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In: Accounting

You are a public accountant with many small business clients. During a recent visit to a...

You are a public accountant with many small business clients. During a recent visit to a client’s business, the bookkeeper approached you with a problem. The columns of the trial balance were not equal. You helped the bookkeeper find and correct the error, but believe you should go one step further.

Requirement: Write a memo to all of your clients that explains (a) the purpose of the double-entry framework, (b) the importance of maintaining the equality of the accounting equation, (c) the errors that might cause an inequality, and (d) suggestions for finding the errors.

The document should be in a memo format, 12-font Times New Roman, and be between 500-750 words.

Solutions

Expert Solution

MEMO

To: Specify Client name

From: Public accountant Firm/company name

Subject: Purpose of Double entry, importance of equality in accounting system, error causing inequality and suggestions on finding errors

  

Point (a): The purpose of the double-entry framework:

There are two type of system used for accounting i.e. Single entry system and double entry system. In the later method, the transaction are recorded in such a manner that for each debit amount, there will be an entry for credit amount too. for example, if an asset is purchased on taking a loan will increase the asset on Debit side whereas gives increase in liability as well. Double entry system is used to make financial statements in easy and fast manner too. This decrease the chances of error while doing the accounting. Furthermore the accounting system available online are mostly based on double or dual entry system.

The purpose of maintaining the said system is so that total assets are equal to total outside liabilities plus owner's equity.

Point (b): The importance of maintaining the equality of the accounting equation:

Maintaining equality in accounting equation means your debit side is equal to credit side. i.e. total assets are equal to total liabilities. It means every debit transaction effect credit side too and if the equality is not maintained then financial preparation will also not be possible. As already mentioned in Point (a) that total assets equals to total liabilities plus owner's equity. For eg. if there is sale on credit then it will increase accounts receivable on asset side and owner's equity on liability side with the same amount.

As a conclusion it can be said that accounting equation is an important tool in double entry accounting. It helps to record debits and credits accurately. furthermore it also helps to measure business profitability. An investor will always look for how much there are assets over liability which shows in turn profitability as well.

Point (c): The errors that might cause an inequality:

Trial balance of any organisation will certainly have debits which are equal to credit amounts if everything is recorded correctly. and if these are not matching then there might be errors and we need to identify it and correct accordingly.

Error which cause inequality may be that numbers are transposed while posting from the general journal to the general ledger, or from the ledger to the trial balance sheet, this could cause the trial balance to not equal out. Also, there could be a mathematical error which can cause a problem. Or might be an account is credited which should have been debited or vice versa, or you applied a transaction to the wrong account. for eg. If you bought $1000 worth of stationery with credit card but accidentally posted it as a cash transaction and it will throw off trial balance.

Point (d): Suggestions for finding the errors:

If there is error as mentioned in point (c), then we need to identify and correct the same. For eg. if it is found that the amount is substantial then we need to start with the larger transactions made during the period and make sure no numbers were transposed and that the transaction was applied to the proper ledger account. If that checks out, recalculate the ledgers with the most transactions, which for most businesses is cash and sales. And if above checks are not working then we might to look from starting that all the transaction are recorded properly and in correct ledger. Thereon we need to see if numbers are correctly carried forward from journal entry to ledger accounts properly.

Thanks.

ekkarill92 answered 9 months ago
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