Basic Bookkeeping - Lesson 5

Question 0

Which principle does the Trial Balance aim to prove has been applied correctly?

Answer 0

The double-entry principle.

If the total of the Debit balances matches the total of the Credit balances this confirms that for every debit entry in the books there has been a corresponding credit entry and vice-versa.

Question 1

What is the Trial Balance?

Answer 1

The Trial Balance is a listing of the balances of the accounts in the ledger at a particular point in time.

If all the postings have been correctly made, the total of the debit balances must be the same as the total of the credit balances. It is therefore an arithmetical check on the bookkeeping double entries which have been made.

Question 2

What should the Trial Balance prove?

Answer 2

The Trial Balance will prove the arithmetical accuracy of the double-entry process.

Question 3

What will the Trial Balance not prove?

Answer 3

That every entry in the books has been posted to the correct account.

Question 4

If the two Trial Balance totals do not square and the error can’t be located, how should it be corrected?

Answer 4

By making a journal entry and inventing a temporary extra account called a Suspense Account in which to debit or credit the amount needed to make the Trial Balance agree.

Question 5

Describe the procedure if the debit side exceeded the credit side by £50 in the Trial Balance.

Answer 5

Open a suspense account and credit £50 to it, thereby squaring the trial balance.

Find the reason for the £50 error.

Close the suspense account by debiting it with £50 and crediting the appropriate account accordingly.

Question 6

What is an Error of Omission and how does it effect the trial balance?

Answer 6

A transaction which is not recorded in the ledger at all - neither a debit or credit entry has been made.

This will not prevent the trial balance from squaring, as both sides will be wrong by the same amount.

Question 7

Give an example of when an Error of Omission might occur?

Answer 7

When the source document, eg a sales invoice, is lost or missing so has not been recorded in the Sales Day Book and neither debited to the customer’s account or credited in the total posting to the Sales account.

Question 8

What is an Error of Original Entry?

Answer 8

This occurs where the original figure entered in a subsidiary book is incorrect and the posting to the ledger is made using the wrong figure.

Question 9

Give an example of an Error of Original Entry.

Answer 9

A purchases invoice was wrongly entered in the Purchases Day Book as £67 instead of £76. The wrong amount was then posted to the Supplier’s account nod included in the total posting to the Purchases account.

The trial balance would not be affected as both sides would be £9 short and would therefore balance.

When the supplier’s statement was received and checked, this error would be found and would be corrected by a journal entry.

Question 10

What is an Error of Commission?

Answer 10

This error occurs where the correct amount is entered but in the wrong personal account e.g. Where a sales invoice for £350 is correctly entered in the day book and credited to the Sales account in the general edger but, instead of being debited to J. Smith’s account it is debited to L. smith’s account.

The trial balance would still agree but a journal entry would be required to correct the error.

Question 11

What is an Error of Principle?

Answer 11

This error occurs where one of the ledger entries is made to the wrong type of account, although to the correct side of that account. E.g. A car bought for £3,500 by cheque is correctly credited to the bank account but, instead of being debited to the Motor Car account (an Asset or Real account) it is debited to the Motor Car Expenses account (an Expense or Nominal account).

The trial balance would agreed but a journal entry would be needed to correct the ledger.

Question 12

What are Compensating Errors?

Answer 12

When the ledger contains two or more separate errors which by chance cancel each other out.

E.g. If the Sales and Purchases accounts were both added up to £1 too much, the trial balance would not disclose this as we would merely have a debit balance overstated by £1 and a credit balance overstated by £1.

Question 13

What is an Error of Duplication?

Answer 13

When the same entry is made twice, both the debit an the credit side of the ledger being increased by the same amount.

E.g. If an invoice was entered in the Day Book twice and each of the entries was correctly posted, the trail balance would not reveal the error. One of the entries would have to be reversed to eliminate it.

Question 14

What types of accounts are contained in the Sales Ledger?

Answer 14

The Sales Ledger contains the personal accounts of the trade debtors of the business.

Question 15

What are the main types of errors that will not be disclosed by a trial balance?

Answer 15

Errors of Omission, Errors of Original Entry, Errors of Commission, Errors of Principle, Compensating Errors and Errors of Duplication will not be disclosed by the trial balance.

Question 16

What are bad debts treated as for bookkeeping purposes?

Answer 16

Bad debts are treated as expenses.

Question 17

In what sense is a bad debt an expense?

Answer 17

In that sense that it is negative income.

The goods were supplied and the revenue from those goods was included in the sales figure as income received or anticipated.

The amount must know be eliminated as an asset as the income is forgone.

Question 18

How is the income from a sale which had become a bad debt eliminated as an asset?

Answer 18

It is eliminated by crediting the debtor’s account to cancel the asset and debiting the Bad Debts account.

The Bad Debts account is treated as a normal expense of the business.

Question 19

Where would the entry to write of a bad debt first be recorded?

Answer 19

In the Journal. The relevant postings would be made from there.

Question 20

Why are bad debts considered a normal business expense?

Answer 20

Because, however well run a business is, where sales are offered on credit terms, it is almost inevitable that some debts will turn bad.

Question 21

What is Credit Control?

Answer 21

Credit Control is the process of keeping a close watch on the credit-worthiness of customers and considering whether it is wise to continue offering credit terms where ther is any doubt about a particular customer.

Question 22

What do initial checks for credit-worthiness usually consist of?

Answer 22

As a minimum this will generally involve asking for a bank reference.

Where a customer is a business which has been in operation for some time, it is often the practice to seek references from other businesses which which hat customer has dealt.

It will then be possible to assess the level of credit it would be wise to extend.

Question 23

What may a Sales Ledger clerk do as a matter of credit control?

Answer 23

Watch an individual account to make sure that goods are not issued which at an time would allow the customer to exceed heir agreed credit limit.

