Returns, Discount and Sales Tax

Discount
1. Trade Discount $1000 @ 5% Dr. Receivables - $950
Cr. Sale - $950
2. Settlement Discount (4%)
There are two ways of accounting for settlement discount:

A) When Costumer was expected to take the advantage

1) Dr. Receivables (950*96%) – 912 (950-950*4%)
Cr. Sale - 912
If, however, the customer did not take advantage of the early settlement terms,
2) Dr. Cash – 950
Cr. Receivables – 912
Cr. Income – 38

B) When Costumer was not expected to take the advantage

1) Dr. Receivable – 950
Cr. Sale – 950
If, however, the customer did take advantage of the early settlement terms,
2) Dr. cash – 912
Dr. Expense - 38
Cr. Receivable – 950
 Accounting From Customer/Purchaser Point of View
1. Initial record of a transaction:
Dr. Purchase 950 (this is the original amount after reducing trade discount)
Cr. Payables 950

2. If the customer does not take the advantage of settlement discount, the full
amount will be payable to the supplier:
Dr. Payables 950 full amount
Cr. Cash/Bank 950

3. If the customer does take the advantage of settlement discount, the discount
amount will be recorded as:
Dr. Payables 950 (original amount)
Cr. Cash 912 (net amount after discount)
Cr. Discount received 38 (discount amount)
 Sales Tax
1. Input tax (Sales tax paid on purchases)
Dr. Purchase – excluding sales tax (Net Cost) 1000 @ 20%
Dr. Sales tax a/c (input tax)
Cr. Payable/cash – including sales tax (Gross Cost)

Receipt of input tax from tax authority

Dr. cash received
Cr. Sales tax receivable

2. Output tax (Sales tax charge on sales)

Dr. Receivables/cash – including sales tax (Gross amount)
Cr. Sales – excluding sales tax (Net Cost)
Cr. Sales tax

Payment of output tax to tax authority

Dr. Sales tax payable
Cr. Cash

Tax Payable to Tax Authority

Tax Payable = Output tax – Input tax – tax paid before
Sales Tax Payable A/C
b/f хх
Input Tax хх Output Tax хх
Cash paid хх
c/f хх
ххх ххх
Conditions to Apply:
If question is providing gross sales amount (i.e. including sales tax), and we have
to find the net sales amount (i.e. without sales tax), we need to use the following
formulae:

Therefore, Net sales excluding sales tax = Gross sales * 100

100 + Tax rate
Sales Tax = Gross Sale * Tax Rate
100 + Tax rate
 Accounting for Inventory

Statement of Profit and Loss

Sales xx
Cogs (xx)
Profit xx

Cost of Goods Sold (cogs) = opening inventory + purchase – closing inventory

Note: The inventory shown in balance sheet is the closing inventory

Year end inventory adjustments

1. Opening Inventory(Removed from inventory asset and recognized as expn)
Dr. cogs
Cr. Opening inventory
2. Closing Inventory (Removed from purchase cost and cf as asset in next year)
Dr. Closing inventory
Cr. Cogs

Valuation of inventory
Inventory is included in the statement of financial position at lower of:
- Cost – cost of purchase, cost of coversion
- Net Realisable Value (NRV) – Selling price less any selling costs
Q. Storm, an entity, had 500 units of product X at 30 June 20X5. The product
had been purchased at a cost of $18 per unit and normally sells for $24 per
unit. Recently, product X started to deteriorate but can still be sold for $24
per unit, provided that some rectification work is undertaken at a cost of $3
per unit. Find the value of closing stock.
Soln
Cost = 18
NRV = 24-3 =21
 Since cost is lower than NRV, then the inventory is valued as per cost.
Closing Inventory = 18*500 = 9000

Methods of calculating cost of inventory

1. FIFO (First In First Out)
2. AVCO (Average Cost)
- Periodic weighted average cost
- Continuous Weighted average cost

1. FIFO
Q. Opening Stock – 5 units @ $3.5 per units
2nd Jan – purchase of 5 units @ $4 per units
4th Jan – Purchase of 5 units @ $5 per units
6th Jan – Sales of 7 units @ $10 per units
8th Jan – Purchase of 5 units @ $5.5 per units
Find the value of closing stock.
Soln
Closing Inventory Unit = 5+5+5+5-7
= 13 units
Closing Inventory = 5*5.5 + 5*5 + 3*4
= 27.5 + 25 +12
= 64.5

Cogs = o/s + P – c/s

Or, c/s = o/s + P - sale

2. AVCO (Continuous)
3. AVCO (Periodic)

Total purchase along with o/s of 20 units = 5*3.5 + 5*4 + 5*5 + 5*5.5
= 90
1 unit = 90/20 = 4.5
(7 unit) = 7*4.5 = (31.5)

Therefore, Closing Inventory = 90-31.5

= 58.5

Notes:
- If closing stock is greater than opening stock then profit under FIFO is
greater than AVCO.
- Profit and closing stock are directly proportional
- Inventory should be always valued at power of cost or NRV

Profit = sales – cogs

Profit = sales –(o/s + P – c/s)
Profit = sales – o/s – p + c/s

Mark up and margin profit

Cost – mark up
Sale – margin

COST OF INVENTORY

This is expenditure incurred in the normal course of business in bringing the

product or service to its present location and conditions. This includes
purchase costs and production costs where production cost is the total of
purchase costs and Conversion costs.
 Purchase costs include:
- Purchase price of materials
- Import duties
- Transport and handling (carriage inwards) & less trade discounts.
Note: Settlement discounts do not affect the cost of inventory; they only
affect the final amount paid to the creditor.
Conversion costs include:
- Direct labor costs
- Direct expenses
- Attributable production overheads (indirect costs)
- Depreciation of plant and machinery used in manufacturing process
The cost of inventory excludes:
- Non-manufacturing overheads
- Storage costs
- Selling costs
- Abnormal wastage costs

Mark up and Margin

Selling Price – Margin = Cost Price
Cost Price + Mark up = SP
1) SP and mark up given, cost = ?
2) Cost and margin given, SP = ?

1) Cost = SP * 100 Profit = SP * mark up %

100 + mark up % 100 + mark up %

2) SP = cost *100 Profit = cost * margin %

100 – margin % 100 – margin%
 Tangible Non-Current Assets
These are assets which have physical form and expected to use more than 12 months.

PPE (Property, Plant and Equipment)

PPE are assets which are bought by business for continuing use with physical form. PPE is an
asset which have life extended more than one accounting periods and earn profit over more
than one accounting period. PPE are tangible item which are held for use in production or supply
of goods or service for rental or other administrative purpose. Tangible PPE are assets which has
life more than one year and resources are controlled by entity and from which future expected
economic benefit inflow to the entity.

