{m}.{s}.1We will now go back to the trial balance of Mr Allen. We have seen the profit and loss account and balance sheet produced from these figures.
Account | Debit | Credit |
---|---|---|
Sales | 2,725 | |
Cost of sales | 1,500 | |
Wages | 50 | |
Rent | 400 | |
Heat and light | 340 | |
Post,tel,stat | 25 | |
Fittings | 1,000 | |
Stock | 3,375 | |
Debtors | 2,050 | |
Bank | 3,185 | |
Loan | 2,000 | |
Creditors | 840 | |
Capital | 6,360 | |
11,925 | 11,925 | |
PROFIT AND LOSS ACCOUNT | ||
Sales | 2725 | |
Less: Cost of sales | 1500 | |
Gross profit | 1225 | |
Less: Expenses | ||
Wages | 50 | |
Rent | 400 | |
Heat and light | 340 | |
Post, tel, stat | 25 | |
815 | ||
NET PROFIT | 410 | |
BALANCE SHEET | |
ASSETS | |
Fittings | 1,000 |
Stock | 3,375 |
Debtors | 2,050 |
Bank | 3,185 |
Total Assets | 9,610 |
LIABILITIES | |
Loan | 2,000 |
Creditors | 840 |
Total Liabilities | 2,840 |
Net assets | 6,770 |
CAPITAL | |
At start of period | 6,360 |
Net pofit | 410 |
At the end of period | 6,770 |
[{m}.{s}b]
If anything is wrong with any of the figures in the trial balance, then, correspondingly, something must be wrong with the profit and loss account and/or the balance sheet.
We will take a look at the various types of errors that could affect the trial balance.
Errors broadly fall into the following categories:
Errors can combine in such a way that they are:
We will look at various errors that might have been made, and consider, in particular:
For each error that we look at we will see:
We can therefore see clearly the effect of the error on the trial balance.
We will look at most of the errors in the context of the receipt of an electricity bill for £340.
Electricity | |||
---|---|---|---|
Your name Your address Your street Your town Post code | |||
Customer Reference No 1234567890 | |||
Electricity Bill | |||
Standing charges | @ 0.50p per day for 80 days | 40.00 |
|
Kilowatt hours | 937.5 @ 0.32 per kilowatt hour | 300.00 | |
Total | 340.00 | ||
Please pay within the next 2 weeks. |
{m}.{s}.5We will now see the various possible mistakes that could be made in recording this transaction. For each of the following errors, you are to say what type it is.
Other errors that will affect the trial balance, and its balancing, are:
The first debit and credit columns have no errors.
ACCOUNT | DEBIT | CREDIT | DEBIT | CREDIT | DEBIT | CREDIT |
Sales | 2,725 | 2,725 | 2,725 | |||
Cost of sales | 1,500 | 1,500 | 1,500 | |||
Wages | 50 | 50 | 50 | |||
Rent | 400 | 400 | 400 | |||
Heat and light | 340 | 340 | 340 | |||
Post, tel, stat | 25 | 25 | 25 | |||
Fittings | 1,000 | 1,000 | 1,000 | |||
Stock | 3,375 | 3,375 | 3,375 | |||
Debtors | 2,050 | 2,050 | 2,050 | |||
Bank | 3,185 | 3,815 | 3,185 | |||
Loan | 2,000 | 2,000 | 2,000 | |||
Creditors | 840 | 840 | 840 | |||
Capital | 6,360 | 6,360 | 6,360 | |||
11,925 | 11,925 | 12,555 | 11,925 | 12,925 | 11,925 | |
TB out of balance
We have seen that certain errors will result in a trial balance that does not balance.
TB balances
A balancing trial balance, however, does not mean that the figures are correct. The following errors could have been made:
We have seen that certain errors cause the trial balance to be out of balance[{m}.{s}e]. It sometimes happens that we need to prepare draft accounts before the cause of the imbalance can be established and corrected.
Correct entry |
Incorrect entry |
|||
Dr | Cr | Dr | Cr | |
Heat and light | 340 | 340 | ||
Creditors | 340 | -- |
It is unsatisfactory to prepare accounts from an out-of-balance trial balance, so as a temporary measure, a Suspense account is added [{m}.{s}f, highlighted row]. The appropriate balance is inserted to make the trial balance square.
Accounts can now be prepared but where does the balance in the Suspense account go?
To prepare accounts prudently, we should never overstate assets or income and we must make sure that all expenses and liabilities are included.
Thus if the Suspense account:
The use of the Suspense account should only be temporary and the cause of the error should be established as soon as possible. In this case we would find that the credit entry to Creditors had not been made.
ACCOUNT | DEBIT | CREDIT | DEBIT | CREDIT |
Sales | 2,725 | 2,725 | ||
Cost of sales | 1,500 | 4,875 | ||
Wages | 50 | 50 | ||
Rent | 400 | 400 | ||
Heat and light | 340 | 340 | ||
Post, tel, stat | 25 | 25 | ||
Fittings | 1,000 | 1,000 | ||
Stock | 3,375 | 0 | ||
Debtors | 2,050 | 2,050 | ||
Bank | 3,185 | 3,185 | ||
Loan | 2,000 | 2,000 | ||
Creditors | 500 | 840 | ||
Capital | 6,360 | 6,360 | ||
Suspense | 340 | 0 | ||
11,925 | 11,925 | 11,925 | 11,925 | |
[{m}.{s}f]
Our journal entry to make the correction[{m}.{s}f, orange columns] must involve a posting to the Suspense account. Here we must make the entry previously omitted:
As we only had one error in this case, the Suspense account is now cleared. It may be that the balance was caused by several errors, in which case the Suspense account will not be cleared until they are all corrected.
Certain errors can be made in manual systems that cannot be made in computer systems. Computers are particularly good at things like addition and will keep a check on entries being made so that the trial balance remains in balance.
A computer system will not let you make an entry where debits do not equal credits. This eliminates some possible errors.
A computer system will also correctly calculate the balance in an account and add the trial balance correctly. This eliminates further possible errors.
Errors in a computer system are still possible but rather fewer than in manual systems. The one that is particularly easy in a computer system is to make an entry in the wrong account (error of commission).