Question

A

The agreement of the trial balance totals is an indication that all transactions have been properly recorded in the books of accounts. Do you agree with this statement? Required: Outline 4 reasons to justify your response. B ABC Ltd started business on 1/1/14, and its financial year ends on 31st December each year. The following information was extracted from the company’s asset register. DATE TRANSACTION AMOUNT (GHS) 2016 January, 1 Purchased one motor van 58,500 2016 September, 1 Purchased two motor vans 78,000 each 2018 March, 1 Purchased one motor van 45,200 2018 May, 2 Sold the motor van purchased in January 2016 18,240 2019 April 1 Purchased three motor vans 62,000 each Additional Information The company’s policy is to depreciate Motor vehicles at a rate of 20% per annum on cost. You are required to prepare: i) The Motor vehicles account (2016-2019) ii) Provision for depreciation account (2016-2019) iii) Disposal account for 2018 iv) Statement of profit or loss extract for 2018 and 2019 (1 mark) v) Statement of financial position extract for 2018 and 2019

Answer 1

A.

No, I strongly disagree with the given statement. The trial balance is a statement that shows the ledger account balances at the end of the year. Usually the trial balance tallies if there are no errors committed while accounting. But, there are few errors that will arise in the course of accounting which won't be visible on the face of a trial balance because irrespective of the existence of such an error, the trial balance still tallies. The types of errors that will lead to the agreeement of trial balance or the errors which are not disclosed by trial balance are the following:

• Errors of Complete Ommission:

If a particular transaction is completely ommited to be recornded in the books of accounts, the trial balance of the company will tally as the same has NULL effect on both debit side and credit side of the trial balance. Whereas, a partial ommission will lead to the disagreement of the trial balance.

• Errors of Principle:

These are the errors that are committed due to the incorrect application of the accounting principles by the company. The best example for the same is treating personal expense as capital expenditure. In this case, instead of debiting the personal accounts, the corresponding debit has been gone to the asset account and hence the debit side total doesn't show a variation and will match.

• Compensating Errors:

These are group of errors, the total effect of which is not reflected in the Trial Balance. These errors are of a neutralizingn nature. For eg: An extra debit of $100 in the wages account will be compensated by an extra credit of $100 in the sales account

• Recording wrong amount in the books of original entry:

If a transaction is wrongly recorded in the books of original entry and is subsequently carried through the ledgers, it will not cause disagreement in the Trial Balance.

• Recording both aspects of a transaction more than once:

The trial balance will agree if both the aspects of a transaction are recorded twice in the books of original entry.

• Errors in recording a transaction on the correct side of a wrong account:

If a transaction is recorded on the correct side of a wrong aaccount, it will not cause a disagreement in the trial balance.

For further clariffication on sale of motor van and depreciation for each vans, the following working notes are attached herewith: