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Question-1

State the meaning of a trial balance?

Solution:
The Trial balance is the summary of balances of all accounts recorded in the ledger.

 

The format or a Trial balance is:
 

Trial Balance of…as on March 31, 2005

Account Title

L.F.

Debit Amount
Rs.

Credit Amount
Rs.

 

 

 

 

 

 

Total

 

 

 

 

 

 

It is normally prepared at the end of an accounting year. However, an organisation may prepare a trial balance at the end of any chosen period, which may be monthly, quarterly, half yearly or annually depending upon its requirements.

Question-2

Give two examples of errors of principle?

Solution:
The accounting entries should be recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, errors resulting from such violation are known as errors of principle. An error of principle may occur due to incorrect classification of expenditure or receipt between capital and revenue. It may lead to under/over stating of income or assets or liabilities, etc. These errors do not affect the trial balance.

For example,

The amount spent on additions to the buildings should be treated as capital expenditure and must be debited to the asset account. Instead, if this amount is debited to maintenance and repairs account, it has been treated as a revenue expense. This is an error of principle.

Similarly, if a credit purchase of machinery is recorded in purchases book instead of journal proper or rent paid to the landlord is recorded in the cash book as payment to landlord, these errors of principle. These errors do not affect the trial balance.

 

Question-3

Explain error of commission and give an example?

Solution:
The error of commission is committed due to wrong posting of transactions, wrong totaling or balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of amount in the books of original entry, etc.

 

For example: Raj Hans Traders paid Rs. 25,000 to Preetpal Traders (a supplier of goods). This transaction was correctly recorded in the cashbook. But while posting to the ledger, Preetpal’s account was debited with Rs. 2,500 only. This constitutes an error of commission. Such an error by definition is of clerical nature and most of the errors of commission affect in the trial balance.

Question-4

What are the methods of preparing trial balance?

Solution:
A trial balance can be prepared in the following three methods:

 

(i) Totals Method

(ii) Balances Method

(iii) Totals-cum-balances Method

 

Totals method

In this method, total of each side in the ledger (debit and credit) is found out separately and shown in the trial balance in the respective columns. The total of debit column of trial balance should agree with the total of credit column in the trial balance because the accounts are based on double entry system. But, this method is not widely used in practice, as it does not help in assuming accuracy of balances of various accounts and preparation of the financial statements.

 

Balances Method

This is the most widely used method. Under this method trial balance is prepared by showing the balances of all ledger accounts and then totaling up the debit and credit columns of the trial balance to assure their correctness. The account balances are used because the balance summarises the net effect of all transactions relating to an account and helps in preparing the financial statements. In trial balance, normally in place of balances in individual accounts of the debtors, a figure of sundry debtors is shown, and in place of individual accounts of creditors, a figure of sundry creditors is shown.

 

Totals-cum-balances Method

 

This method is a combination of totals method and balances method. In this method four columns for amount are prepared. Two columns for writing the debit and credit totals of various accounts and two columns for writing the debit and credit balances of this account. But, this method is also not used in practice because it is time consuming and hardly serves any additional or special purpose.

Question-5

What is a suspense account? Is it necessary that is suspense account will balance off after rectification of the errors detected by the accountant? If not, then what happens to the balance still remaining in suspense account?

Solution:
In every business enterprise the efforts they take in locating errors is not over, unless they are corrected. To avoid delay in preparation of financial statements, the amount of difference of the trial balance is temporarily put in an account called” Suspense Account” so as to tally the trial balance by putting the difference on the shorter side. When all errors are located and rectified, the suspense account would close automatically. But incase some balance still remains in the suspense account, due to non location of errors, it will be shown in the balance sheet on the asset side in case of debit balance and on the liabilities side in case of credit balance.

 

The trial balance when prepared on the above basis if it does not tally. This difference will be temporarily put to suspense account and trial balance will be made to agree in the ledger.

Till the all errors affecting agreement of trial balance are not located it is not possible to rectify them and tally the trial balance in such a situation, is shown in the Suspense account, make the total of debit and credit columns and proceed further with the accounting process.

When the errors are located and are identified, the amounts are transferred from suspense account to the relevant accounts thereby closing the suspense account. Thus, suspense account is not placed in any particular category of accounts and is just a temporary phenomenon.

Question-6

Rectify the following errors:

 

Cash sales Rs. 16,000

(i) Were not posted to sales account.

(ii) Were posted as Rs. 6,000 in sales account.

 

(iii) Were posted to commission account.

