Importance of Trial Balance and its Limitations

This article discusses the importance of trial balance in accounting and how it helps in preparing financial statements. It also highlights the limitations of trial balance and how it cannot detect compensating errors. The article also includes a table explaining the errors that can cause the trial balance to not balance and how to correct them.

Solution-1
Part-A
(i) It is true that trial balance is very important statement; this is so because trial balance gives a
bird’s eye view of the entire transactions posted in the books. In other words, it is the
summary of the entries posted in the general ledgers. With the help of trial balance, the other
financial statements like balance sheet, income statement, etc. are prepared, without trial
balance one cannot think of preparing these statements (Accounting-simplified.com, 2018).
(ii) No, this is not correct to assume that if the trial balance “balances”, then the books are
correct. Because the trial balance cannot highlight the compensating error like error of
omission or error of commission. The examples of such errors are if the amount required to
be posted to the fuel account is posted to the maintenance account, so this error will not be
reflected by trial balance, since it is an error of commission, similarly if an entry is omitted to
be posted in the books, then also it will not affect the trial balance (Accounting-
simplified.com, 2018).
Part-B
Would the error
cause the Trial
Balance not to
balance
Which
accounts
would be
affected and
how?
How would the
error be corrected
Effect on Trial
Balance totals
Yes No Debit Credit
Example A payment for wages of
$500 was credited to cash correctly
but debited to wages twice expense.
Yes Wages
expense
Debit side of Wages
Expense reduced by
500
$ (500)
1. The Accrued Wages account with
a balance of $500 was omitted from
the Trial Balance.
Yes Accrued
Wages
Credit side of
Accrued Wages to be
increased by 500
$ 500
2. A payment of $490 for Prepaid
Rent was only posted to the Cash at
Bank account and not to Prepaid
Rent
Yes Prepaid Rent
Debit side of Prepaid
rent account to be
increased by 490
$ 490
3. A debit of $458 to Cash at Bank
was posted as $485. The credit entry
was correct.
Yes Cash at bank
Debit side of cash at
bank account to be
reduced by $27
$ (27)
4. A credit of $600 to Accounts
Payable should have been made to
Fees Revenue
No
Accounts
Payable, Fees
revenue
Credit side of
accounts payable to
be reduced by $600,
and credit side of
fees revenue account
is increased by $600
$ -
5. A Dr for a cash receipt of $500
from customers in settlement of their
accounts was posted twice as a DR to
the Cash at Bank and a Dr to
Yes Cash at bank
Debit side of cash at
bank account to be
reduced by $500
$ (500)

Accounts Receivable accounts
6. The Prepaid Expense balance of
$7280 was listed in the Trial Balance
as $7820
Yes Prepaid
Expense
Debit side of prepaid
expense account to
be reduced by $540
$ (540)
7. A $5210 credit to Fees Revenue
was posted as a $521 credit. The
debit entry to Accounts Receivable
was made correctly.
Yes Fees revenue
Credit side of fees
revenue account to
be increased by
$4689
$ 4,689
8. A purchase of office equipment for
$3300 on credit was not recorded. No
Office
equipment,
accounts
payable
Debit side of office
equipment to be
increased by $3300
and credit side of
accounts payable to
be increased by
$3300
$ 3,300 $ 3,300
9. A purchase of Furniture for $7500
using a loan was posted as a debit to
the Loan Payable account and a debit
to the Equipment account.
Yes Loan Payable
Credit side of loan
payable account to
be increased by
$15,000
$ 15,000
10. The drawings account balance
was listed as a credit for $1500. Yes Drawings
Debit side of the
Drawings account to
be increased by
$3000
$ 3,000

