FA1 Chapter 8 Eng

Chapter 8 Correction of Errors (I): Errors Not Affecting Trial Balance
Agreement
Notes to Teachers
1 Review Chapter 4 of Frank Wood’s Introduction to Accounting and Chapter 2 of
this book. Briefly explain the purpose of preparing a trial balance and the uses of
the general journal (or the journal). Students should know that some errors affect
trial balance agreement while others do not.
2 It is not difficult to understand the correction of errors mentioned in this chapter.

But students may have difficulty deciding whether a correcting entry affecting
expenses/revenues should be made in a nominal account or the profit and loss
account. To avoid confusion, a description should be added to specify what
expense/revenue account is involved, e.g., ‘Profit and loss — Rent and rates’.
3 Errors in period-end adjustments are covered in this chapter. Teachers should go

through Chapters 3 to 5 with students before teaching Section 8.8.
4 Sale or return transactions are quite common in public examinations. Teachers are
advised to review Section 6.4 of this book before starting Section 8.8.
Check Your Progress

Q8-1 Personal accounts are accounts of individuals or entities that have
transactions with a firm, such as debtors’ accounts (accounts receivable)
and creditors’ accounts (accounts payable).
Q8-2 The general journal (or the journal) is used to record transactions that do
not fit into any one of the other books of original entry.
Q8-3 Capital expenditure is expenditure that generates long-term benefits for an

entity. It usually refers to the money spent on the:
 acquisition or production of non-current assets
 extension of or improvement to existing non-current assets
Capital expenditure should not be wholly written off as an expense in the

accounting period in which it is incurred. Instead, it should be expensed
over a number of accounting periods by way of depreciation.
NSS BAFS: Frank Wood’s Financial Accounting 1 © Pearson Education Asia Limited 2016
Teacher’s Manual 2nd Edition 146
Q8-4 Expenditures related to the running of motor vehicles, for example, petrol
and motor vehicle repairs.
Q8-5 No. A casting error in a book of original entry, say, the purchases journal,
would only affect its corresponding account in the general ledger (i.e.,
purchases account). The trade creditors’ accounts in the trade payables
ledger would be unaffected as long as the individual entries in the purchases
journal were correct. The same logic applies to the trade debtors’ account in
the trade receivables ledger if there is a casting error in the sales journal.
Q8-6 Nominal accounts are accounts that will be closed off at the end of an
accounting cycle and whose balances will be shown in the income
statement.
Q8-7 Example 3
Dr Profit and loss — Purchases $2,500
Cr T Hui $2,500
Example 4
Dr T Lo $200
Cr Profit and loss — Sales $200
Example 6
Dr Profit and loss — Sales $1,000
Cr Profit and loss — Purchases $1,000
Try This Activity

A8-1 Error of principle — The sale of a non-current asset was wrongly treated as
a sale of goods.
The correcting journal entries are:

Dr Sales $6,000
Dr Accumulated depreciation: Cars $90,000
Dr Profit and loss — Loss on disposal $4,000
Cr Cars $100,000
A8-2 Dr Sales $300

Cr T Lo $300
A8-3 In that case, the correction entries to the profit and loss account should be
made to the capital account instead.
A8-4 Dr Expense account (or the profit and loss account if the expense account
had been closed off) with an amount double the amount of the error
Cr Prepaid expenses account
Cr Accrued expenses account
A8-5 Dr Depreciation account

Cr Accumulated depreciation account
with the amount undercharged
A8-6 Dr Allowance for doubtful debts $1,200 (= $600  2)

Cr Profit and loss $1,200
A8-7 If the overstated opening inventory had been transferred out of the
inventory account to the profit and loss account for the period, the
correcting journal entries would be:
Dr Capital (for sole proprietorships) $500*
Cr Profit and loss — Opening inventory $500
If the overstated opening inventory had not been transferred out of the
inventory account, the correcting journal entries would be:
Dr Capital (for sole proprietorships) $500*
Cr Inventory $500
*
The debit entry would be made in the ‘partners’ capital/current accounts’
for partnerships or ‘retained profits’ for limited companies. Refer to
Chapters 10 and 15 of Frank Wood’s Financial Accounting 2 for the
accounts of partnerships and limited companies, respectively.
A8-8 No. The correcting journal entries are:
1 Adjustment for overstated purchases:

