Theory question 105
Correction of Errors and Suspense AccountThe following is the trial balance of Abete Trading Company as at 31st December, 2020: (Dr / Cr, Le)
Provision for depreciation of fixed assets / 9,260
Stock at 1st January, 2020 3,600
Purchases and sales 100,000 / 174,000
General expenses 17,000
Fixed assets 42,600
Returns 2,400 / 4,800
Discounts 400 / 2,000
Salaries and wages 21,000
Suspense account 3,060
Totals 190,060 / 190,060
Additional information: (i) Stock in hand on 31st December, 2020 was Le 4,000. (ii) Investigation revealed the following errors which necessitated the opening of suspense account:
- Drawings of Le 1,000 was posted to salaries and wages account;
- Furniture bought at Le 1,560 was wrongly debited to fixed asset at Le 300;
- Purchases day book was undercast by Le 2,000;
- Discount allowed of Le 200 to a customer had not been posted to the customer's account.
(iii) Depreciation of fixed assets is 10% per annum.
You are required to:
(a) Correct the errors through journal entries (no narration is required);
(b) Prepare Trading, Profit and Loss Account for the year ended 31st December, 2020.
Show the model answer
(a) Journal (Le): Dr Drawings 1,000, Cr Salaries and wages 1,000.
Dr Fixed assets (furniture) 1,260, Cr Suspense 1,260.
Dr Purchases 2,000, Cr Suspense 2,000.
Dr Suspense 200, Cr Debtors (customer) 200.
(Suspense: 3,060 + 200 − 1,260 − 2,000 = nil.)
(b) Trading, Profit and Loss Account (Le): Sales 174,000 − returns inwards 2,400 = 171,600. Opening stock 3,600 + purchases (100,000 + 2,000 = 102,000 − returns outwards 4,800 = 97,200) = 100,800 − closing stock 4,000 = cost of sales 96,800. Gross profit 74,800; add discount received 2,000 = 76,800.
Expenses: salaries and wages (21,000 − 1,000) 20,000; discount allowed 400; general expenses 17,000; depreciation 10% × (42,600 + 1,260 = 43,860) 4,386 = 41,786.
Net profit Le 35,014.
Correct the errors first, then use the corrected purchases, salaries and fixed assets figures.