Question 1

Question

The trial balance is a financial report that lists the balances of all general ledger accounts at a particular point in time. Its primary purpose is to ensure that the total of debit balances equals the total of credit balances, thereby confirming the mathematical accuracy of the double-entry bookkeeping system. However, a balanced trial balance does not guarantee the absence of all errors. Discuss the error disclosed and not disclosed by the trial balance and how they should be treated to correct the situation
Question 2
You are provided with the following transactions for XYZ Ltd. for the month of July 2024:
1. July 1: Sold goods on credit to ABC Ltd. for K5,000.
2. July 3: Purchased goods on credit from DEF Ltd. for K3,000.
3. July 5: Returned goods to DEF Ltd. worth K500.
4. July 7: ABC Ltd. returned goods worth K1,000.
5. July 10: Received K2,000 in cash from ABC Ltd. against the credit sales.
6. July 15: Purchased goods in cash for K1,500.
7. July 20: Sold goods for cash amounting to K2,500.
8. July 25: Paid K1,000 to DEF Ltd. for the credit purchase.
9. July 28: Returned goods worth K200 to DEF Ltd. from the cash purchase.
Required:
a) Record the above transactions in the appropriate day books (Sales Day Book, Purchases Day Book, Sales Returns Day Book, Purchases Returns Day Book, and Cash Book).
b) Post the totals from the day books to the general ledger.
c) Prepare a Trial Balance as of July 31, 2024.

Answer 1

Question 1: Errors Disclosed and Not Disclosed by the Trial Balance

Errors Disclosed by the Trial Balance:

1. Recording Errors: If an amount is recorded incorrectly, it can cause a discrepancy in the totals, which will be highlighted in the trial balance.
2. Omissions: If a transaction is entirely omitted from the ledger, it will not appear in the trial balance, which may lead to an imbalance.
3. Double Entries: If a transaction is entered twice, it will create equality on both sides, but still may not reflect the true position.

Treatment: To correct these errors, a thorough review of the accounts should take place. This can include examining source documents and comparing ledger entries with financial records for accuracy.

Errors Not Disclosed by the Trial Balance:

1. Compensating Errors: These are errors that offset each other, such as debiting one account for an overstated amount and crediting another account for the same overstated amount.
2. Errors of Principle: If an expense is recorded as a capital expenditure or vice versa, the trial balance may still balance, yet the financial statements will be distorted.
3. Errors of Commission: Incorrect amounts are posted to the wrong account but the correct amount is debited and credited, preserving the balance in the trial balance.
4. Transposition Errors: If numbers are transposed (e.g., 150 is recorded as 510), the total may still balance.

Treatment: For these errors, a more extensive investigation is often necessary. This may involve:

• Reviewing each transaction and verifying the amounts against source documents.
• Conducting a reconciliation of accounts to ensure accurate postings.
• Employing audits or detailed internal checks to uncover hidden discrepancies.

Question 2: Recording Transactions for XYZ Ltd. in July 2024

a) Record the Transactions in the Appropriate Day Books

Sales Day Book | Date | Details | Invoice No. | Amount (K) | |------------|----------------|--------------|------------| | July 1 | ABC Ltd. | 001 | 5,000 | | July 7 | Sales Return | 002 | (1,000) | | July 20 | Cash Sale | 003 | 2,500 | | Total | | | 6,500 |

Purchases Day Book | Date | Details | Invoice No. | Amount (K) | |------------|----------------|--------------|------------| | July 3 | DEF Ltd. | 004 | 3,000 | | July 5 | Purch. Return | 005 | (500) | | July 15 | Cash Purchase | 006 | 1,500 | | Total | | | 4,000 |

Sales Returns Day Book | Date | Details | Invoice No. | Amount (K) | |------------|----------------|--------------|------------| | July 7 | ABC Ltd. | 002 | 1,000 | | Total | | | 1,000 |

Purchases Returns Day Book | Date | Details | Invoice No. | Amount (K) | |------------|----------------|--------------|------------| | July 5 | DEF Ltd. | 005 | 500 | | July 28 | DEF Ltd. | 007 | 200 | | Total | | | 700 |

Cash Book | Date | Details | Receipts (K) | Payments (K) | Balance (K) | |------------|----------------|---------------|---------------|--------------| | July 10 | Cash from ABC | 2,000 | | 2,000 | | July 15 | Cash Purchase | | 1,500 | 500 | | July 20 | Cash Sale | 2,500 | | 3,000 | | July 25 | Payment to DEF | | 1,000 | 2,000 | | Total | | 4,500 | 2,500 | |

b) Post the Totals from the Day Books to the General Ledger

General Ledger

1. Sales Account

   • Credit: 6,500 K

2. Purchases Account

   • Debit: 4,000 K

3. Sales Returns Account

   • Debit: 1,000 K

4. Purchases Returns Account

   • Credit: 700 K

5. Cash Account

   • Debit: 4,500 K
   • Credit: 1,500 K (cash purchase)
   • Credit: 1,000 K (payment to DEF Ltd.)
   • Balance: 2,000 K

6. Accounts Receivable (ABC Ltd.)

   • Debit: 5,000 K (Initial Sale)
   • Credit: 1,000 K (Sales Return)
   • Credit: 2,000 K (Cash Received)
   • Balance: 2,000 K

7. Accounts Payable (DEF Ltd.)

   • Credit: 3,000 K (Initial Purchase)
   • Debit: 500 K (Purchases Return)
   • Credit: 1,000 K (Amount Paid)
   • Debit: 200 K (Purchases Return)
   • Balance: 1,700 K

c) Prepare a Trial Balance as of July 31, 2024

Trial Balance for XYZ Ltd. | Account | Debit (K) | Credit (K) | |---------------------------|-----------|------------| | Sales | | 6,500 | | Sales Returns | 1,000 | | | Purchases | 4,000 | | | Purchases Returns | | 700 | | Cash | 2,000 | | | Accounts Receivable | 2,000 | | | Accounts Payable | | 1,700 | | Total | 9,000 | 9,000 |

Note: Ensure all accounts are balanced, as it confirms the accuracy of the transactions recorded.