 


Solution:
(i)

 

Suspense A/c          Dr.  16,000
To Sales A/c                          16,000

(Cash sales not posted to sales account now rectified)

 

(ii)

 

Suspense A/c          Dr. 10,000
To Sales A/c                        10,000

(Cash sales Rs. 16,000 were posted to sales account as Rs. 6,000, now rectified)

(iii)

 

Commission A/c        Dr.  16,000
To Sales A/c                            16,000

(Cash sales posted to commission account instead of sales account, now corrected)

Question-7

Depreciation written-off as the machinery Rs. 2,000

 

(i) Was not posted

(ii) Was not posted to machinery account

 

(iii) Was not posted to depreciation account

 


Solution:
(i) It was recorded through journal proper. From journal proper posting to all the accounts are made individually. Hence, no posting was made to depreciation account and machinery account. Therefore, rectification entry will be:

 

Depreciation A/c        Dr.    2,000
To Machinery A/c                        2,000
(Depreciation on machinery not posted, now corrected)

 

(ii) In this case posting was not made to machinery account. It is to be assumed that depreciation account should have been correctly debited. Therefore, rectification entry shall be:

 

Suspense A/c         Dr.  2,000
To Machinery A/c                  2,000

(Depreciation on machinery not posted to Machinery account, now corrected).

 

(iii) In this case depreciation account was not been debited. However, machinery account must have been correctly credited. Therefore, rectification entry shall be:

 

Depreciation A/c       Dr.        2,000
To Suspense A/c                          2,000

(Depreciation on machinery not posted to Depreciation account, now corrected).

Question-8

Trial balance of Anurag did not agree. It showed an excess credit Rs. 10,000. Anurag put the difference to suspense account. He located the following errors:

 

(i) Sales return book over cast by Rs. 1,000.

 

(ii) Purchases book was undercast by Rs. 600.

 

(iii) In the sales book total of page no. 4 was carried forward to page 5 as Rs. 1,000 instead of Rs. 1,200 and total of page 8 was carried forward to page 9 as Rs. 5,600 instead of Rs. 5,000.

 

(iv) Goods returned to Ram Rs. 1,000 were recorded through sales book.

 

(v) Credit purchases from M & Co. Rs. 8,000 were recorded through sales book.

 

(vi) Credit purchases from S & Co. Rs. 5,000 were recorded through sales book.

However, S & Co. were correctly credited.

(vii) Salary paid Rs. 2,000 was debited to employee’s personal account.

 


Solution:
(i)

 

Suspense A/c              Dr. 1,000
To Sales Return A/c                  1,000

(Sales returns book overcast by Rs. 1,000, now corrected).

 

(ii)

 

Purchases A/c           Dr. 600
To Suspense A/c                   600

(Purchases book under cast by Rs. 600, now corrected)

(iii)

 

Sales A/c                Dr. 400
To Suspense A/c                   400

(Error in carry forward of sales book, now corrected).

 

Note : Errors in carry forward the total of one page to another during a period finally affects the total of that book resulting in error of under/overcastting. In this case, carry forward from page 4 to 5 resulted in under casting of Rs. 200 and carry orward from page 8 to page 9 resulted in overcastting of Rs. 600. Overall Overcastting being Rs. 600–200 = Rs. 400.

 

(iv)

 

Sales A/c                     Dr. 1,000
To Return Outwards A/c                1,000

(Return Outwards wrongly recorded through sales book, now rectified).

 

(v)

 

Purchases A/c             Dr. 8,000
Sales A/c                   Dr. 8,000
To M & Co.’s A/c                           16,000

(Credit purchases wrongly recorded through sales book now rectified).

 

(vi)

 

Purchases A/c                      Dr. 5,000
Sales A/c                            Dr. 5,000
To Suspense A/c                                10,000

(Credit purchases wrongly recorded through sales book, however suppliers account correctly credited, now rectified).

 

(vii)

 

Salary A/c                              Dr.     2,000
To Employee’s personal A/c                              2,000

(Salary paid wrongly debited to employee’s personal account, now corrected)
 

Dr.

Suspense Account

Cr.

Date

Particulars

J.F.

Amount
Rs.

Date

particulars

J.F.

Amount
Rs.

 

Difference as per Trial Balance

Sales

 

 

 

10,000

1,000

 

 

Purchases

Sales

Purchases

Sales

 

600

400

5,000

5,000

     

11,000

     

11,000

 

 

Question-9

Trial balance of Rahul did not agree. Rahul put the difference to suspense account.

Subsequently, he located the following errors:

(i) Wages paid for installation of Machinery Rs. 600 was posted to wages account.

(ii) Repairs to Machinery Rs. 400 debited to Machinery account.

(iii) Repairs paid for the overhauling of second hand machinery purchased Rs. 1,000 was debited to Repairs account.

