Theory question 108
Correction of Errors and Suspense AccountThe trial balance of Asibi as at December 31, 2010 failed to agree. A Suspense Account was opened for the difference. Draft final accounts were prepared which showed a net profit of GH¢4,000 for the year to December 31, 2010. The following errors were subsequently discovered:
(i) The Purchases Day Book total of GH¢8,000 had been posted to the ledger as GH¢16,000.
(ii) The Sales Account had been undercast by GH¢12,000.
(iii) Discounts received of GH¢700 had been debited to discounts allowed account.
(iv) An accrued telephone charge of GH¢600 was omitted.
(v) Loose tools bought for GH¢400 had been debited to purchases account.
(vi) Purchase of stock for GH¢7,000 had not been posted to the ledger.
(vii) Bad debts of GH¢950 written off in the debtor's account had not been treated in the expense account.
(viii) Asibi had withdrawn goods to the value of GH¢300 for her personal use. No entries had been made in the books.
You are required to prepare a Statement showing the effect of the errors on the draft net profit and the corrected net profit for the year.
Show the model answer
Statement of corrected net profit (GH¢)
Net profit per draft accounts 4,000
Add (errors that understated profit):
(i) purchases overstated (16,000 − 8,000) 8,000
(ii) sales undercast 12,000
(iii) discount received wrongly debited to discounts allowed (700 × 2) 1,400
(v) loose tools charged to purchases 400
(viii) goods withdrawn, purchases to be reduced 300
Total added 22,100 → 26,100
Less (errors that overstated profit):
(iv) accrued telephone omitted 600
(vi) purchases not posted 7,000
(vii) bad debts not charged 950
Total deducted 8,550
Corrected net profit GH¢17,550
Ask for each error: did it make expenses too high or income too low (add back), or the opposite (deduct)?