Capital and Revennue expenditure

Those expenditures which are included in cost of PPE in statement of financial position are called
capital expenditure and rest which are written off in statement of profit and loss are called
revenue expenditure.
Recognition Criteria for PPE (IAS-16)
Items of PPE are recognized as asset when:
• It is probable that future economic benefit associated with assets will inflow into the
entity.
• Cost should be reliably measured
Initial Measurement
An item of PPE should be initially measured at cost. The cost of PPE includes:
- Purchase cost
- Freight
- Site preparation charges
- Delivery and handling
- Irrecoverable tax
- All related professional, legal and engineering fees
- All other cost that needs the assets to bring in working condition for its intended use.
- Trials and tests
- Burrowing cost – not required in f3
- Dismantling cost – not required in f3
The cost that should be excluded or never be capitalized includes:
- Abnormal waste cost
- Warranty cost while purchasing
- Storage cost
- General and administrative cost
- Staff training cost
- Cost incurred after the asset is physically ready for use
-
Subsequent Expenditure
Subsequent expenditure should be treated as expenses. However, it should be capitalized if
recognition principle is matched.
For Example:
- Modification to extend its useful life
- Modification to extent to increase production capacity
- Upgrade the machine to improve the quality of assets
- Adoption of new process leading to large reduction in cost
PPE Exchange
In case of exchange. PPE are measured at fair value for exchange of similar item
For example,
While exchanging $5000 car with $6000 car then,
Dr. PPE – 6000
Cr. PPE – 5000
Cr. Income – 1000
Depreciation
Depreciation is the systematic allocation of cost over its useful life. It should reflect the pattern
in which asset's economic benefit are consumed by entity.
Methods of calculating depreciation
1. Straight Line Method (cost-residual value)/useful life
2. Reducing Balance Method (CV * depreciation rate)
 The main difference between the reducing balance and straight-line methods of depreciation
is that while the reducing balance method charges depreciation as a percentage of an asset's
book value/carrying value, the straight-line method expenses the same amount each year.

In case of straight-line method,

Depreciation is also calculated simply as a certain percentage of cost.
If Depreciation rate is 5% then,
Depreciation = (cost-residual value)*5% Or,
Useful life of asset = 100/5 = 20 years
Depreciation = (cost-scrap value)/20

Carrying Amount or Carrying Value of PPE

CV = Cost – Accumulated depreciation

Journal Entry for Depreciation charge

Dr. Depreciation expense - PNL
Cr. Accumulated Depreciation – Balance sheet

Q.1 On 1 jan 20X1, ABC co. purchased an item of PPE at $25,000. This item of PPE was
depreciated by the straight-line method at 5% per year. What is the carrying value of PPE after
3 years. Show with entry of depreciation. What is the depreciation charge and carrying amount
to be shown in financial statement for the year ended 31 December 20X2.
Soln
Cost = 25000
Depreciation = (25000*5%) = 1250
Carrying value after three years = cost – Ad = 25000-2500= 22500
Q.2 On 1 jan 20X1, ABC co. purchased an item of PPE at $25,000. This item of PPE was
depreciated by the reducing balance method at 5% . What is the carrying value of PPE after 3
years. Show with entry of depreciation.
Soln

Cost/cv Deprn CV
Year – 1 25000 25000*5% = 1250 25000 – 1250 = 23750
Year – 2 23750 23750*5% = 1187.5 23750 – 1187.5 = 22562.5
Year – 3 22562.5 22562.5*5% = 1128.125 22562.5 – 1128.125 = 21434.375

Subsequent Measurement
a) Cost Model
CV of PPE = Cost – AD
b) Revaluation Model (Fair Value)
CV of PPE = Fair Value – AD

Revaluation Model
If an asset's carrying amount is increased as a result of a revaluation, the increase shall be
recognized in other comprehensive income and accumulated in equity under the heading of
revaluation surplus.
If an item of PPE is revalued, then all assets related to that class should be revalued.
Revaluation of a non-current asset is accounted as:
Dr. Cost of PPE xx (Revalued amount – Original cost)
Dr. Accumulated Depreciation xx
Cr. Revaluation Surplus xx (Revalued amount – Carrying value)

Q. Hamstrung runs a kilt-making business in Scotland. It has run the business for many years
from a building which originally cost $300,000 and on which $100,000 accumulated depreciation
has been charged to date. Hamstrung wishes to revalue the building to $750,000. Find the
financial statement extract. To find: CV and Revaluation surplus
Soln
Cost = 300000
AD = 100000
Carrying Value = 300000-100000= 200000
Statement of Financial Position:
NCA = 750,000
Equity
- R/s = 550,000
Revaluation Surplus = Revalued Amount – Carrying Value at that date
= 750,000-200,000 = 550,000
Dr. PPE(Balancing) – 450,000 ( Revalued amount – cost of NCA) = 750000- 300000 = 450000
Dr. Accumulated Depreciation – 100,000
Cr. Revaluation Surplus – 550,000
Show the financial statement extract.
PNL Statement
Depreciation Expense = xxxx
Other comprehensive income:
Revaluation surplus = 550000
Statement of financial position
NCA:
PPE 750000
Equity:
Revaluation surplus 550000
Statement of changes in equity
Revaluation surplus 550000
Q. A company bought a property four years ago on 1 jan for $ 170,000. Since then property
prices have risen substantially and the property has been revalued at $ 210,000.
The property was estimated as having a useful life of 20 years when it was purchased. What is
the balance on the revaluation surplus reported in the statement of financial position.
Soln
Cost = 170000
RA = 210,000
Carrying value just before the date of revaluation,
CV = 170000-170000/20*4 = 136000
Revaluation surplus = RA – CV = 210,000-136,000= 74000

Dr. PPE ( RA-cost)- (210,000-170,000) = 40,000

Dr. Accumulated depreciation –(170000/20*4) = 34000
Cr. Revaluation surplus = 74000

Disposal of NCA
If,
Cost - $100 m
AD – $60 m
Disposal on $80m

1) Dr. cash – 80
Cr. Disposal – 80
2) Dr. Disposal – 100
Cr. PPE – 100
3) Dr. AD – 60
Cr. Disposal

Dr. cash – 80
Dr. AD – 60
Cr.PPE – 100
Cr. Income – 40
 Transfer of excess depreciation

The excess of the new annual depreciation charge over the old depreciation charge may
be the subject of an annual transfer from revaluation surplus to retained earnings.

Dr. Revaluation Surplus XX

Cr. Retained Earnings XX

Disposal of Previously Revalued Assets

When the previously revalued asset is disposed off then all the revaluation gain
related to that asset should be transferred to the retained earnings.
For Example: If an asset has a carrying amount on a certain date of $10,000 and it is
revalued by $12,000 at that date, we get revaluation surplus of $2000. When this
asset is disposed off, then the previous revaluation surplus of $2000 should be
transferred to the retained earnings.
Dr. Revaluation surplus $2000
Cr. Retained Earnings $2000

Some important ledger accounts

Dr. Disposal a/c Cr.

PPE – cost 100 Cash 80
PNL (Income) 40 AD 60
Loss on disposal XX

Dr. PPE Cost A/C Cr.

$ $
B/F XX cash received from disposal XX
Addition/Purchase XX loss on disposal XX
Revaluation Surplus XX AD XX
C/F XX
 Dr. PPE CV A/C Cr.
$ $
B/F XX Depreciation XX
Addition/Purchase XX Cash received from disposal XX
Revaluation Surplus XX loss on disposal XX
C/F XX

1. ABC Co had non-current assets with a cost of $2,260,000 at the start of 20X8. During the year the following
transactions took place:
a. Non-current assets with a cost of $545,000 were purchased
b. Assets costing $290,000 were sold for $130,000
c. A building which had cost $700,000 and had a carrying amount of $350,000 was revalued to $900,000
What is the balance on the non-current assets cost or revaluation account at 31-Dec-20X8?
a. $3,065,000
b. $2,715,000
c. $2,875,000
d. $3,225,000
PPE Cost A/C
$ $
B/F 2,260,000 Disposal 290,000
Addition/Purchase 545,000
Revaluation Surplus 550,000 C/F 3065000

RS = 900,000 -350,000 = 550,000

Q. At 30 September 20X2, the following balances existed in the records of Lambda Co:
Plant and equipment:
Cost $860,000
Accumulated depreciation $397,000
During the year ended 30 September 20X3, plant with a written down value of $37,000 was sold for $49,000. The
plant had originally cost $80,000. Plant purchased during the year cost $180,000. It is the Lambda Co’s policy to
charge a full year's depreciation in the year of acquisition of an asset and none in the year of sale, using a rate of
10% on the straight-line basis.
What is the carrying amount that should appear in Lambda Co's statement of financial position at 30
September 20X3 for plant and equipment?
Soln:
Cost = 860,000 – 80,000 + 180,000 = 960,000
AD = 397,000 – 43,000 + 96,000 = 450,000

Carrying Value = 960,000 – 450,000 = 510,00

 Intangible Non- Current Assets

An identifiable non-monetary asset without physical substance is termed as intangible

asset.
For examples:
- Licenses
- Patents
- Brands
- Trademarks
- Copyrights
- Franchises
Research and development costs
Research is original and planned investigation undertaken with a prospect of gaining new
scientific or technical knowledge. All charges related to research are accounted as expenses.
Development is an application of research finding. Development cost are capitalized only after
technical and commercial feasibility of asset for sale or use has been established.
The basic principle of recognition of an intangible asset in the financial statements is that 'the
assets meets:
- The definition of an intangible asset, and
- The recognition criteria'
For simplicity, the recognition criteria (PIRATE) for development expenditure are:
P – Probable future economic benefit should inflow into the entity
I – Intention to complete asset for sale or use
R – Resources available to complete the asset for sale or use
A – Ability to complete the assets for use or sale
T - Technically feasible to complete the asset for use or sale
E – Expenditure should be reliably measured

Amortization
It is a systematic allocation of cost over its useful life. It should reflect the pattern in which
related economic benefits are consumed by intangible in case of limited life.
In case, the assets have infinite life, it should not be amortized but subject to annual review for
impairment.
Dr. Amortization expense (PNL)
Cr. Accumulated amortization (SOFP)
Amortization should start when asset is available for use.
The amortization period should be regularly reviewed if there is any changes, it should be
accounted as per IAS – 8 change in accounting estimates.

Way of solving numericals

- Find out development expenditure and research expenditure
- Development cost are capitalized as intangible assets and amortized over their useful
life. Amortization should start when asset is available for use.
- Research expenditure is written down to statement of profit and loss as incurred.
 Accruals and Prepayment
Accrual Concept:
We must record all the incomes and expenses in PNL relating to a period, whether or not the
cash has been received or paid.
Accrued expenditure (Liability)
An accrual arises where expenses of the business, relating to the year, have not been paid by
the year end. It is treated as liability in the statement of financial position.
a) Dr. Expense (PNL) b) Dr. Accrued Expense
Cr. Accrued expense (SFP) Cr. Cash
Prepaid Expenditure (Asset)
A prepayment arises where some of the following year's expenses have been paid in the
current year. It is treated as asset in the statement of financial position.
a) Dr. prepaid expenses b) Dr. Expense c) Dr. PE
Cr. Cash Cr. Prepaid Expense Cr. Expense

Prepaid and Accrued Expense a/c

$ $
PE/bf 550 AE/bf 2000
Cash paid 5400 Expense 3100
AE/cf 650 PE/cf 1500
xxx xxx

Q. The following transaction relates to Ram’s electricity expenses ledger account for the
year ended 30 June 20X9:
➢ Prepayment brought forward $ 550, prepayment carried forward $1500
➢ Cash paid $5,400
➢ Accrual carried forward $ 650, Accrual brought forward $2000
What amount should be charged to the statement of profit or loss in the year ended 30 June
20X9 for electricity?
a) $ 3100 b). $ 6,000 c. $ 5,500 d. $ 5,300
Accrued Income (Asset)
Accrued income arises where income has been earned in the accounting period but has not yet
been received. It is treated as asset in the statement of financial position.
a) Dr. Accrued Income b) Dr. Cash
Cr. Income Cr. Accrued Income
Prepaid Income (Liability)
Prepaid income arises where income has been received in the accounting period but which
relates to the next accounting period (not earned yet). It is treated as liability in the statement
of financial position.
a) Dr. Cash b) Dr. Prepaid Income c) Dr. Income
Cr. Prepaid Income Cr. Income Cr. Prepaid Income

Prepaid & Accrued Income a/c

$ $
AI/bf 16900 PI/bf 24600
Income 316200 Cash received 318,600
PI/cf 28400 AI/cf 18300
xxx xxx

10.10) B, a limited liability company, receives rent for subletting part of its office premises to a
number of tenants.
In the year ended 31 December 20X4 B received cash of $318,600 from its tenants.
Details of rent in advance and in arrears at the beginning and end of 20X4 are as follows:
31 December
20X4 20X3
$ $
Rent received in advance 28,400 24,600
Rent owing by tenants 18,300 16,900
All rent owing was subsequently received
What figure for rental income should be included in the statement of profit or loss of B for
20X4?
Errors In Recording
Errors that occur, while recording of accruals and prepayments, their impact on
financial statements and corrections to be made are as follows:
Case-1 : Accrual not treated as accrual (omission)
Effects of omission in financial statements:-
PNL: - Expense understated
- Profit overstated
SFP: - Current liability understated
Case-2: Prepaid expense not treated as prepayment (omission)
Effects of omission in financial statements:
PNL: - Expense overstated
- Profit understated
SFP: - Current asset understated

Case-3: Accrued expense recognized as prepaid expense

Effects of mis-recognition in financial statements:
PNL: - Expense understated
- Profit overstated
SFP: - Current liability understated
The correct double entry with double amount has to be passed for the correction of
this error. The total difference in the amounts of assets and liabilities will be double
the amount of error.

Case-4: Prepaid expense recognized as accrued expense

Effects of mis-recognition in financial statements:
PNL: - Expense overstated
- Profit understated
SFP: - Current asset understated
The correct double entry with double amount has to be passed for the correction of
this error. The total difference in the amounts of assets and liabilities will be double
the amount of error.
Point to be noted:
- Accrual always decrease the profit
- Prepayment always increase the profit
 RECEIVABLES

Theories to Learn:
- Merits and Demerits of credit facilities
- Aged receivables analysis
- Credit limits

Irrecoverable Debt Expense (IDE)

Those debts which will become uncollectible and will be written off at that time are called as
Irrecoverable debt expenses.

Reasons for occurrence of IDE

- The customer has gone bankrupt
- The customer is out of business
- Dishonesty may be involved
- Outright refusal to pay
- Disappearance of customer
- Death of customer
-
The accounting entry to remove such known irrecoverable debts is:
Dr. Irrecoverable debt expense (PNL) XX
Cr. Receivables control a/c XX

If that Irrecoverable debt is recovered then the entry will be:

Dr. Cash or Dr. Cash
Cr. IDE (Expense) Cr. Irrecoverable debts recovered (Income)
This amount can be showed either as a decrease in expense or an increase in income depending
upon the policy of company.

Allowance for Receivables/Doubtful Debts

At the end of the year, there may be amounts owing to the business, which the accountant
considers will become irrecoverable debts in the future. Prudence concept requires that an
allowance is made for these doubtful debts.
The purpose of this type of adjustment is to ensure that the amount of trade receivables
reported on the statement of financial position is not overstated.
Increase in allowance - Increases receivable expense
It occurs if b/f of allowance is less than c/f of allowance.
Then, Increase in allowance = closing allowance – opening allowance
The accounting treatment to create a new allowance or to increase an existing allowance is:
Dr. Irrecoverable debts expense (PNL) XX
Cr. Allowance for receivables (SFP) XX

Decrease in allowance - Decreases receivable expense

It occurs if b/f of allowance is greater than c/f of allowance.
Then, Decrease in allowance = opening allowance – closing allowance
The accounting treatment to reduce an existing allowance is:
Dr. Allowance for receivables (SFP) XX
Cr. Irrecoverable debts expense (PNL) XX

Ways to deal with problems:

1. Write off irrecoverable debts.
2. Calculate the receivables balance after adjustment of the write off of IDE.
3. Ascertain the specific allowance for receivables required.
4. Deduct the debt specifically allowed for from the receivables balance.
5. Multiply the remaining receivables balance by the general allowance percentage to give
the general allowance required.
General allowance = General allowance%*(closing receivables-IDE-specific allowance)
6. Add the specific and general allowances required together.
7. Compare the b/f and c/f of allowance for receivables and account for increase and
decrease in allowance for receivables.

Note: Allowance to adjust in statement of financial position at current asset is only the
closing allowance.

Q. 11.2 At 31 December 20X2 a company's receivables totaled $400,000 and an allowance

for receivables of $50,000 had been brought forward from the year ended 31 December 20X1.
It was decided to write off debts totaling $38,000. The allowance for receivables was to be
adjusted to the equivalent of 10% of the receivables.
What charge for receivables expense should appear in the company's statement of profit or
loss for the year ended 31 December 20X2?
a. $74,200
b. $51,800
 c. $28,000
d. $24,200

1. Dr. IDE – 38,000

Cr. Receivables – 38,000

2. Net receivable balance = 400,000 – 38,000

= 362,000 Receivables = 362000-36200
3. b/f of allowance = 50,000 = 325800
c/f of allowance = 10% 0f 362,000
= 36,200
Decrease in allowance = 50,000 – 36,200 = 13800
Dr. allowance for receivable – 13,800
Cr. IDE – 13,800

IDE a/c
$ $
Receivables 14,600 allowance for receivables 2,000
c/f (balancing amount) 12,600
xxx xxx
IDE = 38000 – 13800
= 24,200

Q. 11.3 At 1 July 20X2 the receivables allowance of Q was $18,000

During the year ended 30 June 20X3 debts totaling $14,600 were written off. The receivables
allowance required was to be $16,000 as at 30 June 20X3.
What amount should appear in Q's statement of profit or loss for receivables expense for the
year ended 30 June 20X3 ?

Bf of allowance = 18,000
c/f of allowance = 16,000
decrease in allowance = 18,000 – 16,000 = 2,000
IDE = 14,600 – 2000
= 12,600
 Provision, Contingent Liabilitiess and Continget Assets (IAS—37)
Provision:
A liability of uncertain timing or amount is called as provision. Provision should be recognized
when:
a) Present obligation (legal or constructive) arise as a result of past event
b) Cost should be reliably measured
c) Payment is probable
Entry for creation and payment of Provision:
a) Dr. Expenses b) Dr. Provision
Cr. Provision Cr. Cash

More than 95% Virtually Certain - Payable Recognize and Disclose

More than 50% ( 50-95)% Probable - Provision Recognize and Disclose
Less than 50%(10-50)% Possible – Contingent liability Disclose only
Less than 10% Remote - X -

Contingent Liability:
a) It is a present obligation arise from past event but not recognized since the payment is
not probable or amount cannot be measured reliably.
b) It is a possible obligation that arise from past event whose existence will be confirmed
only by occurrence or non-occurrence of future uncertain event.
c) Provision should be recognized as well as disclosed whereas contingent liability should
be disclosed only.
It has no entry and is only disclosed.
Contingent assets:
It is a possible asset that arise as a result of past event. It should be recognized and disclosed if
it is virtually certain and if it is probable then should be disclosed only.
More than 95% Virtually Certain Recognize and Disclose
More than 50% Probable Disclose only
Less than 50% Possible -
Less than 10% Remote -
Remeasurement of Provision:
a) If payment is made in excess of provision created, the excess amount should be treated
as expense
Eg:
Estimated - $50,000 but paid - $60,000
Entry to create provision Entry for payment of provision
Dr. Expense – 50,000 Dr. Provision – 50,000
Cr. Provision – 50,000 Dr. Expense(balancing) – 10,000
Cr. Cash - 60,000
b) If payment is less than provision created, the less amount should be treated as
income.
Eg:
Estimated - $50,000 but paid - $40,000
Entry to create provision Entry for payment of provision
Dr. Expense – 50,000 Dr. Provision – 50,000
Cr. Provision – 50,000 Cr. Income(Balancing) - 10,000
Cr. Cash – 40,000
c) Review of Provision:
Provision should be reviewed and adjusted at each reporting date. If provision increase,
it should be treated as expense and if provision decrease, it should be treated as income.
Increase in Provision is treated as expense
Dr. Expenses
Cr. Provision
Decrease in provision is treated as Income
Dr. Provision
Cr. Income

d) Provision should be used for the purpose for which it was originally created and should
be reviewed at each balance sheet date to adjust the current best estimates. If the
payment is no longer probable, the provision should be reversed.
Entry to record the reversal of provision:
Dr. Provision
Cr. Expenses
Q. Customer file legal claim against a company for defective product. It was found that the
defective product was result of contractor. Legal department advise that the chances to success
case is not likely and he also recommend that there is a high chance to recover amount from
contractor.
In both cases amount will be $10,000
Find how the cases are treated in financial statement by the company.
Soln:
1st case: Company is not likely to success – it is probable that company will lose the case.
Hence, it is a provision for the company and the entry will be:
Dr. Expense – 10,000 Dr. Provision – 10,000
Cr. Provision – 10,000 Cr. Income – 10,000
2nd case: Company is likely to win the case. Hence, it is probable contingent asset. It has no
entry and should be disclosed only in the financial statement.
So, 10,000 is disclosed to the financial statement as probable contingent asset.

Q. Wanda Co allows customers to return faulty goods within 14 days of purchase. At 30

November 20X5 a provision of $6,548 was made for sales returns. At 30 November 20X6, the
provision was re-calculated and should now be $7,634.
What should be reported in Wanda Co's statement of profit or loss for the year to 31 October
20X6 in respect of the provision?
A) A charge of $7,634
B) A credit of $7,634
C) A Charge of $1,086
D) A credit of $1,086
Soln:
starting of provision = 6,548
c/f of provision = 7,634
Increase in provision = 7634-6548
= 1086
Dr. Expense – 1086
Cr. Provision - 1086
 Control Account Reconciliation
Individual Accounts:
We prepare individual receivable ledger and payable ledger for each credit customer and credit supplier
respectively which are known as individual ledger accounts.
Control Accounts:
Control accounts are general ledger accounts that summarize a large number of transactions or the aggregate
of all individual receivables and payables ledger accounts. Hence, we prepare receivable control account and
payable control account by this summarization.

a) Receivables Control Account

Before preparing the Receivables control account, let's collect all the Journal Entries that includes receivables.
a) Cash received from the credit customer
Dr. Cash
Cr. Receivable
b) Credit sales
Dr. Receivable
Cr. Sales
c) Sales Return (Return Inward)
Dr. Sales Return
Cr. Receivable
d) Discount allowed on credit sales
Dr. Discount allowed
Cr. Receivable
e) Dishonored of cheques
Dr. Receivable
Cr. Bank
f) Irrecoverable debts expense
Dr. Irrecoverable Debts Expense
Cr. Receivable
g) Contra Entries: The situation may arise where a customer is also a supplier. Instead of both owing each
other money, it can be agreed that a contra be made of the balances i.e. they are cancelled.
Dr. Payable
Cr. Receivable
h) Interest Charged
Dr. Receivable
Cr. Interest Income
i) Bank refunds of credit balances (cash paid to clear credit balances)
Dr. Receivable
Cr. Bank
 Receivables' ledger control account
$ $
Balance b/f xx Balance b/f xx
Credit Sales xx Cash received from credit costumer xx
Dishonor of cheque xx Sales Return xx
Interest charged xx Discount allowed to credit customer xx
Bank refunds of credit balances xx Irrecoverable Debts Expense xx
Contra xx
Balance c/f xx Balance c/f xx
xxx xxx

a) Payables Control Account

Before preparing the Payables control account, let's collect all the Journal Entries that includes Payables
a) Cash paid to the credit supplier
Dr. Payable
Cr. Cash
b) Credit purchase
Dr. Purchase
Cr. Payable
c) Purchase Return (Return Outward)
Dr. Payable
Cr. Purchase Return
d) Discount received in credit Purchase
Dr. Payable
Cr. Discount receive
e) Contra Entries
Dr. Payable
Cr. Receivable
f) Bank refunds of debit balances (Cash received to clear debit balances)
Dr. Bank
Cr. Payable

Payables' ledger control account

$ $
Balance b/f xx Balance b/f xx
Cash paid to credit supplier xx Credit purchase xx
Purchase return xx Bank refunds of debit balances xx
Discount received in credit purchase xx
Contra xx
Balance c/f Balance c/f xx
xxx xxx
 ➢ Note that any entries to the control accounts must also be reflected in the individual
accounts within the accounts receivable and payable ledgers.

Q. The payables ledger control account below contains a number of errors:

Payables' ledger control account
$ $
Opening balance (amounts owed to supp) 318,600 Purchase 1,268,600
Cash paid to suppliers 1,364,300 Contra balances 48,000
Purchase returns 41,200 Discount received 8,200
Refunds received from suppliers 2,700 Closing balance 402,000
$1,726,800 $1,726,800

All items relate to credit purchases.

What should the closing balance be when all the errors are corrected?

Q. The following control account has been prepared by a trainee accountant:

Receivables' ledger control account
$ $
Opening balance 308,600 Cash received from credit cust 147,200
Credit Sales 154,200 Discount allowed to credit cust 1,400
Cash Sales 88,100 Interest charged on overdue a/c 2,400
Contra 4,600 Irrecoverable debts expenses 4,900
Allowance for receivables 2,800
Closing balance 396,800
$555,500 $555,500

What should the closing balance be when all the errors made in preparing the receivables
ledger control account have been corrected?
Control Account Reconciliation
The reconciliation is a working to ensure that the entries in the ledger accounts (memorandum)
agree with the entries in the control account. The totals in each should be exactly the same. If
not same, it indicates an error in either the memorandum account or the control account. All
discrepancies should be investigated and corrected.
➢ The format for control account reconciliation is given below:
Receivables' ledger control account
$ $
Unrevised c/f ( balance given by the examiner) xx Adjustments for errors xx
Adjustments for errors xx Revised balance c/f xx
xxx xxx

➢ Reconciliation of individual receivables' balances with control account balance

$
Balance as extracted from list of receivables x
Adjustment for errors x/(x)
Revised total agreeing with balance c/f on control account x

- The examiner will provide details of the error(s).

- You must decide for each whether correction is required in the control account, the
list of individual balances or both.
- When all errors have been corrected, the revised balance on the control account
should agree to the revise total of the list of individual balances.

Suppliers statement reconciliations:

It is possible to reconcile the supplier statement to the individual ledger account balance. As
such, these are a further way to prove the accuracy of accounting records. The aggregation of
suppliers statements is reconciled with the control accounts.
Q. A receivables ledger control account had a closing balance of $8,500. It contained a contra to the payables
ledger of $400, but this had been entered on the wrong side of the control account.
What should be the correct balance on the control account?
a) 7,700 debit
b) 8,100 debit
c) 8,400 debit
d) 8,900 debit

Receivables' ledger control account

$ $
Unrevised c/f 8,500 Payables 800
Adjustments for errors xx Revised balance c/f 7700
8500 8500

Q. The accountant at Borris Co has prepared the following reconciliation between the balance on the trade payables
ledger control account in the general ledger and the list of balances from the suppliers ledger:

Balance on general ledger control account 68,566

Credit balance omitted from list of balances from payables ledger (127)
68,439
Undercasting of purchase day book 99
Total of list of balances 68,538

What balance should be reported on Borris Co's statement of financial position for trade payables?
a) 68,439
b) 68,538
c) 68,566
d) 68,665

Balance as per control account = 68,566+ 99 = 68,665

Balance as per individual ledger account = 68,538 + 127 = 68,665

 Capital Structure and Finance cost
Capital structure of a company is made up of debt and equity instruments.
Debt: Which requires some form of mandatory transfer of economic benefit to the provider of
the finance
Equity: which gives the provider of the finance the rights to share in the residual assets of the
business when it ceases to trade.
Three forms of financial capital:
1. Ordinary (equity) share capital:
Ordinary share capital is treated as equity and the associated dividend payments are recorded
in the statement of changes in equity. An ordinary shareholding is evidence of ownership of a
company and the shareholders receive the residual interest in the business once it ceases to
trade in proportion to the size of their shareholdings.
Double entry to show the issue of share
Dr. cash (issue price*no. of share issued)
Cr. Share Capital (Nominal value * no. of share issued)
If the share is issued in premium,
Dr. Cash (issue price*no. of share issued)
Cr. Share Capital (Nominal Value * no. of share issued)
Cr. Share Premium (the difference between nominal and issue price * no. of share issued)
2. Loan notes:
This is a form of debt and appears as a liability on the statement of financial position. The
interest payment is treated as a finance charge, which is shown as an expense in the statement
of profit and loss. This is a deduction from profit.
Double entry to show the issuance of loan notes
Dr. Cash xx
Cr. Non-Current Liability xx
Double entry to account for finance charge
Dr. Finance Charge (expense) xx
Cr. NCL/CL/Cash xx
3. Preference shares:
a) Redeemable preference shares:
Creates obligation to repay the preference shareholder. These are treated as loan and
recorded as a liability in the statement of financial position and dividend payments are treated
as finance charge.
Dividend paid is accounted as:
Dr. Finance Charge (expense) xx
Cr. NCL xx
The treatment of redeemable preference share is an example of the accounting concept of
substance over form.
b) Irreddeemable preference shares:
These are the shares that do not have to be repaid. These are therefore treated as equity in the
statement of financial position. These are not same as ordinary shares as they do not entitle the
owner to a residual interest in the business. Dividend paid is treated the same as ordinary
dividends in the financial statements.
Dividend paid is accounted as:
Dr. Retained Earning xx
Cr. Cash xx

Issuance of Shares
Share can be issued by 3 ways:
i) At market value (Normally issued to new shareholder)
ii) Bonus Share (issued only to existing shareholder)
iii) Right Share (issued only to the existing shareholder)

i) At Market Value:
Eg: 100,000 shares issued at market value.
If, Nominal Value = $1 per share
Market Value = $10 per share
Number of share issued = 100,000 shares

Dr. Cash - (100,000*10) = $1000,000

Cr. Share Capital (100,000*1) = $100,000
Cr. Share Premium (100,000*9) = $900,000
ii) Bonus Share:
An issue of this type of share does not raise cash, but is funded by the existing share premium
account (or retained earnings if the share premium account is insufficient). This issue is may be
made when company is unable to pay cash dividends and thus gives dividends in form of share
which is known as Scrip Dividend. Bonus Share is issued in Nominal Value.
Dr. Share Premium (Nominal Value * No. of share issued) xx
Cr. Share Capital (Nominal Value * No. of share issued) xx
Eg: Bonus issue of 100,000 shares
Nominal Value = $1 per share
Market Value = $10 per share
Number of share issued = 100,000 shares
Dr. Share Premium (100,00*1) $100,000
Cr. Share Capital (100,000*1) $100,000

ii) Right Share:

Right issue is the offer of new shares to existing shareholders in proportion to their existing
shareholding at a stated price (normally below market value and above nominal value)
Eg: Issued right share 100,000 @ $5 per share
Nominal Value = $1 per share
Market Value = $10 per share
Number of share issued = 100,000 shares
Dr. Cash - (100,000*5) = $500,000
Cr. Share Capital (100,000*1) = $100,000
Cr. Share Premium (100,000*4) = $400,000

Reserves
The equity section of a statement of financial position, other than share capital, is often
referred as 'reserves'
- Share premium
- Retained earnings
- General reserve
- Revaluation reserve

a) Revenue Reserves:
Retained earnings and the general reserves are called as revenue reserves. These are
distributable, and so can be paid out as a dividend.
b) Capital Reserves:
Share premium and the revaluation reserve are called as capital reserves. These cannot be
paid out as a dividend.

Notes To Learn:
- Proposed dividends at the end of the year that have not been approved by
shareholders cannot be recorded as liabilities at the year end. Also, dividend are only
recorded when they are paid.
- Nominal and Par value are same
- The market value of a share is irrelevant to a company for accounting purposes – once
the share has been issued, no further accounting entries are required by the company.
- Revaluation Surplus is only added to profit after NCA are sold. So, revaluation surplus
is recorded in valuation reserve rather than as retained earning.

Income Tax
There are two types of profit:
1. Taxable Profit
2. Accounting Profit
Tax is always calculated on taxable profit:
Eg: If accounting profit is $20,000. This figure is after the deduction of entertainment cost of
$200 which is not allowed by the tax. What is the taxable profit?
Soln
Taxable Profit = Accounting Profit + Entertainment Charge
= 20,000 + 200 = 20,200
1. Taxable Profit:
Taxable profit is the amount derived as per tax law whereas accounting profit is derived from
books of account. Tax expense is always calculated on taxable profit.
Eg: Accounting profit - $20,000, $200 is not allowed as per income tax act. The tax rate is 20%.
Require: Profit after tax (Profit for the period as per tax) along with double entry for tax
expense.
Soln
Taxable Profit = 20,2000 Tax Expense = 20,2000*20% = 4040 Dr. Tax Expense
Profit after tax as per tax law = 20,200 – 4040 = 16160 Cr. Tax liability
Under and Over Provision of Tax

1. Under Provision of Tax

If in trial balance, the amount of tax payable appears on debit side, then this is a under
provision.
Last year:
Tax Payable = 4040
Tax Paid = 4500
Accounting entry for last year
Dr. Tax payable 4040
Dr. under provision 460
Cr. Tax paid/cash 4500

Accounting entry for this year (current year)

Dr. Tax Expense 4460 Dr. tax expense - 4000
Cr. Tax liability 4000 Cr. Tax liability - 4000
Cr. Tax under provision 460

If last year under provision was created then it is added to the tax expense of this year. Hence,
under provision increases the tax expense of the year.

1. Over Provision of Tax

If in trial balance, the amount of tax payable appears on credit side, then this is a over
provision of tax.
Last year:
Tax Payable = 4040
Tax Paid = 3800
Accounting entry for last year
Dr. Tax payable 4040
Cr. Over provision 240
Cr. Tax paid/cash 3800

Accounting entry for this year (current year)

Tax liability = 4000
Dr. Tax over provision 240 Dr. Tax expense - 4000
Dr. Tax Expense 3760 (PNL) Cr. Tax liability - 4000
Cr. Tax liability 4000
If last year over provision was created then it is reduced to the tax expense of this year. Hence,
over provision decreases the tax expense of the year.
 Events After Reporting Period (IAS-10)
The event occurs or discover the fact between period end and the date where the financial
statements are authorized for issue are called subsequent event or event after reporting
period.
The event may be favorable or unfavorable. There are two types of events:
a) Adjusting Events
b) Non- Adjusting Events

a) Adjusting Events:
Event providing evidence relating to condition existing after the reporting date and require
adjustment in financial statement. For examples:
- Trade receivables may go bad (IDE)
- Inventory may sold at lower off cost
- If going concern issue arise, the financial statement should be prepared on break up
basis and disclose it. In break up basis, assets are recorded at likely sales value,
inventory and receivables require more provision and additional liability may require.

a) Non - Adjusting Events:

Event that occurs after balancing date which does not require adjustment in financial statement,
however which may be of such materiality that their disclosure require to ensure that financial
statement are not misleading. For examples:
- A major NCA after the reporting date, destruction occurs.
- Dividend declared after reporting period.

Disclosure of material non-adjusting events:

If material non-adjusting event is identified then it should be disclosed by way of a note to the
financial statements. This note should describe:
i) The nature of the event
ii) An estimate of the financial effect, or a statement that such an estimate cannot be made.
 Revenue from Contract with Customers(IFRS-15)
Revenue is defined as income arising in the course of an entity's ordinary activities.
IFRS-15 provides five steps approach to revenue recognition and clarifies when revenue from
various source is recognized.

The Five Steps approach for revenue recognition

1. Identify the contract
2. Identify the separate performance obligations within a contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when a performance obligation is satisfied.

Performance obligation is satisfied when risk reward, control and ownership is transferred.

Q. ABC co. sells a machine for $50,000 along with one year's technical support on 1 July 20X1. It
usually sells the machine for $60,000 and expected that technical support will cost ABC co.
15000. Determine how should the transaction price be allocated and how much revenue should
be recognized for the year ended 31 Dec 20X1, if the technical support agreement starts from 1
July 20X1.
Soln:
Transaction Price = $50,000
Actual Price of Machine = $60,000
Actuall price of technical support = $15000
Total actual price = 75000
Step:4
Machine = 60,000/75000*50,000 = 40,000
Technical support = 15000/75000*50,000 = 10,000 (prepaid income)

Revenue to be recognized for year ende 31 Dec 20X1 = 40,000 + 10,000*6/12

= 40,000 + 5000
At 1 July 20X1 (Journal entry at the point of sale) = 45000
Dr. Cash - $50,000
Cr. Sale - $40,000
Cr. Prepaid income - $ 10,000

Dr. Prepaid income – 5000

Cr. Income/Revenue – 5000
 Bank Reconciliations
The objective of a bank reconciliation is to reconcile the difference between:
- The cash book balance, i.e. the business record of their bank account
- The bank statement balance, i.e. the bank's record of the bank account.

Important terms:

Cheque Lodgments:
Debited in ledger (Cash book) but not credited in Statement (Bank Statement)
Uncleared/Unpresented Cheque:
Credited in Ledger but not debited in statement
Standing Order:
Debited in bank but not credited in ledger
Dishonor of Cheque:
Reduce in ledger

1) If question is asking cash book balance/bank statement balance before adjustment

Balance as per Bank Statement xxx
Deposited/Credited in bank but not deposited/debited in ledger (xx)
Withdrawn/Debited in bank but not Credited in ledger xx
Credited in ledger but not withdrawn/debited from bank (xx)
Debited in ledger but not deposited/credited in bank xx
Balance as per Cash Book xxx

2) If question is asking Bank Statement after adjustment from cash book balance
Balance as per Cash Book xxx
Credited in bank but not deposited in ledger xx
Debited in bank but not credited in ledger (xx)
Credited in ledger but not withdrawn from bank xx
Debited in ledger but not credited in bank (xx)
Balance as per Bank Statement xxx
3) If question is asking Cash Book Balance after adjustment from Bank Statement
(only adjust item that can be adjusted in bank statement)
Balance as per Bank Statement xxx
Credit error by bank (xx)
Debit error by bank xx
Unpresented Cheque (xx)
Cheque Lodgment xx
Balance as per Cash Book xxx

Short way to deal with questions for format 1st and 2nd

Bank (Format-1) Cash (Format-2)

C - +
D + -
C - +
D + -

Cash Book
$ $
b/f (positive) xx b/f (overdraft) xx
Standing Order xx
Direct Credit xx Direct debit xx
Credit error (x2) xx Debit error (x2) xx
Dishonor of Cheque xx
c/f (overdraft) c/f (Positive) xx

Bank Statement
$ $
b/f (overdraft) xx b/f (positive) xx
Unpresented Cheque xx Uncleared lodgement xx
Credit error (x1) xx Debit error (x1) xx
c/f (positive) xx c/f (overdraft) xx
Q1. The cash book of Worcester shows a credit balance of $1,350. Cheques of $56 have been written to suppliers but
not yet cleared the bank; uncleared lodgements amount to $128. The bank has accidentally credited Worcester’s
account with interest of $15 due to another customer. A standing order of $300 has not been accounted for in
the general ledger.
What is the balance on the bank statement?
☐ $993 Cr
☐ $993 Dr
☐ $1,707 Cr
 $1,707 Dr

Q2. Jo’s bank ledger account shows a balance of $190 credit. Her bank statement reports a balance of $250 credit.
Which of the following will explain the difference in full?
☐ Unpresented cheques of $100 and an uncleared lodgement of $30
 Unpresented cheques of $150, the misposting of a cash receipt of $130 to the wrong side of the cash account
and unrecorded bank interest received of $30
☐ An unrecorded direct debit of $30, a dishonoured cheque of $70 and an uncleared lodgement of $40
☐ An unrecorded standing order of $60, an unpresented cheque of $110 and a bank error whereby Jo’s account
was accidentally credited with $110

Q3. The following bank reconciliation statement has been prepared by an inexperienced bookkeeper at 31
December 20X5: $
Balance per bank statement (overdrawn) 38,640
Add: Lodgements not credited 19,270
57,910
Less: Unpresented cheques 14,260
Balance per cash book 43,650
What should the final cash book balance be when all the above items have been properly accounted for?
☐ $43,650 overdrawn
 $33,630 overdrawn
☐ $5,110 overdrawn
☐ $72,170 overdrawn

Q4. A bank reconciliation statement for Dallas at 30 June 20X5 is being prepared. The following information is
available:
1. Bank charges of $2,340 have not been entered in the cash book.
2. The bank statement shows a balance of $200 Dr.
3. Unpresented cheques amount to $1,250.
4. A direct debit of $250 has not been recorded in the ledger accounts.
5. A bank error has resulted in a cheque for $97 being debited to Dallas’ account instead of Dynasty’s account.
6. Cheques received but not yet banked amounted to $890.
The final balance in the cash book after all necessary adjustments should be:
 ☐ $463 Dr
 $463 Cr
☐ $63 Cr
☐ $63 Dr

Q5. The following information relates to a bank reconciliation:

1. The bank balance in the cash book before taking the items below into account was $8,970 overdrawn.
2. Bank charges of $550 on the bank statement have not been entered in the cash book.
3. The bank has credited the account in error with $425 which belongs to another customer.
4. Cheque payments totalling $3,275 have been entered in the cash book but have not been presented for
payment.
5. Cheques totalling $5,380 have been correctly entered on the debit side of the cash book but have not been
paid in at the bank.
What was the balance as shown by the bank statement before taking the items above into account?
☐ $8,970 overdrawn
 $11,200 overdrawn
☐ $12,050 overdrawn
☐ $17,750 overdrawn

Q6. Your firm’s cash book shows a credit bank balance of $1,240 at 30 April 20X9. On comparison with the bank
statement, you determine that there are unpresented cheques totalling $450, and a receipt of $140 which has
not yet been passed through the bank account. The bank statement shows bank charges of $75 which have not
been entered in the cash book.
The balance on the bank statement is:
 $1,005 overdrawn
☐ $930 overdrawn
☐ $1,475 in credit
☐ $1,550 in credit
 Errors in Trial Balance and Suspense Account
There are two types of errors that we face in trial balance.
1) Errors where the trail balance still balances.
2) Errors where the trial balance does not balance.

We create suspense account if some errors do not let trail balance to be balanced.

1) Errors where the trail balance still balances

➢ Errors of omission:
Eg: A cash sale of $100 was not recorded.
Dr. Cash – 100
Cr. Sale – 100

➢ Errors of Commission: A transaction has been recorded in the wrong account but in
account of same element.
Eg: Rent expense of $500 has been debited to the repairs expense account.
The double entry for both account: Dr. Expense
Cr. Cash/payable

➢ Errors of Principle: A transaction is recorded incorrectly in wrong account in account of

different elements.
Eg: Purchase of NCA has been debited to the repair expense account rather than asset
account.
Should do: Did do: Correction:
Dr. NCA Dr. repair expense a/c Dr. NCA
Cr. Cash Cr. Cash Cr. Repair Expense

➢ Compensating error: Two different errors have been made which cancel each other out.
Eg: Rent bill of $1200 is debited as $1400 and sales is overstated by 200.
Did do: Correction:
Dr. Rent bill – 1400 Dr. Sale - 200
Cr. Cash – 1200 Cr. Rent bill - 200
Cr. Sale - 200
 ➢ Errors of original entry: The correct double entry has been made but with wrong
amount.
Eg: A cash sale of $76 has been recorded as $67
Should do: Did do: Correction:
Dr. cash – 76 Dr. cash - 67 Dr. Cash - 9
Cr. Sale – 76 Cr. Sale – 67 Cr. Sale - 9

➢ Reversal of Entries: The correct amount has been posted to the correct accounts but on
the wrong side.
Eg: a cash sale of $200 has been debited to sales and credited to bank.
Should do: Did do: Correction:
Dr. Cash – 200 Dr. sale – 200 Dr. Cash - 400
Cr. Sale – 200 Cr. Cash – 200 Cr. Sale - 400

2) Errors where the trial balance does not balance:

➢ Single sided entry: A debit entry has been made but no corresponding credit entry or
vice versa.
Eg: purchase of PPE for $300 has been debited to Asset account but no credit entry has
made.
Should do: Did do: Correction:
Dr. PPE – 300 Dr. PPE – 300 Dr. Suspense - 300
Cr. Cash – 300 Cr. Suspense – 300 Cr. Cash - 300

➢ Debit and Credit entries have been made but at different values:
Eg: A receipt of $5 from a credit customer had been correctly posted to the receivable
account but had been entered in the cash book as $625.
Should do: Did do: Correction
Dr. Cash – 5 Dr. cash - 625 Dr. Suspense - 620
Cr. Receivable – 5 Cr. REC – 5 Cr. Cash - 620
Cr. Suspense - 620
 ➢ Two debit or two credit entries have been posted.
Eg: A credit sale of goods worth $500 is correctly entered in Receivable account but
entered twice in Sales account.
Should do: Did do: Correction
Dr. Receivable – 500 Dr. Receivable – 500 Dr. Sale - 500
Cr. Sale – 500 Dr. Suspense - 500 Cr. Suspense - 500
Cr. Sale – 500
Cr. Sale - 500

➢ An incorrect addition in any individual account, i.e. miscasting.

➢ Opening balance has not been brought down
➢ Extraction Error: The balance in the trial balance is different form the balance in the
relevant account or the balance from the ledger account has been placed in the wrong
column of the trial balance.

Establishment of Suspense Account:

A suspense account is an account in which debits or credits are held temporarily until
sufficient information is available for them to be posted to the correct accounts.
There are two reasons why suspense accounts may be created.

a) If the debit and credit balance of trial balance does not equal.
b) When an accountant is sure about debit entry but unsure about credit entry or vice versa. In
this case unsure debit or credit entry is debited or credited with suspense. When original
destination of debit and credit entry is identified then the suspense is reversed and original
entry will be made.

Suspense Account
$ $
b/f - trial balance difference xx b/f - trial balance difference xx
(If debit side is less than credit) (If Credit side is less than Debit)

Adjustments of errors xx Adjustments of errors xx

c/f (remaining balance) xx c/f (remaining balance) xx

xxx xxx
Remember that: xxx = xxx (the total debit side should be equal to total credit side)
- Sometime question may give b/f and ask for c/f.
- Sometimes question may ask b/f giving all other data.