Correction of Errors

What is a Trial Balance?

A list of the balances of the ledger accounts at a specific date

I always forget the point that the trial balances have the opening balances and is used to prepare financial statements. In fact, if the trial balance is wrong even the income statement is wrong

Advantages of a Trial Balance

1. Used as an error correcting procedure

2. Used as a basis for financial statements

What is a Suspense account?

A temporary account that is created to temporarily balance the trial balance and to help correct errors affecting the trial balance

Uses of Suspense account

1. Allows draft financial statements to be prepared

2. To facilate the correction of errors

3. To temporarily balance the trial balance

4. A place for the bookkeeper to enter the transaction when correcting the errors

State 6 Errors not affecting the trial balance

1. Error of Omission

2. Error of Commission

3. Error of Principle

4. Error of Original Entry / Transposition Error

5. Error of Complete Reversal

6. Compensating Error

Errors affecting the trial balance

1. Single entries

2. Entries on the wrong single account

3. Incorrect additions in the Trial Balance

4. Incorrect additions in the ledger accounts

5. Double entries in a single account

These are the techincal terms used and so really you would not need to know them. There are also errors affecting the trial balances. The main use of these is when using it for the narrations

Narrations gives a reason for the entries made in the general journal

Advantages of Control Accounts

1. Provides Quick Totals of the Trade recievable/payables for the Quick preparation of financial statements

2. Helps in Identifying Errors by comparing the Totals in the ledgers and the trade recieveables and payables

3. Helps avoid frauds due to segregation of duties and providing an internal check

4. Provides a summary of the transaction related with the trade recieveables and payables

5. Proves the accuracy of the financial records

Advantages of Sales Ledger Control account

The same as the general advantages but, you need to be specific and mention only trade recievables and sales ledger

Same for purchase ledger control accounts...

Factors to Consider when Charging interest on Overdue Accounts

1. May lose customers as customers are demotivated

2. May require strict credit control procedures which may increase cost

3. May improve cash flow / liquidity as money is gained faster

4. Improves trade recievables collection period

Why are provision for Doubtful Debts not recorded?

Provision for doubtful debts does not affect individual debtors account

What is a Contra Entry and the Reason?

A contra entry is an entry that appears in the debit side of the purchase ledger control account and the credit side of the sale ledger.

It is made to set off the value in the purchase ledger with the sales ledger of the same person

So the account can be settled using a single check and reduces administrative cost

Reasons for Credit Balance in the Sale ledger Control Accounts

1. Overpayment by customer in error

2. Failed to deduct cash discounts at the time the payment was made

3. Failed to adjust contra entries

4. Customer paid in advance for goods

5. The customer returned goods after the account has been settled

Reasons for Debit Balance in the Purchase ledger Control Accounts

1. Overpayment by the business in error

2. Failed to deduct cash discounts at the time the payment is made

3. Failed to adjust contra entries

4. Business paid in advance for goods

5. The Business returned goods after the account has been settled