Question

In: Accounting

Inquiries undertaken after the failure of the trial balance to balance revealed that the difference was wholly due to carrying down the Cash account balance

 Inquiries undertaken after the failure of the trial balance to balance revealed that the difference was wholly due to carrying down the Cash account balance of $74,500 as $47,500.

 No suspense account was set up. To correct this error, which of the following courses of action is necessary?

  1.  Journal entry: Debit Cash account and credit Sales account with $27,000.

  2.  Journal entry: Debit Suspense account and credit Cash account with $27,000.

  3.  Journal entry: Debit Cash account and credit Suspense account with $27,000.

  4.  No Journal entry: Debit the Cash account with $27,000.



Solutions

Expert Solution

The above error can be classified as one-sided error as the cash balance has been wrongly carried down as $47,500 instead of $ 74,500.

Rectification of One sided Errors

While correcting errors, we first need to consider the following two cases –

1. Rectification of errors before preparing Trial Balance – in such a case, the error is corrected by directly debiting or crediting the concerned ledger account.

2. Rectification of errors after preparing Trial Balance – in such a case, single sided error is corrected by passing a Journal entry through the suspense account.

Since in the above case, we are rectifying the error after preparation of Trial Balance, we will pass the following entry for correction –

Cash a/c                                                                                 Dr.

$27,000

        To Suspense a/c

$27,000

As the Cash account was wrongly caried down as $47,500 (insted of $74,500) it is understated. Thus, we will Debit the Cash a/c by $27,000 ($74,500 - $ 47,500) and credit Suspense account by $27,000.

Thus, the correct option is (C)

Why other options are incorrect –

(A) Is incorrect as understatement of Cash is not attibutable to Sales

(B) Is incorrect as there is understatement of cash and in order to rectify it we will debit cash a/c and not credit cash a/c.

(D) Is incorrect as journal entry will be required to be passed as the rectification is being done after preparation of trial balance.

ekkarill92 answered 2 years ago
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