Question

Gold-I-Locks plc manufactures and sells doors and windows that contain a revolutionary locking mechanism the CEO developed while at university.  You have been provided with the company’s trial balance as at 31 March 2020.  Unfortunately, it was prepared by a junior member of staff and does NOT balance.  

Gold-I-Locks plc Trial Balance As at 31 March 2020
	£	£
Equity shares		100,000
8% debentures		50,000
Share premium		9,500
Retained profits		12,976
Motor vehicles (cost)	210,000
Accumulated depreciation		19,000
Inventories	14,167
Accounts receivable	11,000
Accounts payable		8,336
Bank	10,906
Sales		270,620
Purchases	186,000
Wages	33,502
Electricity expenses	350
Rent expenses2	2,218
General expenses	1,112
Debenture interest	4,000

The junior member of staff has identified the following errors but does not know how to correct them:

1. A payment of £150 for electricity was entered in the Bank Account but was not recorded in the Electricity Expense Account.
2. There is a debit in the Rent Expense Account for £718 and a debit to the bank account for the same amount.
3. A sale for £1,200 has been entered correctly in Accounts Receivable but as £120 in the Sales Account.
4. A payment to a supplier of £457 has been correctly recorded in Accounts Payable Account but no other entry has been made.

Required:

1. Prepare journal entries to correct the above errors and prepare a T-account for the Suspense Account showing the entries.

[20 marks]

2. There are two general categories of errors: Those that cause the trial balance not to balance and those that do not affect the trial balance balancing.  Describe one of each type of error, provide an example and describe how you would correct it. [word limit: 100-200 words]

Answer 1

The Journal entries to rectify the errors are as under:-

The Suspense Account is as under

The detail explnation on 2 categories of errors are as under

The Accounting errors can be broadly classified into 2 categories

a) Errors that do not affect the trial balance

b) Errors that affect the trial balance balancing

Errors that do not affect the trial balance

These errors can be further classified into 2 categories

i) Error of omission

ii) Compensating Error

Error of omission are those errors, where an accounting entry has been omitted to be recorded in the book of accounts. For example of credit Sale of Rs. 5000 to Mohan omitted to be recorded. Since in this error neither Sales Account is credited nor Mohan account is debited, so this error will not affect the Trial balance Accuracy

Compensating Errors arise, where one error is compensated by other error. For example, purchase of 1000 from jack posted in Jack Account as 100 on credit Side. Further Sale of 1000 to Mohan posted the debit of Mohan account as 100. In this compensating error short posting on the credit of jack by 900 is compensated by short posting on debit of Mohan by 900. Thus these two error will not affect the accuracy of Trial balance

Errors that affect the trial balance balancing

These are errors which arises due to posting of wrong amount in one ledger. For example , Sale of 5000 to Mack, posted to the debit of his account as 500. This error will result in imbalancing of Trial balance to the extent of 4500