Dr Trade creditor’s account $12,000 (= 600  $20)
Cr Purchases $12,000
2 Adjustment for overstated closing inventory:

Dr Profit and loss — Closing inventory $12,000
Cr Inventory $12,000
A8-9 For ordinary sales, goods can only be returned by a customer to the supplier
if the supplier agrees to accept them. For goods sold on a sale or return
basis, goods can be returned by a customer to the supplier unconditionally.
Assessment
Short Questions
8.1 (a) Error of commission 1
(b) Error of omission 1
(c) Error of principle 1
(d) Error of original entry 1
The Journal
Details Dr Cr
$ $
(a) H Lin 6,780 0.5
H Lui 6,780 0.5
(b) Machinery 43,900 0.5
L Po 43,900 0.5
(c) Vans 38,000 0.5
Motor expenses 38,000 0.5
(d) C Fung ($2,210  $2,120) 90 0.5
Sales 90 0.5
8.2X (a) Error of commission 1
(b) Error of commission 1
(c) Error of original entry 1
(d) Complete reversal of entries 1
The Journal
Details Dr Cr
$ $
(a) H Wong 6,990 0.5
K Wong 6,990 0.5
(b) Cash 1,890 0.5
Bank 1,890 0.5
(c) K Li ($9,900  $8,900) 1,000 0.5
Purchases 1,000 0.5
(d) H Kwong ($8,000 × 2) 16,000 0.5
Cash 16,000 0.5
8.3 (a) Error of principle 1
(b) Error of omission 1
(c) Complete reversal of entries 1
(d) Compensating errors 1
The Journal
Details Dr Cr
$ $
(a) Drawings 1,200 0.5
Motor vehicles 1,200 0.5
(b) Bank 10,000 0.5
Capital 10,000 0.5
(c) Cash ($1,200 × 2) 2,400 0.5
Bank 2,400 0.5
(d) Sales 100 0.5
Purchases 100 0.5
8.4X (a) Error of original entry 1
(b) Error of principle 1
(c) Complete reversal of entries 1
(d) Compensating errors 1
The Journal
Details Dr Cr
$ $
(a) Returns outwards ($1,600 ‒ $1,060) 540 0.5
D Mok (trade creditor) 540 0.5
(b) Sales 2,000 0.5
Machinery disposal 2,000 0.5
(c) Bank ($6,000 × 2) 12,000 1
Bank charges 6,000 0.5
Interest revenue 6,000 0.5
(d) Returns inwards 800 0.5
Returns outwards 800 0.5
8.5
The Journal
Details Dr Cr
$ $
(a) Inventory 800 0.5
Profit and loss — Closing inventory 800 0.5
(b) Accumulated depreciation: Office furniture 2,000 0.5
Profit and loss — Depreciation: Office furniture 2,000 0.5
(c) Profit and loss — Increase in allowance for doubtful

debts ($4,200  $2,400) 1,800 0.5
Allowance for doubtful debts 1,800 0.5
(d) Profit and loss — Expenses ($700  2) 1,400 1
Prepaid expenses 700 0.5
Accrued expenses 700 0.5
8.6X
The Journal
Details Dr Cr
$ $
(a) Profit and loss — Closing inventory 3,600 0.5
Inventory 3,600 0.5
(b) Computers 10,000 0.5
Profit and loss — Purchases 10,000 0.5
Profit and loss — Depreciation: Computers

