Correction of Errorsone 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

Accounts Purpose

AssetRecord 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

LiabilityRecord what the firm owes.

e.g. Loan A/C, Bank Overdraft A/C, Creditors A/C

ExpenseRecord the firm’s day to day running expenses.

e.g. Wages A/C,, Insurance A/C, Purchases A/C

RevenueRecord day to day income earned by the firm

e.g. Sales A/C, Rent Received A/C, Commission A/C

Summary of possible entries

Debit Credit

Asset Asset

Liability Liability

Expense Expense

Revenue Revenue

4 QuestionsThus 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 1 Stage 2 Stage 3 Stage 4

Source Documents Subsidiary Books LedgerDouble Entry

Final AccountsBalance Sheet

Invoices [credit purchases and sales]

Sales BookPurchases Book

Post these transactions using Double Entry Rules

Transfer from the Ledger to ascertainProfit for the Year and the Net Worth of the Company at a point in time

Credit NotesSales Returns BookPurchases Returns Book

Cheque Payments Cheque Payments Book

ReceiptsCash Receipts Book

Anything Else General 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!)

ErrorsDon’t show up

Original EntryOmissionCompensating

CommissionPrincipleReversal

Do show upHalf double entryTwice on same side

Figures differentTotting 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

Profits

Adjusting the Profit

Profit as per draft accounts

Add

Less

Corrected Net Profit

Balance Sheet Items

Item Original Figure

Changes New Figure

Premises

Debtors

Bank (xxxxx)

Creditors

Capital

Loan

Sample questions

From past exam papers

Watch for

Nature of business Unseen items Switching figures English!