Question Three The trial balance of Judy Mwaba failed to agree because the credi

Question

Question Three

The trial balance of Judy Mwaba failed to agree because the credit balances were more than the debit balances by K1, 350. Consequently, the suspense account was opened and after some investigations the following errors were discovered as at 31st July 2017:

The sales day book total was listed as K1, 250 instead of K1, 520.

Discount allowed was credited to discount received K1, 050.

The purchases day book total K1, 320 had been recorded properly in the ledger but posted to the payables control twice.

Repair for furniture K560 was debited to furniture account.

Cash receipts from receivables K1, 800 was debited in the cash book but not posted to the receivables control account

Required:

(a)        Describe two (2) reasons for preparing the trial balance.                               (2 marks)

(b)       Briefly explain two (3) errors that will be revealed by the trial balance.       (3 marks)

(c)        Briefly explain two (5) errors that will not be revealed by the trial balance. (5 marks)

(d)       Prepare:

(i) Journal entries to correct the above entries. (Narratives are required)

(5 marks)

(ii) Suspense account showing the correction of the errors                             (5 marks)

(e)         If the net profit calculated was K12, 570 before errors were discovered, what could have been the corrected net profit after the discovery of the mistakes?

(5 marks)

The IASB’s framework for the preparation and presentation of financial statements sets out the concepts underlying the preparation and presentation of financial statements for external users. Based on the framework, you are required to answer the following questions:

(f)        State the objective of financial accounting.                                                    (5 marks)

(g)       List any five users of financial statements and briefly describe their information needs.                                                                                                                 (5 marks)

(h)       Identify and explain the qualitative characteristics of financial statements. (8 marks)

(i)        Define the five elements of financial statements.                                           (5 marks)

(25 marks)

(Total: 100 marks)

Explanation / Answer

a.Two (2) reasons for preparing the trial balance. A trial balance is a synopsis/statement of balances of all the different accounts in the general ledger. It enlists all the debit & credit balances. It serves the following purposes: Attests to the arithmetical accuracy of the books of account Ensures that each debit has been matched with a credit It is a solid basis for preparing the financial statements ,such as income statement, balance sheet and cash flow statement (b)Two errors that will be revealed by the trial balance If the totals of a Trial Balance do not agree,then we can conclude that there must have been some error/ errors in recording of transactions or compilation of accounts. For example, 1. Posting an amount in a transaction to the wrong side of the account----posting an on account purchase to the debit of accounts payable , resulting in debit of the same amount twice , with no corresponding credit.Debit side total of the trial balance will show twice the difference. 2. Fully omitting /leaving out an account head from the general ledger--while taking out the summary--causing the totals to disagree by the balance of this acccount. c.Two errors that will not be revealed by the trial balance As it only attests to the arithmetical accuracy of the books of account, certain errors are not disclosed by a trial balance. For example, Error of Principle that go against the fundamental principles of book-keeping & accountancy--like recording a furniture purchase in the purchases account(it should be debited to furniture account) or expensing a capital account (Initial installation expenses should be debited to the asset account instead of going through teh current year income statement)---- this error will not affect the debit/credit balance totals of a trial balance. Errors of Omission---a transaction totally omitted to be recorded in the books of initial entry , will not affect either the debit or credit side & hence cannot be found out from an agreeing trial balance. d. i..Rectification Journal Entries Account Titles Debit Credit a.Suspense a/c 270 Sales Revenues 270 (Rectification of short-credit of (1520-1250)) b.Discount allowed a/c 1050 Discount recived a/c 1050 Suspense a/c 2100 (Rectification of wrong credit to discounts recd.& omitted debit to discounts allowed) c.Accounts payable 1320 Suspense a/c 1320 (Rectification of wrong credit (twice) to accounts payable control a/c.) d.Repairs expense 560 Furniture 560 (Rectification of wrong capitalisation of the expense) e.Suspense a/c 1800 Receivables control a/c 1800 (Rectification of omission of posting to the receivables control a/c.) d.ii.. Suspense account Posting ref. Debit Credit a. 270 b. 2100 c. 1320 e. 1800 Balance c/d 1350 3420 3420 Balance b/d 1350 e. Corrected Net profit Net profit before 12570 a. 270 b. -2100 d. -560 Corrected net profit 10180 F. Objectivs of financial accounting The main objective of financial accounting is to record all financial transactions in a systematic manner , so as to help analyse them in futute and more importantly for preparation of financial statements, & to assess the financial position so as to aid in decision making processes relevant to the business.

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