($10,000  20%) 2,000 0.5
Accumulated depreciation: Computers 2,000 0.5
(c) Profit and loss — Bad debts 4,000 0.5
Trade receivables 4,000 0.5
Profit and loss — Allowance for doubtful accounts
[($26,500  $4,000)  5%] 1,125 1
Allowance for doubtful accounts 1,125 0.5
(d) Profit and loss — Expenses ($800  2) 1,600 0.5
Accrued revenue 800 0.5
Accrued expenses 800 0.5
8.7
The Journal
Details Dr Cr
$ $
(a) Trade creditors 120
1
Trade debtors 120
(b) Drawings ($800  2) 1,600 0.5
Capital 800 0.5
Profit and loss — Purchases 800 0.5
(c) Profit and loss — Returns inwards 780 0.5
Trade debtors 780 0.5
(d) Profit and loss — Sales ($24,000  50%) 12,000 0.5
Accounts receivable 12,000 0.5
Inventory ($20,000  50%) 10,000 0.5
Profit and loss — Closing inventory 10,000 0.5
(e) Profit and loss — Sales 32,000 0.5
Disposal: Vans 32,000 0.5
Vans 80,000 0.5
Accumulated depreciation: Vans ($80,000  10%  4) 32,000 1
Profit and loss — Loss on disposal of vans 16,000 0.5
or simply as:
Profit and loss — Sales 32,000 0.5
Accumulated depreciation: Vans 32,000 1
Profit and loss — Loss on disposal of vans 16,000 2.5
Vans 80,000 0.5
Application Problems
8.8
(a) (i) An error of commission is where an entry has been made in a wrong
account of the same type. 1
(ii) An error of omission is where no entry has been made for a transaction. 1
(iii) An error of principle is where an entry has been made in a wrong type of
account. 1
(iv) An error of original entry is where an incorrect amount has been entered in
a book of original entry and so the posting to ledger accounts is made with
that incorrect amount. 1
(v) Complete reversal of entries is where a double entry has been made on the
wrong sides of ledger accounts. 1
(vi) Compensating errors are where two or more errors have cancelled each
other out so that trial balance agreement is not affected. 1
(b) When any of the above types of errors are made, the same amount is entered on
the debit side and the credit side. Therefore, the totals of all debit and credit
balances will equal and the trial balance will agree. 2
8.9X
(a)
The Journal
Details Dr Cr
$ $
(i) Office expenses 5,000 0.5
Office equipment 5,000 0.5
Correction of error: Repairs to office equipment

entered in the office equipment account. 0.5
(ii) Sales 2,000 0.5
Purchases 2,000 0.5
Correction of error: Purchases and sales accounts 0.5
both overcast by $2,000.
(iii) Sundry expenses 1,000 0.5
Accrued expenses 1,000 0.5
Correction of error: Sundry expenses of $1,000 not

accrued. 0.5
(b)
F Mok
Corrected Trial Balance as at 31 December 2015
$ $
Inventory, 1 January 2015 30,000 0.5
Purchases ($100,000  $2,000) 98,000 1
Sales ($220,000  $2,000) 218,000 1
Office equipment, net ($100,000  $5,000) 95,000 1
Furniture and fittings, net 200,000 0.5
Bank 60,000 0.5
Trade payables 24,000 0.5
Accrued expenses 1,000 0.5
Office expenses ($40,000 + $5,000) 45,000 1
Sundry expenses ($25,000 + $1,000) 26,000 1
Capital 347,000 0.5
590,000 590,000
8.10
The Journal
Details Dr Cr
$ $
Machinery ($4,000 + $400) 4,400 1
Insurance expense 1,200 0.5
Sundry expenses 5,600 0.5
Accumulated depreciation: Machinery

