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 step by step and clearly answer the questions below
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

A. Errors Disclosed by the Trial Balance

1. Incorrect Totals: If the totals computed for the debit and credit sides of the trial balance do not match, this indicates an error in recording transactions. Common errors include:

   • Incorrect addition of the debit or credit accounts.
   • Transactions recorded in the wrong account (but still balanced).

   Correction: Review each account entry, recalculating balances to identify addition/subtraction mistakes.

2. Omissions: If one or more transactions are completely omitted from the ledger.

   Correction: Identify the omitted transactions and record them accordingly in the ledger.

B. Errors Not Disclosed by the Trial Balance

1. Error of Omission: If a transaction is completely omitted (not recorded in any account).

   Correction: Ensure there's proper bookkeeping to record all transactions.

2. Error of Commission: If an amount is entered in the wrong account but still keeps the debit and credit sides balanced. For example, if K1,000 is credited to Account A instead of Account B which should’ve been debited.

   Correction: Analyze individual transactions and their respective accounts to trace entries back to their correct accounts.

3. Compensating Errors: Two errors that offset each other (i.e., an error that overstates one account while erroneously underestimating another).

   Correction: Identifying compensating errors can be tricky and usually involves detailed reconciliation of accounts.

4. Transposition Errors: When digits are switched (e.g., K12,000 written as K21,000).

   Correction: Cross-checking balances against invoices and receipts can help uncover these errors.

5. Incomplete Records: Where certain transactions are recorded without the corresponding entries.

   Correction: Maintaining accurate ledgers and keeping meticulous records can help reduce the risk of incomplete entries.

Question 2:

a) Record the transactions in the appropriate day books:

1. Sales Day Book: | Date | Invoice No. | Customer | Amount (K) |
|-----------|-------------|----------------|------------| | July 1 | 001 | ABC Ltd | 5,000 | | July 20 | 002 | Cash Sale | 2,500 |

2. Purchases Day Book: | Date | Invoice No. | Supplier | Amount (K) |
|-----------|-------------|----------------|------------| | July 3 | 001 | DEF Ltd | 3,000 | | July 15 | 002 | Cash Purchase | 1,500 |

3. Sales Returns Day Book: | Date | Invoice No. | Customer | Amount (K) |
|-----------|-------------|----------------|------------| | July 7 | 001 | ABC Ltd | 1,000 |

4. Purchases Returns Day Book: | Date | Invoice No. | Supplier | Amount (K) | |-----------|-------------|----------------|------------| | July 5 | 001 | DEF Ltd | 500 | | July 28 | 002 | DEF Ltd | 200 |

5. Cash Book: | Date | Receipts (K) | Payments (K) | Amount (K) | |-----------|---------------|--------------|------------| | July 10 | 2,000 | | 2,000 | | July 25 | | 1,000 | 1,000 |

b) Post the totals from the day books to the general ledger:

General Ledger Accounts:

1. Sales Ledger:

   • Sales: K5,000 + K2,500 - K1,000 (Returns) = K6,500

2. Purchases Ledger:

   • Purchases: K3,000 + K1,500 - K500 (Returns) - K200 (Returns) = K4,800

3. Cash Account:

   • Cash Inflow: K2,000
   • Cash Outflow: K1,000
   • Balance: K2,000 - K1,000 = K1,000

4. Debtors Account (Accounts Receivable):

   • ABC Ltd: K5,000 - K1,000 (Returns) - K2,000 (Payment) = K2,000

5. Creditors Account (Accounts Payable):

   • DEF Ltd: K3,000 - K500 (Returns) - K200 (Returns) - K1,000 (Payment) = K1,300

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

| Account | Debit (K) | Credit (K) | |-------------------------------|-----------|------------| | Sales | | 6,500 | | Purchases | 4,800 | | | Cash | 1,000 | | | Debtors (Accounts Receivable) | 2,000 | | | Creditors (Accounts Payable) | | 1,300 | | |-----------|------------| | Total | 7,800 | 7,800 |

Summary

• The trial balance is balanced at K7,800 for both Debits and Credits.
• This exercise illustrates the importance of accurately recording financial transactions and maintaining thorough records to prevent errors that the trial balance may not disclose.