Solution-2
Part-A
Matching principle is the basic accounting principle, which states that the expenses should be booked in
the period in which associated income is booked. This principle works best with accrual method of
accounting, but is not in line with cash method of accounting. Under accrual method of accounting, the
expenses are booked on accrual basis, i.e. when they are incurred, irrespective of when their payment is
made, whereas under cash basis of accounting, expenses are booked when they are actually paid in cash.
So, if a company pays commission on its sales, which is required to be paid in the following month of
sale let’s say for December sales, the commission is payable in January. So, matching principle and
accrual method of accounting requires the company to account for commission payable in December only
whereas cash method of accounting requires the commission to be accounted for in January, i.e. when it is
paid (AccountingCoach.com, 2018).
Part-B
(i) Journal entries in the books of J. Jackson for the year ended 30th June, 2018
Sr. No. Particulars Debit ($) Credit ($)
(i) Wages expense (21000/5*2) 8,400
To Wages payable 8,400
(To record the wages payable for the 2 days in June, 18)
(ii) Commission fees receivable 1,520
To Commission fees 1,520
(To record income earned but not received)
(iii) Prepaid Rent (36000/12*7) 21,000
To Rent expense 21,000
(To record prepaid rent)
(iv) Interest receivable (25,000*6%*1/4) 375
To Interest income 375
(To record interest earned but not received)
(v) Unearned revenue (12000*30%) 3,600
To Revenue 3,600
(To record revenue earned)
(vi) Office furniture 6,000
To Office expenses 6,000
(To record the rectifying entry)
(vii) Supplies expense (800+5200-1500) 4,500
To Office supplies 4,500
(To record consumption of office supplies)
(viii) GST Collected 7,960
To GST Paid 7,960
(To record the settlement of amounts)

(ii) Calculation of new profit figure
Particulars Amount ($)
Old Profit 3,281,001
Adjustments
(Increase) / decrease in expense
Wages expense (8,400)
Rent expense 21,000
Office furniture purchased 6,000
Supplies expenses (4,500) 14,100
Increase / (decrease) in income
Commission fees 1,520
Interest income 375
Unearned revenue 3,600 5,495
Revised Profit 3,300,596
The revised profit is $3,300,596.

Solution-3
Part-A
The four qualitative characteristics as mentioned in IASB’s conceptual framework are (Jan, 2018):
(a) Relevance – Means the financial information should be relevant and useful to the users of the
financial statements.
(b) Materiality – All the possible information affecting the users of the financial statements should be
disclosed
(c) Faithful representation – The financial information should be free from errors and should reflect
true and fair view.
(d) Comparability – The financial information should be comparable with the financial information
of other companies or for previous years.
Part-B (i)
HARDYARDS ACCOUNTING SERVICES
Worksheet for period ended 30th June, 2018
Account Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit
Cash at Bank 14,900 14,900
Accounts Receivable 25,825 25,825
Prepaid Expenses 2,200 2,200
Office Supplies 6,160 6,160
Accrued Revenue 2,540 2,540
GST Paid 26,000 26,000
Equipment 163,000 163,000
Accumulated Depreciation 28,000 28,000
Accounts Payable 6,320 6,320
Loan Payable 55,000 55,000
Salaries Payable 1,930 1,930
GST Collected 32,740 32,740
Unearned Revenue 2,750 2,750
B. Bright Capital 50,000 50,000
B. Bright Drawings 5,000 5,000
Painting Revenue 204,055 204,055
Wages Expenses 100,020 100,020
Rent Expense 6,550 6,550
Depreciation Expense 11,000 11,000
Marketing Expense 5,520 5,520
Office Supplies Expense 6,180 6,180
Interest on Loan Expense 5,900 5,900
380,795 380,795 135,170 204,055 245,625 176,740
Profit 68,885

Total 245,625 245,625
(iii) Closing entries in the journal
Sr. No. Particulars Debit ($) Credit ($)
1 Painting Revenue 204,055
To Income Summary 204,055
2 Income Summary 135,170
To Wages expense 100,020
To Rent expense 6,550
To Depreciation expense 11,000
To Marketing expense 5,520
To Office supplies expense 6,180
To Interest on loan expense 5,900
3 Income summary 68,885
To Retained earnings 68,885
4 B. Bright Capital 5,000
To B. Bright Drawings 5,000

Solution-4
Part-A
(a) No, the way the credit are offered will not change, however the process will change at the end of
the businesses as now instead of collecting the debts on their own, they will hire the factors who
will collect the debts on their behalf. They need to incur additional factoring costs for this.
(b) Yes, the firms will no longer be required to monitor their receivables. Factoring means
outsourcing the collections of debts to the third party.
(c) Not allowing the bad and doubtful debts will make the profit and loss account reflect the false
picture with overstated profits and overstated accounts receivable.
Part-B
(i) Journal Entries for June
Sr. No. Particulars Debit ($) Credit ($)
(i) Allowance for Doubtful Debts 11,510
To Accounts Receivable 11,510
(To record for bad debts written off)
(ii) Cash (99550*20%) 19,910
Accounts receivable (99550*80%) 79,640
To GST Collected (99550/110%*10%) 9,050
To Sales (99,550/110%) 90,500
(To record sales during the month)
(iii) Cash 121,600
To Accounts receivable 121,600
(To record cash collected from customers)
(iv) Accounts receivable 1,870
To Allowance for Doubtful Debts 1,870
(To record reversal of accounts receivable)
Cash 1,870
To Accounts receivable 1,870
(To record cash collected from customers)
(v) Accounts receivable 2,200
To Sales 2,200
(To record sale not recorded earlier)
(vi) Bad debts expense 13,075
To Allowance for Doubtful Debts 13,075
(To record bad debts expense)

