Monday, May 23, 2022

ACCOUNTANCY FORM 5-CORRECTION OF ACCOUNTING ERRORS

ACCOUNTANCY FORM 5-CORRECTION OF ACCOUNTING ERRORS

ACCOUNTANCY FORM 5-CORRECTION OF ACCOUNTING ERRORS
Monday, May 23, 2022

ACCOUNTANCY FORM 5-CORRECTION OF ACCOUNTING ERRORS

UNAWEZA JIPATIA NOTES ZETU KWA KUCHANGIA KIASI KIDOGO KABISA:PIGA SIMU/WHATSAPP: 0787237719

ACCOUNTANCY FORM 5-CORRECTION OF ACCOUNTING ERRORS




INTRODUCTION

Error-Mistake

Rectification-Correction

Errors may occur

1.While the transactions are initially recorded.

2.While the ledge account are being recorded.

3.While the trial balance is bean prepared.

 

CLASSIFICATION OF ERRORS

1. Arithmetical error

Error occur due to

a)      Adding

b)      Subtracting

c)      Multiplying

d)      Dividing

2. Clerical error

These are errors which arises due to falling to complete double entry system.

The Accounting errors are classified into two types which are;

  • Errors which do not affect the agreement of the Trial balance.
  • Errors which affect the agreement of the Trial balance.

1.ERRORS WHICH DO NOT AFFECT THE AGREEMENT OF A TRIAL BALANCE RESULT DUE TO:-
1. Omission of figure(s);
It is among the errors in which it occurs when a transaction is completely omitted from the books.

Example: If we sold Tshs. 10,000/= goods to Usama but did not enter it in either sales or Usama’s personal account, the trial balance will still balance.

       2. Commission; This is where the correct amount is entered but in the wrong personal account.

Example: where a sale of 100/= to K. Asaad is entered in the account of B. Asaad . It will be noted that the correct class of account was used; both the account concerned being personal accounts.

       3. Original entry:

This error occurs when the original figure is incorrect, yet double entry is still observed using this incorrect figure. An instance of this could be where there were sales of 4500/= goods but an error is made in calculating the sales Invoice. If sales was calculated as 4300/= and credited as Sales and debited to the personal account of the customer, the customer, the trial balance will still balance.

        4. Reversal of entries;

Where the correct accounts are used but each item is shown on the wrong side of account.




Example: Supposed we had purchased goods at 1200/= the double entry of which is Cr. Cash 1200/= and Dr. purchases 1200/=. In error it is entered  as Cr. Purchase1200/= and Dr. Cash 1200. The Trial balance will still agree.

5.  Application of principle;

Where an item is entered in which wrong class of account.

6.Compensating of figures;

Where errors cancel out each other. If the Sales account was added up to be 600/= too high and the purchases a/c also added up to be 600/= too high, then these two errors would cancels out in the trial balance.

2.ERRORS WHICH AFFECT THE AGREEMENT OF A TRIAL BALANCE RESULT:

(i)   Incorrect additions either total too great or too small in any account.

(ii)   Entering an item on only one side of the book.

For instance, if the debit entry is made but not the credit entry (once recording only).

(iii) Posting an entry twice in the books of accounts on the same side.

E.g. Dr. Sales 500 and Dr. Cash A/C 500 or vice – versa.

(iv) Failing to post an entry to the trial balance.

E.g. Balance of 100/= From Discount a/c is totally forgotten, not posted to trial balance through an account has been prepared.

(v) Entering one figure on the debit side of the books but another figure on the credit side.

E.g. If 800/= for cash received from K. Usama is entered in the cash book but 8,000/= is entered in respect of it in Usama’s A/c

SUSPENSE ACCOUNT

Is an A/C opened and used in corrections errors which can cause disagreement of the trial balance.

Since errors are discovered in trial balance, so as to prepare final accounts at the end of accounting period to enable work on the trial balance is often transferred to a temporary ledger account called suspense account. Either by debiting or crediting.




EFFECTS OF BOOK-KEEPING ERROR ON PROFIT

Sometime final account are prepared before detection and correction of errors which have been committed in the course of book-keeping for the period.

The trading, profit and loss account drawn up on the basis of erroneous trial balance will them show a wrong gross profit and net profit for the period ending.

