of K2,850. The following errors were subsequently discovered:
- Sales of K6,500 were credited to the Purchases Account.
- Insurance expense of K2,000 was completely omitted from the books.
- The Cash Account was undercast by K1,200.
- A payment of K750 for office rent was debited to the Rates Account.
Required:
(a) Journal entries necessary to correct each error (ignoring narratives). (12 marks)
(b) Prepare the Suspense Account after posting the correction entries. (3 marks)
Solution Guide
(a) Journal Entries:
- Dr Sales K6,500; Cr Purchases K6,500
- Dr Insurance Expense K2,000; Cr Suspense Account K2,000
- Dr Suspense Account K1,200; Cr Cash Account K1,200
- Dr Rent Expense K750; Cr Rates Expense K750
(b) Suspense Account:
Suspense Account
————————————————————————-
Debit Side Credit Side
Jun 30, Cash (3)
K1,200 Jun 30, Original Balance
K2,850
Jun 30, Insurance (2)
K2,000
Jun 30, Balance c/d
K3,650
————————————————————————
Total: K1,200 Total: K8,500
————————————————————————-
|Jul 1, Balance b/d
K3,650
END OF CHAPTER 5
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THE TRIAL BALANCE AND ERROR CORRECTION/E-cyclopedia Resources by Kateule Sydney is licensed under CC BY-SA 4.0
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