(iv) Own business material Rs. 8,000 and wages Rs. 2,000 was used for construction of building. No adjustment was made in the books.

(v) Furniture purchased for Rs. 5,000 was posted to purchase account as Rs. 500.

(vi) Old machinery sold to Karim at its book value of Rs. 2,000 was recorded through sales book.

(vii) Total of sales returns book Rs. 3,000 was not posted to the ledger.

 

Rectify the above errors and prepare suspense account to ascertain the original difference in trial balance.

 


Solution:
(i)

 

Machinery A/c         Dr. 600
To Wages A/c                     600

(Wages paid for installation of machinery wrongly debited to wages account, now rectified)

 

(ii)

 

Repairs A/c         Dr.        400
To Machinery A/c                   400

(Repairs paid wrongly debited to machinery account now rectified)

 

(iii)

 

Machinery A/c       Dr. 1,000
To Repairs A/c                  1,000

(Repairs for overhauling of second hand machinery purchased, wrongly debited to repairs account, now rectified).

 

(iv)

 

Building A/c                  Dr. 10,000
To Purchases A/c                         8,000
To Wages A/c                             2,000

(Material and wages used for construction of Building, not debited to building account).

 

(v)

 

Furniture A/c               Dr.  5,000
To Purchases A/c                           500
To Suspense A/c                         4,500

(Furniture purchased for Rs. 5,000 wrongly debited to purchases account as Rs. 500, now rectified).

 

(vi)

 

Sales A/c                    Dr. 2,000
To Machinery                             2,000
(Sale of machinery wrongly recorded in sales book, now rectified).

 

(vii)

 

Sales Return A/c                  Dr. 3,000
To Suspense A/c                                3,000

(Total of sales returns book not posted to ledger, now rectified).

Dr.

Suspense Account

Cr.

Date

Particulars

J.F.

Amount
Rs.

Date

Particulars

J.F.

Amount
Rs.

 

Difference as per Trial Balance Sales

 

 

7,500

 

 

Furniture
Sales return

 

 

4,500
3,000

     

7,500

     

7,500

 

Hence, original difference in Trial Balance was Rs. 7,500 excess credited.

Question-10

Trial balance of Anant Ram did not agree. It showed an excess credit of Rs. 16,000. He put the difference to suspense account. Subsequently the following errors were located:

 

(i) Cash received from Mohit Rs. 4,000 was posted to Mahesh as Rs. 1,000.

(ii) Cheque for Rs. 5,800 received from Arnav in full settlement of his account of Rs.6,000, was dishonoured. No entry was passed in the books on dishonour of the cheque.

(iii) Rs. 800 received from Khanna, whose account had previously been written off as bad, was credited to his account.

(iv) Credit sales to Manav for Rs. 5,000 was recorded through the purchases book as Rs. 2,000.

(v) Purchases book undercast by Rs. 1,000.

(vi) Repairs on machinery Rs. 1,600 wrongly debited to Machinery account as Rs. 1,000.

(vii) Goods returned by Nathu Rs. 3,000 were taken into stock. No entry was recorded in the books.

 


Solution:
(i)

Mahesh’s A/c         Dr. 1,000
Suspense A/c        Dr. 3,000
To Mohit’s A/c                       4,000

(Cash received from Mohit Rs. 4,000 wrongly posted to Mahesh as Rs.1, 000, now rectified)

 

(ii)

Arnav’s A/c          Dr. 6,000
To Bank A/c                      5,800
To Discount Allowed A/c        200

(Cheque received from Arnav for Rs. 5,800 in full settlement of his account of Rs. 6,000, dishonored but no entry made in books, now rectified)

 

(iii)

Khanna’s A/c                          Dr. 800
To Bad debts recovered A/c                  800

(Bad debts recovered wrongly credited to Khanna’s account, now rectified)

 

(iv)

Manav’s A/c                Dr.      7,000
To Purchases A/c                             2,000
To Sales A/c                                   5,000

(Credit sales to Manav Rs. 5,000 wrongly recorded through purchases book as Rs. 2,000, now rectified)


(v)

Purchases A/c             Dr. 1,000
To Suspense A/c                       1,000
(Purchases book under cast by Rs. 1,000)

 

(vi)

Repairs A/c               Dr. 1,600
To Machinery A/c                     1,000
To Suspense A/c                        600

(Repairs on machinery Rs. 1,600 wrongly debited to machinery account as Rs. 1,000, now rectified)

 

(vii)

Sales Return A/c          Dr. 3,000
To Nathu’s A/c                          3,000

(Sales return from Nathu not recorded)

Dr.

Suspense Account

Cr.

Date

Particulars

J.F.

Amount
Rs.

Date

particulars

J.F.