[$8,000 ‒ ($44,400 × 20% × 9/12)] 1,340 1.5
Depreciation on machinery 1,340 0.5
8.11
(a)
The Journal
Details Dr Cr
$ $
(i) F H Ltd (trade creditor) 1,480 0.5
Purchases returns 1,480 0.5
(ii) Drawings 3,330 0.5
Purchases 3,330 0.5
(iii) T Hui (trade debtor) 1,680 0.5
T Ho 1,680 0.5
(iv) Discounts allowed ($940  $640) 300 0.5
K Young (trade debtor) 300 0.5
(b)
T Sung
Corrected Trial Balance as at 31 March 2016
$ $
Inventory, 1 April 2015 214,000 0.5
Discounts allowed ($6,200 + $300) 6,500 1
Discounts received 9,000 0.5
Allowance for doubtful accounts 19,200 0.5
Purchases ($1,880,000  $3,330) 1,876,670 1
Purchases returns ($28,000 + $1,480) 29,480 1
Sales 2,642,000 0.5
Sales returns 22,000 0.5
Buildings at cost 1,400,000 0.5
Accumulated depreciation: Buildings 70,000 0.5
Motor vehicles at cost 300,000 0.5
Accumulated depreciation: Motor vehicles 90,000 0.5
Capital 1,692,000 0.5
Bank 142,000 0.5
Trade receivables ($226,000  $300) 225,700 1
Trade payables ($152,000  $1,480) 150,520 1
Operating expenses 332,000 0.5
Drawings ($180,000 + $3,330) 183,330 1
4,702,200 4,702,200
(c) The above errors did not affect the agreement of a trial balance. This is because
either no entry was made in any account (i and ii) or the entries made on the
debit and credit sides of the accounts were of the same amount (iii and iv).
When all the double entries in ledger accounts are of equal amounts, the trial
balance will agree. 2
8.12X
The Journal
Details Dr Cr
$ $
Depreciation on computers ($10,000 × 20% × 3/12) 500 1.5
Accumulated depreciation: Computers 500 0.5
Sales 1,500 0.5
Accumulated depreciation: Computers ($6,000 + $500) 6,500 1
Profit and loss — Loss on disposal of computers 2,000 0.5
Computers 10,000 0.5
Sales 8,000 0.5
Sundry expenses 8,000 0.5
Depreciation on computers ($8,000 × 20% × 9/12) 1,200 1.5
Accumulated depreciation: Computers 1,200 0.5
Drawings 3,600 1
Accumulated depreciation: Computers ($3,200 + $1,200) 4,400 1
Computers 8,000 0.5
8.13
(a)
The Journal
Details Dr Cr
$ $
(i) Profit and loss — Closing inventory [30  ($220 ‒ $120)] 3,000 1
Inventory 3,000 0.5
(ii) Inventory ($80 × 20) 1,600 1
(iii) Profit and loss — Closing inventory (10  $90) 900 1
Inventory 900 0.5
(iv) Profit and loss — Closing inventory (15  $100 × 20%) 300 1.5
Inventory 300 0.5
(v) Trade receivables [(100 ‒ 25) × $200 × 150%] 22,500 1.5
Sales 22,500 0.5
Inventory (25 × $200) 5,000 1
(b) Closing inventory = $46,800 ‒ $3,000 + $1,600 ‒ $900 ‒ $300 + $5,000 1.5
= $49,200 0.5
(c) The prudence concept (or conservatism) should be applied to item (iv). This
concept ensures that the net assets and profits of a business are not overstated. 1
The application of the lower of cost and net realisable value rule to item (iv)
ensures that the closing inventory will not be overvalued. 1
8.14X
(a)
The Journal
Details Dr Cr
$ $
(i) Furniture and fittings 14,000 0.5
Profit and loss — Purchases 14,000 0.5
Correction of error: Purchases of fittings entered in

the purchases account. 0.5
(ii) Profit and loss — Depreciation 28,000 0.5
Accumulated depreciation: Motor vehicles 28,000 0.5
Correction of error: Depreciation on motor vehicles

not provided 0.5
(iii) Profit and loss — Bad debts 4,100 0.5
Accounts receivable 4,100 0.5
Correction of error: Bad debt not written off. 0.5
(iv) Profit and loss — Closing inventory 12,400 0.5
Inventory 12,400 0.5
Correction of error: Closing inventory overvalued. 0.5
(b)
R Tse
Corrected Statement of Financial Position as at 30 September 2015
$ $ $
Non-current assets Capital
Furniture and fittings, net Balance as at 1 October 2014 769,000 0.5
($154,000 + $14,000) 168,000 Add Net profit for the year (Workings) 273,500 1 2
Motor vehicles, net 1,042,500
($298,000  $28,000) 270,000 Less Drawings 286,000 1 0.5
438,000 756,500
Current assets Current liabilities
Inventory Accounts payable 185,000 0.5
($272,400  $12,400) 260,000 1
Accounts receivable
($124,100  $4,100) 120,000 1
Bank 123,500 503,500 0.5
941,500 941,500
Workings:
Net profit for the year = $304,000 + $14,000  $28,000  $4,100  $12,400
= $273,500
(c) None of the above errors affected the agreement of a trial balance. This is
because either the entries made on the debit and credit sides of the accounts
were of the same amount (i and iv) or no entries were made in any account (ii
and iii). 2
8.15X
(a)
The Journal
Details Dr Cr
$ $
(i) Inventory [200  ($120 ‒ $12)] 21,600 1
(ii) Profit and loss — Expenses ($4,100  2) 8,200 1
Prepayments 4,100 0.5
Accruals 4,100 0.5
(iii) Accumulated depreciation: Non-current assets