As soon as invoices were issued which totalled a figure close to the agreed limit, the clerk would issue instructions not to accept any orders for goods totalling more than the available remaining amount, without first checking whether previous invoices have been paid.

Question 24

How do monthly statements assist in credit control?

Answer 24

The issuing of monthly statements serve as a useful aid in prompting debtors to pay the amount due when the credit terms state that it is due.

Question 25

When accounts become overdue, what might a business do to try and remedy the problem?

Answer 25

Issue polite reminders to the debtor of the amounts for which it is awaiting payment.

Question 26

What is it always important to do when making a journal entry? Why?

Answer 26

Add a brief notation to the transactions to make it clear why you made the entry in question. It may not always be clear later on.

Question 27

What must any business which holds computerised data on individuals do?

Answer 27

Register with the Data Protection Register as a data user.

Question 28

What is the purpose of the Data Protection register?

Answer 28

The Data Protection Act sets out rules for processing personal information on computers. The data kept by companies must be, for example, fairly an lawfully processed and not kept for linger than necessary. It gives individuals the right to know about the information held on them.

Any business which holds computerised data on individuals must register with the Data Protection Register as a data user.

Question 29

What are the two basic types of stock?

Answer 29

Stock for resale and stock for consumption.

Question 30

How can stock for resale be described?

Answer 30

Stock purchased in bulk for resale in smaller quantities.

This stock may represent finished goods, partially finished goods or raw materials to be used in the manufacture of finished goods.

Question 31

How can stock for consumption be described?

Answer 31

Material bought for use within the business but not sold by the business either as it is or as part of a manufactured product.

E.g. Stationery

Question 32

In respect of stock, what must a business take into consideration when it draws up it’s accounts at the end of an accounting period?

Answer 32

How much stock it has left at the time.

Question 33

What document would be used by a department within a business to obtain. Stationery from the store?

Answer 33

To obtain stationery from the store a stock requisition form would be used. This form is accepted by the storekeeper as authority to release supplies.

Question 34

For what is the stock sheet used?

Answer 34

A stock sheet is used as a controlled means of checking that a business’s stock, as physically counted, matches what is recorded in the stock record cards.

Question 35

Why are stock requisition forms used?

Answer 35

As a means of guarding against theft and as a means of preventing of the possibility of a business exhausting it’s stocks without anyone being aware of it.

Question 36

How is a stock requisition form filled out?

Answer 36

The document Is completed and recorded to show where the stock item has gone. For example, there could be sections asking who the item was requisitioned by, for which department, the description of goods requested, plus the name of the manager of the department.

Question 37

What information might a stock record card hold?

Answer 37

What the stock is, the stock reference number, the location of where the stock is held in the store (eg row 4, bin 11)’ the supplier from which new stock would be ordered, the re-order level etc.

Question 38

What is re-order level In relation to stock?

Answer 38

The level, fixed by company policy, at which the storekeeper would ask for the item to be re- ordered from the supplier. Thus preventing the business from not being able to carry out its business properly because of insufficient supplies.

The maximum level of stock to be held would also be set so that the business did not have too much money tied up in stock.

Question 39

What is the stock record card also sometimes known as?

Answer 39

The stock ledger card.

Question 40

What are bin cards?

Answer 40

Bin cards are a further extension of the stock record card and are used for recording items taken out of a particular bin to which the card refers. It is a further level of stock control used in a large business holding large quantities of stock stored in separate buns or boxes of some category.

Question 41

What is a purchase requisition form?

Answer 41

A order for which the storekeeper uses to order further stock of a particular item. It is passed on to the purchasing or ordering officer, who will complete a purchase order to send to the supplier.

Question 42

What information might appear on an order form or purchase requisition?

Answer 42

Quantity (eg 40)
Unit (eg box)
Description (eg A4 printer paper)
Supplier (eg Rymans)

Question 43

What is a purchase order?

Answer 43

An order form sent to the supplier.

Question 44

What items might appear on a purchase order?

Answer 44

Address for delivery
Address for invoice
PO number
Date
Quantity
Unit
Code no.
Description
Unit price
Value (inc VAT)
Signature of and position of person ordering
Telephone number of person ordering

Question 45

When the supplier delivers the goods he will supply a delivery or advice note. What happens to it?

Answer 45

It is checked and signed by whoever is receiving the goods.

It is handed back to the delivery person and a copy is retained. The copy is passed on to the purchasing officer for matching with the original order form and, eventually, with the invoice when it arrives.

Question 46

What happens to ordered stock goods when they are delivered?

Answer 46

They are passed to the storekeeper and logged on his stock record card and, if applicable, bin card.

Question 47

What is stock reconciliation!

Answer 47

A stock reconciliation is a physical count of a business’s stock as a check on the numbers found in its stock records. A stock sheet is used.

It is performed at the end of a business’s accounting year (and possibly at least one other time during the year).

Question 48

What information might a stock sheet hold?

Answer 48

A stock sheet would be pre-numbered at the top right-hand corner of the page .

Stock count at - showing the date the count was done

Checker - the checker’s name

Product code - internal code

Description - of item

Location - eg within the store room

Unit - eg box or ream or litre

Number - of units counted by the checker

Stock card - balance shown on the stock record card or bin card

Question 49

Give 4 reasons why there may be a discrepancy between the stock record card and the physical count.

Answer 49

An error on the stock record card (eg balance incorrectly calculated)

Damaged stock removed without being recorded.

Stock used without being recorded or out into store store without being noted.

Stolen stock

Question 50

Why s a stock reconciliation done?

Answer 50

The ensure there are no discrepancies.

To confirm that the business’s stock procedures are adequate.

To record the actual stock, as physically counted, on the stock record card as a starting point for the coming year.