Amount
Rs.

 

Difference as per Trial Balance
Mohit

 

 

16,000
3,000

 

Purchases
Repairs
Balance c/d

 

1,000
600
17,400

     

19,000

     

19,000

 

Note: Even after rectification of errors suspense account is showing a debit balance of Rs. 17,400. This is due to non-detection of errors affecting trial balance. Balance of suspense account will be carried forward to the next year and will be eliminated as and when all the remaining errors affecting trial balance are located.

 

Question-11

Trial balance of Kailash did not agree. He put the difference to suspense account. The following errors were discovered:

(i) Goods withdrawn by Kailash for personal use Rs. 500 were not recorded in the books.

(ii) Discount allowed to Ramesh Rs.60 on receiving Rs. 2,040 from him was not recorded in the books.

(iii) Discount received from Rohan Rs. 50 on paying Rs. 3,250 to him was not posted at all.

(iv) Rs. 700 received from Khalil, a debtor, whose account had earlier been written-off as bad, were credited to his personal account.

(v) Cash received from Govil, a debtor, Rs. 5,000 was posted to his account as Rs. 500.

(vi) Goods returned to Mahesh Rs. 700 were posted to his account as Rs. 70.

(vii) Bill receivable from Narayan Rs. 1,000 was dishonored and wrongly debited to allowances account as Rs. 10,000.

Give journal entries to rectify the above errors and prepare suspense account to ascertain the amount of difference in trial balance.

 


Solution:
(i)

Drawings A/c                  Dr. 500
To Purchases A/c                      500

(Goods withdrawn by proprietor for personal use not recorded, now rectified).

 

(ii)

Discount allowed A/c            Dr.  60
To Ramesh’s A/c                            60

(Discount allowed to Ramesh not recorded, now rectified)

 

(iii)

Rohan’s A/c                       Dr. 50
To Discount received A/c              50

(Discount received from Rohan not posted, now corrected)

 

(iv)

Khalil’s A/c                             Dr. 700
To Bad debts recovered A/c                700

(Bad debts recovered wrongly credited to debtor’s personal account, now corrected)

 

(v)

Suspense A/c                  Dr. 4,500
To Govil’s A/c                              4,500

(Cash received from Govil Rs. 5,000 wrongly posted to his account as Rs. 500)

 

(vi)

Mahesh’s A/c            Dr.   630
To Suspense A/c                   630

(Goods returned to Mahesh Rs. 700 wrongly posted to his account as Rs. 70, now corrected)

 

(vii)

Narayan’s A/c             Dr.   1,000
Suspense A/c             Dr.   9,000
To Allowances A/c                     10,000

(Bill receivables from Narayan Rs. 1,000 wrongly debited to allowances account as Rs. 10,000).

Dr.

Suspense Account

Cr.

Date

Particulars

J.F.

Amount
Rs.

Date

particulars

J.F.

Amount
Rs.

 

 

Govil

Allowances

 

4,500

9,000

 

Mahesh

Difference as per trial balance

 

630

 

12,870

     

13,500

     

13,500

 

Question-12

Credit sales to Rajni Rs. 5,000 recorded in Purchases book. State the wrong entry recorded in the book of accounts

 

Purchases A/c        Dr. 5,000
To Rajini A/c                             5,000

 


Solution:
Correct effect should have been:

 

Rajini’s A/c            Dr. 5,000
To Sales A/c                          5,000

The rectification entry will be:

Rajini’s a/c                 Dr. 10,000
To Sales A/c                               5,000
To Purchases A/c                         5,000

Question-13

Furniture purchased from M/s Rao Furnishings for Rs. 8,000 was entered into the purchases book. State the wrong entry recorded in the book of accounts

 

Purchases A/c        Dr. 8,000
To Rao’s A/c                            8,000

 


Solution:
Correct effect should have been:

Furniture A/c                 Dr. 8,000
To Purchases A/c                        8,000

Question-14

Cash sales to Radhika Rs. 15,000 were shown as receipt of commission in the cash book. State the wrong entry recorded in the book of accounts

 

Cash a/c                       Dr. 15,000
To Commission A/c                            15,000

 


Solution:
Correct effect should have been:

Cash A/c              Dr. 15,000
To Sales A/c                        15,000

The rectification entry will be:

Commission A/c        Dr. 15,000
To Sales A/c                            15,000

Question-15

Cash received from Karim Rs. 6,000 posted to Nadeem. State the wrong entry recorded in the book of accounts:

 

Cash A/c                  Dr. 6,000
To Nadeem’s A/c                     6,000

 


Solution:
Correct effect should have been:

Cash A/c                Dr. 6,000
To Karim’s A/c                       6,000





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