Even the balance sheet will reveal a wrong financial position as at the end of the period under review

 

COMPUTATION OF CORRECT GROSS PROFIT AND NET PROFIT

The following hints should be followed when calculating the correct gross profit and net profit.

  1. Errors which direct affecting gross profit.

Are those errors which involve items normally posted to determine net income realized from sales or turnover. Involves items appear in the trading account.

  1. Errors direct affecting net profit

 

Are those errors which are normally posted to the profit and loss account to determine net profit for the period or items appeared in the profit and loss account.

  1. Errors involving personal account

Eg real account

HOW TO COMPLETE/CORRECT NET PROFIT FOR THE YEAR

Profit for the year                                            ****

Add:any income undercast      *

 

Any payment overcast *                       **

 

******

 

Less: any payment undercast *

 

any income overcast       **                ***

 

corrected profit                              ***

Illustration;-

Show journal entries necessary to correct the following errors:-

(a) A selling of goods 70,000/= to Halima, had been posted to Halimu’s a/c.

(b) The purchase of machine from Lamu for 1,600,000/= had been omitted from the books.

(c) The purchase of office furniture 800,000/= had been posted to office furniture expenses.

(d) A receipt of cash from Halima 88,000/= had been entered in the wrong side of the accounts.

(e) A cheque of 115,000/= paid to Ram had been correctly entered in the cash book but not in Rama’s account.

(f) The purchases A/c has been under cast by 120,000/=

(g) The following accounts have been under cast;

(i) Rent………………………………………..10,000/=

(ii) Discount received………………………2, 000/=

(iii) Return Inwards…………………………3, 000/=

(h) The following accounts had been over added;-

(i) Sales…………………………..11, 000/=

(ii) Purchases…………………..5,000/=

(iii)  Carriage inwards………6,000/=

        Requirements:

  •  Open up journal entry account.
  • Suspense a/c.




                                               JOURNAL ENTRY

S/NDETAILSDEBIT CREDIT
a)      Halima’s a/c

Halimu’s a/c

(Commission error is now being corrected )

70,000 

 

70,000

b)      Machine

Lamu

(Omission of figure is now being corrected )

1,600,000 

 

1,600,000

c)      Office furniture

Office furniture expenses

(Application of prince is now being corrected )

800,000 

 

800,000

d)      Cash

Hamim

(Being cash received from Hamim)

176,000 

 

176,000

e)      Ram

Suspense

(Being error of commission)

115,000 

 

115,000

f)       Purchases

Suspense

(Being purchases under cast)

120,000 

 

120,000

        i.            Rent

Suspense

(Being discount received under cast)

10,000 

 

10,000

      ii.            Suspense

Discount received

(Being cash paid for goods supplied)

2,000 

2,000

    iii.            Return inwards

Suspense

 

3,000 

3,000

h. (i)Sales

Suspense

(Being sales over added)

11,000 

11,000

   (ii)Suspense

Purchases

(Being carriage inwards over added)

5,000 

5,000

   (iii) Suspense

Carriage inwards

(Being carriage inwards over added)

6,000 

6,000

DR                                                              SUSPENSE A/C                                                                     CR      

Discount received2,000Ram115,000
Purchases5,000Purchases120,000
Carriage inwards6,000Rent10,000
Diff in books246,000Return Inwards3,000
Sales11,000
259,000259,000

 



Below are particulars regarding Jones Ogooli’sFinaL A/c? The net profit per accounts is found to be Shs. 154,000. The balance sheet when drawn up appeared to be as follows:-

Exercise 

Draft balance sheet as at 31/12/1986

LIABILITIESASSETS
 

 

 Tshs:  Tshs:
Capital bal. at 1/1/86 1,000,000Plant and machinery   cost 1,010,000
Add: Net profit    154,000Less: Depreciation     60,000
 1,154,000             950,000
Less: Drawings     72,000
1,082,000CURRENT ASSETS:
CURRENT LIABILITIES:- Stock                   170,000
Creditors  109,000Debtors                 50,000
Suspense A/c     9,000Cash                    30,000250,000
12,000,000                                                       12,000,000

 

The following errors were subsequently detected and corrected:-
1. The cash sales entry entered in cash book only Tshs. 6,000/=

2. Drawings (cash) completely omitted from books Tshs. 1,000/=.
3. Rent account under cast Tshs. 2,000/=.
4. Creditor Mr. Burasapaid , but entry in his ledger A/c.

 

 Requirements:

  •  Open up journal entry account.
  • Suspense a/c.
  • Statements of corrected net profit

 

RESERVES AND PROVISIONS

 INTRODUCTION:

 

  • Any business firm must have an asset in conducting its activities.
  • Assets are the possessions of the business.
  • They are things of value that the firm utilizes in conducting business
  • They are the actual resources that are in the business.
  • Assets include land, building, machinery , stock of goods, debtors cash.
  • Assets are financed by capital and liabilities or in technical terms are financed by equities.

 

DEFINITION OF RESERVE:

 

It is an amount set aside out of profits (i.e. from the profit and loss account or any surpluses for unidentified or Unspecified purposes.

 

KIND OF RESERVES:

Reserved can be classified into the following major categories.

1.  Revenue reserve
2.  Capital reserve

@@@@@@@@@@@@@@@@@@@@@@@@@@

1.REVENUE RESERVE

Is a fund / amount created by voluntary transferring part of the profit kind      normally becomes part of the name of that reserve.

           TYPES OF REVENUE RESERVE

1. Specific reserves: These reserves created out of revenues profit for a specific purpose.

 2. General reserve: These are reserves created out of revenue profit for
general purposes.

 

2. CAPITAL RESERVES.

These are reserves which are created out of the capital profits. These  reserves are not available for distribution among shareholders as dividend in the case of companies.

Examples or sources of capital reserve:

1. Profit on sale of fixed assets: it should be noted that capital profit is only excess of sale price over the cost of fixed asset.
2. Profit prior to incorporation.
3. Premium on issue of shares of debentures.
4. Profits on redemption of debentures
5. Profit on for feature of shares.
6. Surplus on revaluation of fixed assets
7. Amount transferred out of profits to capital.

PROVISION

Provision usually means any amount written off or retained by way of providing
depreciation, renewals or diminution in the value of asset or retained by way of
providing for any known liability of which the amount cannot be determined with substantial accuracy.

Difference between reserve and provision

  1. A reserve is an appropriation of profit while a provision is a charge against profits .in other words true profits cannot be determined without making adjustment for the provisions required.
  2. Creation of reserves increases proprietor’s funds while creation of provisions decreases his funds in the business.
  3. Provisions are created to meet some known contingency, the amount of which cannot be precisely determined .Reserves are created to meet some financial position of the business, while creation of previsions help in maintaining the exiting financial position.




PROVISION FOR BAD AND DOUBTFUL DEBTS.

Bad debts:

 1. Accounting entries on bad debts.

Dr; bad debts a/c

Cr; debtors a/c

Then at the end of accounting period.

Dr: P&L

Cr: bad debts

2.Discount allowed

Dr: P&L

CR: Provision for discount allowed.

3.Treatment on provision for B.D D
i.In the first year:

Dr: P&L

Cr: provision for B. D.D

ii. Decrease in provision for B.D.D

Dr .Provision for B.D.D

Cr: P&L
iii. Increase in provision
Dr: P&L
CR: Provision for B.D.D

 

EXAMPLE

List of debtors.

YEARDEBTORS
2008

2009

2010

2012

100,000

150,000

145,000

140,000

Rate of provision for B.D.D is 10% P.A

Draw Up:

1. provision for B.D.D A/C

2. balance sheet as at 31. 12. 2000 – 2011

2008: 100,000 x   10/100 = 10,000

2009: 150,000 x 10/100 =   15,000

2010: 145,000 x 10/100 = 14,500

2011: 140,000 x 10/100   = 14,000

 

  DR               PROVISION FOR BAD AND DOUBTFUL DEBTS   A/C                                                                           CR

31.12.2008Balance c/d10,00031.12.2008P & L10,000
31.12.2009Balance c/d15,0001.1.2009Balance b/d10,000
31.12.2009P & L5,000
15,00015,000
31.12.2010P & L5001.1.2010Balance b/d15,000
31.12.2010Balance c/d14,500
15,00015,000
31.12.2011P & L5001.1.2011Balance b/d14,500
31.12.2011Balance c/d14,000
14,50014,500
 1.1.2012 Balance b/d 14,000




BALANCE     SHEET     AS     AT       31.12.2008

2008Debtors100,000
less: Provision for B.B.D  10,00090,000
2009Debtors150,000
less: Provision for B.B.D  15,000135,000
2010Debtors145,000
less: Provision for B.B.D  14,500130,500
2011Debtors140,000
less: Provision for B.B.D  14,000126,000

BAD DEBTS RECOVERED.