(ii) Ledger Accounts
Accounts Receivable
Date Particulars Dr Cr Balance
01-Jun Opening balance $265,400 $ 265,400
30-June Allowance for doubtful debts $ 11,510 $ 253,890
30-June GST Collected $ 7,240 $ 261,130
30-June Sales $ 72,400 $ 333,530
30-June Cash $121,600 $ 211,930
30-June Allowance for doubtful debts $ 1,870 $ 213,800
30-June Cash $ 1,870 $ 211,930
30-June Sales $ 2,200 $ 214,130
Allowance for Doubtful Debts
Date Particulars Dr Cr Balance
01-Jun Opening balance $ 15,565 $ (15,565)
30-June Accounts receivable $ 11,510 $ (4,055)
30-June Accounts receivable $ 1,870 $ (5,925)
30-June Bad debts expense $ 13,075 $ (19,000)
Cash at Bank
Date Particulars Dr Cr Balance
01-Jun Opening balance $106,000 $ 106,000
30-June GST Collected $ 1,810 $ 107,810
30-June Sales $ 18,100 $ 125,910
30-June Accounts receivable $121,600 $ 247,510
30-June Accounts receivable $ 1,870 $ 249,380
Sales
Date Particulars Dr Cr Balance
01-Jun Opening balance $878,490 $(878,490)
30-June Cash $ 18,100 $(896,590)
30-June Accounts receivable $ 72,400 $(968,990)
30-June Accounts receivable $ 2,200 $(971,190)
GST Collected
Date Particulars Dr Cr Balance

01-Jun Opening balance
30-June Cash $ 1,810 $ (1,810)
30-June Accounts receivable $ 7,240 $ (9,050)
Bad debt expense
Date Particulars Dr Cr Balance
01-Jun Opening balance
30-June Allowance for doubtful debts $ 13,075 $ 13,075
(iii) Classified Income Statement and Balance Sheet
Extract Income Statement in the books of Homewares Company Ltd
Particulars Amount ($)
Income
Sales $ 971,190
Expense
Bad debts expense $ 13,075
Extract Balance Sheet in the books of Homewares Company Ltd
Particulars Amount ($)
Assets
Current assets
Accounts receivables $ 214,130
Less: Allowance for doubtful debts $ (19,000) $ 195,130
Cash $ 249,380
Total Assets $ 444,510
Liabilities
Current liabilities
GST Collected $ 9,050 $ 9,050
Total Liabilities $ 9,050
(iv) The two methods that can be used to calculate allowance for bad debts are (Cliffsnotes.com,
2018):
a. Percentage of credit sales method – In this method, bad debts are taken at a percentage of
credit sales made during the year.
b. Ageing of debtors method – In this method, debtors outstanding beyond a specified
period say 1 year are taken for provisioning.
Solution-5

Part-A
(i) Calculation of the value of the machine for depreciation purposes
As per AASB 116, the cost of asset includes initial purchase price, any costs directly
attributable to bringing the asset to the location and condition necessary for it to be capable of
operating as per intended use. Hence, the following costs will become part of the asset cost.
Particulars
Is it a part of
asset? Remarks
Initial price paid to the supplier Yes
Purchase cost is part of asset cost as per
AASB 116
Cost to deliver the machine to the site Yes
Delivery costs are part of asset cost as per
AASB 116
Amount to paint the company name on the
machine No Not required for putting machine to use
Amount paid to an engineer to fit the
machine ready for work Yes
Installation costs are part of asset cost as
per AASB 116
Repairs to the factory door damaged when
bringing in the machine No
Since, it is not related to machine and
would come under repairs
Repairs made to replace bolts which had
dislodged during transit Yes
As it is mandatory for putting machine to
use
Particulars Amount ($)
Initial price paid to the supplier $65,000
Cost to deliver the machine to the site $3,500
Amount paid to an engineer to fit the machine ready for work $14,500
Repairs made to replace bolts which had dislodged during
transit $1,500
Total Machine Cost $84,500
(ii) The best method would be straight line depreciation method.
I. Depreciation under SLM using years as life (84,500-7,000)/10 = $7,750
II. Depreciation under SLM using hours as life (84,500-7,000)/100,000*10,000 = $7,750
Assuming 10,000 hours are used in each year
Hence, no change in depreciation under both of the methods, however the depreciation may change in the
2nd method, if the usage of machine hours changes.
(iii) When the fair value of assets differ significantly from its carrying value, then the revaluation
of assets is considered. It is necessary so that the assets reflect true and fair view in the books.

