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(a) Briefly explain the following types of errors: i. Error of commission ii. Error of principle iii. Complete reversal of entries iv. Compensating errors (b) The trial balance of Amanda...

      

(a) Briefly explain the following types of errors:
i. Error of commission
ii. Error of principle
iii. Complete reversal of entries
iv. Compensating errors
(b) The trial balance of Amanda Ltd as at 30 April 2004 did not balance. On investigation, the
following errors were discovered:
1. A loan of Sh.2,000,000 from one of the directors has been correctly entered in the cashbook
but posted to the wrong side of the loan account.
2. The purchase of a motor vehicle on credit fro Sh.2,860,000 had been recorded by debiting the
supplier’s account and crediting the motor expenses account.
3. A cheque for Sh.80,000 from Ogola, a customer to whom goods are regularly supplied on
credit, was correctly entered in the cashbook but was posted to the credit of bad debts
recovered account in the mistaken belief that it was a receipt from Agola, a customer whose
debt had been written off three years earlier.
4. In reconciling the company’s cash book with the bank statement, it was found that bank
charges of Sh.38,000 had not been entered in the company’s records.
5. The totals of the cash discount columns in the cashbook for the month of April 2004 had not
been posted to the respective discount accounts.
The figures were:
Sh.
Discounts allowed 184,000
Discounts received 397,000
6. The company had purchased some plant on 1 March 2003 for Sh.1,600,000. The payment was
correctly entered in the cashbook but was debited to the plant repairs account. Depreciation on
such plant is provided for at the rate of 20% per annum on cost.
Required:
(i) Journal entries with narrations to correct the above errors.
(ii) Suspense accounts showing the original difference

  

Answers


Kavungya
a) Explain:
i. Error of commission occurs when the correct amount is entered in the correct class, but in the
wrong account i.e. instead of the account of debtor Mutiso with sales, debtors Mutisya is
debited.
ii. Error of principle is where a transaction is entered in the wrong class of account e.g.
purchases of a motor vehicle is recorded in the purchases account.
iii. Complete reversal of entries. This is where the transaction is recorded in the correct account
but each item in the wrong side of the account e.g. Sh 5,000 to debtor Smith is debited to
sales account and credited to debtors Smith’s account.
iv. Compensating error: This is where an error is cancelled by another error e.g. If debtors are
overstated by Sh 5,000 then the creditors are also overstated by the same amount. These two
errors would cancel out in the trial balance since the totals of both debit and credits are
overstated by Sh 5000.

fig2416520191008.png
Kavungya answered the question on May 16, 2019 at 07:09


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