  • when bad debts recorded

Dr: cash / bank

Cr: bad debt recoverable a/c

Then at the end of accounting period:

Dr: bad debts recoverable a/c

Cr: P & L

QUESTIONS:
1. A business makes a provision for bad debts and discount allowed at a rate of 6% and 3% of debtors respectively

The debtors balance as at 31st December were;

1995               85,000

1996               75,000

1997               90,000

You are required to show the necessary entries in the provision accounts, profit and loss account and balance sheets for those years.
1. A trader makes a provision for discounts received at the rate of 4% of creditors at the end of the year. The creditors balance as at 31st December were.

19 -2               12,000

19-3                15,000

19-4                10,000

19-5                13,000

You are required to show the necessary entries in the provision for discount received account, profit and loss account and balance sheet as at for these gears.

3. The following items appear in A white trial balance dated 31st December 19-7

DR   CR
TshTsh
Bad debts3,000
Discount allowed1,420
Discount received3,000
Trade debtors70,000
Trade creditors110,000

It is white’s policy to keep the provision for bad debts. Discount allowed and discount received at the rate of 5%, 2.5% and 6% on debtors.

You are required to show the entries in:-
1.The P & L account (extract) for the year ended 31 .12. 19-9
2. Balance sheet (extract) as at 31. 12. 19-9




CALCULATION (1)

Provision for bad debts at a rate of 6%

1995:              85,000 x 6/100 = 5,100

1996:              75,000 x 6/100 = 4500

1997:              90,000 x 6/100 = 5400

 

 DR                                            PROVISION FOR BAD AND DOUBTFUL DEBTS   A/C                                CR

31.12.1995Balance c/d510031.12.195p&L5100
31.12.1996p&l6001.1.1996balance b/d5100
31.12.1996Balance c/d4500
51005100
1.1.1997balance b/d4500
31.12.1997Balance c/d5400p&l900
54005400
1.1.1998balance b/d5400

 

            DR                                            PROFIT AND LOSS A/C                             CR

31.12.1995provision for B.D.Debts510031.12.1996provision for B.D.Debts600
31.12.1997provision for B.D.Debts900




4. E.C Commenced business on 1st January 1997 and his account end to 31  December, every year. For the ended 31. 12. 1997, bad debts written off amounted to 1200/=, if was also found necessary to create the provision for doubt of 2,000/= in 1998, debts, amounting to 1600, proved bad and were w/o. MrsLema, whose debts of 350 was w/o as bad in 1997 settled her account in full on 30.11.1998. As at 31.12.1998 total debts outstanding were 56,000 it was decided to bring  provision up to 5% on this figure of that date.In 1999, 2,350 debts were w/o during the year, and another recovery of 150 was made in respect of debts w/o in 1997. As 31st .12.1999, total debts outstanding were 42,000; the provision for doubtful debt is to be maintained at 5% of this figure.

You are required to prepare:-

1. Bad debts a/c.
2. Provision for bad debts a/c.
3. Bad debts recovery a/c.
CALCULATION (4)

DR                                                             BAD DEBTS A/C                                                                           CR

31.12.1997Debtors120031.12.1997p&l1200
31.12.1998Debtors160031.12.1998p&l1600
31.12.1999Debtors235031.12.1999p&l2350

 

 DR                                                PROVISION FOR BAD AND DOUBTFUL DEBTS   A/C                                 CR

31.12.1997Balance c/d2,00031.12.1997p&l2,000
31.12.1998Balance c/d2,8001.1.1998balance b/d2,000
31.12.1998p&l800
2,8002,800
31.12.1999p&l7001.1.1999balance b/d2,800
31.12.2000Balance c/d2,100
2,8002,800
 1.1.2000 balance b/d 2,100

 

Workings:

31.12.1998: 56000 X 5/100 = 2800

31.12.1999: 42000 X 5/100 = 2100

 

DR                                                 BAD   BEBTS   RECOVERY   A/C                                                               CR

31.12.1998p&l35031.12.1998cash/bank350
31.12.1999p&l15031.12.1999cash/bank150




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