Day 5 - Chapter 12 Flashcards
What is the journal day book used for?
correct errors and omissions
What are the two types of error?
errors where TB still balances
errors where TB does not balance - we use suspense account to force a balance
What is the purpose of a suspense account?
to force the TB to balance
What does the correction of error lead to?
correction of profit
What are the 6 types of errors?
error of omission
error of commission
error of principle
compensating error
transposition error
error of original entry
error of reversal
error of omission
a transaction has been completely omitted from the accounting records
error of commission
a transaction has been recorded in the wrong account but in right FS
ei. motor expense recorded as stationary
error of principle
a transaction has conceptually been recorded incorrectly
ei. debited as an expense rather than an asset
compensating error
errors which are coincidently equal and opposite to each other
transposition error
the correct double entry has been made but two digits in the amounts are recorded the wrong way round
error of original entry
amount posted to both accounts is wrong
error of reversal
debits and credit entries are wrong way around
How do you approach errors questions?
- what is the double entry?
- what should it have been?
- what is the correction required?
What do you assume if only one side of the entry has not been mentioned?
it has been recorded correctly
When do we need suspense account?
only when the TB does not balance
when do we need to clear suspense account?
before publishing FS
What are examples of errors where TB does not balance?
- one sided entry
- opening balance has not been brought forward
- DR and CR entries are different amounts
- errors in adding t accounts
- usually transactions posted to a temporary suspense account
What happens to profit if you
DR SOFP
CR SOFP
No Impact
What happens to profit if you
DR P/L
CR P/L
No Impact
What happens to profit if you
DR p/l
CR SOPF
profit decreases
What happens to profit if you
DR SOPF
CR p/l
profit increases
What is a profit reconciliation?
adjustments made to profit statement reconciling the draft profit figure to the revised profit figure after the correction journals have been processed
Profit Rec Matrix
Draft profit = x
adjustments increase decrease
1 x
2 x
3 x
= x/(x)/x = correct profit figure