{$120,000  [($1,200,000  $348,000 + $120,000)
 10%]} 22,800 1.5
Profit and loss — Depreciation 22,800 0.5
(iv) Profit and loss — Allowance for doubtful debts

($84,000 × 5%) 4,200 1
Allowance for doubtful debts 4,200 0.5
(v) Other receivables (insurance company) 55,000 0.5
Profit and loss — Insurance compensation 55,000 0.5
(b)
Tiger & Co
Statement of Financial Position as at 31 March 2016
$ $ $
Non-current assets
Cost 1,200,000 0.5
Less Accumulated depreciation ($348,000  $22,800) 325,200 1
874,800
Current assets
Inventory ($96,200 + $21,600) 117,800 1
Less Allowance for doubtful debts 4,200 79,800 0.5
Other receivables 55,000 0.5
Bank 37,200 0.5
289,800
Less Current liabilities:
Trade payables 64,800 0.5
Accruals ($14,200 + $4,100) 18,300 83,100 1
Net current assets 206,700

1,081,500
Financed by:
Capital
Balance as at 1 April 2015 800,000 0.5
Add Net profit for the year (Workings) 401,500 2
1,201,500
Less Drawings 120,000 0.5
1,081,500
Workings:
Net profit for the year = $314,500 + $21,600  $8,200 + $22,800
 $4,200 + $55,000
= $401,500

FA1 Chapter 8 Eng

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FA1 Chapter 8 Eng

Uploaded by

Copyright:

Available Formats

Chapter 8 Correction of Errors (I): Errors Not Affecting Trial Balance

2 It is not difficult to understand the correction of errors mentioned in this chapter.

3 Errors in period-end adjustments are covered in this chapter. Teachers should go

Check Your Progress

Q8-3 Capital expenditure is expenditure that generates long-term benefits for an

Capital expenditure should not be wholly written off as an expense in the

Try This Activity

The correcting journal entries are:

A8-2 Dr Sales $300

A8-5 Dr Depreciation account

A8-6 Dr Allowance for doubtful debts $1,200 (= $600  2)

A8-8 No. The correcting journal entries are:

1 Adjustment for overstated purchases:

2 Adjustment for overstated closing inventory:

(b) Error of omission 1

(c) Error of principle 1

(d) Error of original entry 1

H Lui 6,780 0.5

(b) Machinery 43,900 0.5

(c) Vans 38,000 0.5

Motor expenses 38,000 0.5

(d) C Fung ($2,210  $2,120) 90 0.5

8.2X (a) Error of commission 1

(b) Error of commission 1

(c) Error of original entry 1

(d) Complete reversal of entries 1

K Wong 6,990 0.5

Bank 1,890 0.5

(c) K Li ($9,900  $8,900) 1,000 0.5

Purchases 1,000 0.5

(d) H Kwong ($8,000 × 2) 16,000 0.5

Cash 16,000 0.5

8.3 (a) Error of principle 1

(b) Error of omission 1

(c) Complete reversal of entries 1

(d) Compensating errors 1

Motor vehicles 1,200 0.5

(b) Bank 10,000 0.5

Capital 10,000 0.5

(c) Cash ($1,200 × 2) 2,400 0.5

Bank 2,400 0.5

(d) Sales 100 0.5

Purchases 100 0.5

8.4X (a) Error of original entry 1

(b) Error of principle 1

(c) Complete reversal of entries 1

(d) Compensating errors 1

D Mok (trade creditor) 540 0.5

(b) Sales 2,000 0.5

(c) Bank ($6,000 × 2) 12,000 1

Bank charges 6,000 0.5

Interest revenue 6,000 0.5

(d) Returns inwards 800 0.5

Returns outwards 800 0.5

Profit and loss — Closing inventory 800 0.5

(b) Accumulated depreciation: Office furniture 2,000 0.5

Profit and loss — Depreciation: Office furniture 2,000 0.5

(c) Profit and loss — Increase in allowance for doubtful

Allowance for doubtful debts 1,800 0.5

(d) Profit and loss — Expenses ($700  2) 1,400 1

Prepaid expenses 700 0.5

Accrued expenses 700 0.5

Inventory 3,600 0.5