Part-B
(i) Journal Entries
Sr. No. Particulars Debit ($) Credit ($)
01-Mar-18 Truck 3 130,000
GST paid 13,000
To Cash 30,000
To Loan payable 113,000
(To record purchase of truck)
31-Mar-18 Depreciation 8,543
To Accumulated Depreciation 8,543
(To record depreciation till the date of sale)
31-Mar-18 Accumulated Depreciation 70,980
To Truck 2 70,980
(To record transfer of amount)
31-Mar-18 Cash 44,000
To Truck 2 37,020
To Profit on sale (refer WN-1) 2,980
To GST collected 4,000
(To record sale of truck)
30-Jun-18 Depreciation (130,000*9%/12*4) 3,900
To Accumulated Depreciation 3,900
(To record deprecation for the year end)
Note: GST to be assumed at 10%
WN-1 Calculation of Profit on sale of Truck -2
Given Information Truck 2 Truck 3
Date of purchase 1st July, 2014 1st March, 2018
Purchase cost 108,000 130000
Residual value 12,000 13000
Useful life (years) 8 10
Dep method WDV SLM
Dep rate 25% 9.00%

Year
ended on Opening WDV Dep
Closing
WDV
30/06/2015 108,000 27,000 81,000
30/06/2016 81,000 20,250 60,750
30/06/2017 60,750 15,188 45,563
31/03/2018 45,563 8,543 37,020
70,980
WDV as on 31st March, 2018 37,020
Sale value (44,000/110%) 40,000
Profit on sale 2,980
(ii) Calculation of depreciation charges if the method of dep is change to SLM for Truck 2
Depreciation on Truck 2 as per WDV method
Year ended on Opening WDV Dep Closing WDV
30/06/2015 108,000 27,000 81,000
30/06/2016 81,000 20,250 60,750
30/06/2017 60,750 15,188 45,563
31/03/2018 45,563 8,542.97 37,020
70,980
Depreciation on Truck 2 as per SLM method
Depreciation rate ((108000-12000)/8)/108000 = 11.11%
Year ended on Opening WDV Dep Closing WDV
30/06/2015 108,000 12,000 96,000
30/06/2016 96,000 12,000 84,000
30/06/2017 84,000 12,000 72,000
31/03/2018 72,000 9,000 63,000
45,000
(iii) Effect on Profit under two methods of depreciation

Particulars WDV SLM
Revenue as on 30th June, 2017 212,000 212,000
Depreciation for the year 15,188 12,000
Revenue after depreciation 196,813 200,000
Difference between profits is $3,188 (200,000-196,813)
Solution-6
Part-A
(i) Journal Entries
Perpetual Periodic
Transa
ction Particulars
Debit
($)
Credit
($)
Trans
action Particulars
Debit
($)
Credit
($)
1 Inventory (32*55) 1,760 1 Purchases (32*55) 1,760
To Accounts payable 1,760 To Accounts payable 1,760
2 Accounts payable 110 2 Accounts payable 110
To Inventory (2*55) 110 To Purchase return (2*55) 110
3
Accounts receivable
(58*180) 10,440 3
Accounts receivable
(58*180) 10,440
To Sales 10,440 To Sales 10,440
Cost of goods sold (58*48) 2,784
To Inventory 2,784
4 Sales return (2*180) 360 4 Sales return (2*180) 360
To Accounts receivable 360 To Accounts receivable 360
Stock loss (2*48) 96 Inventory (ending) 3,570
To Cost of goods sold 96 COGS 2,880
To Inventory (opening) 4,800
5 Stock loss (2*48) 96 To Purchases 1,650
To Inventory 96
(ii) Income Statement
Income Statement under Perpetual Method
Particulars Amount ($)
Sales 10,440
Less: Sales return (360)

Less: Cost of goods
sold (2,688)
Less: Stock loss (192)
Gross Profit 7,200
Income Statement under Periodic Method
Particulars Amount ($)
Sales 10,440
Less: Sales return (360)
Less: Cost of goods sold (2,880)
Gross Profit 7,200
(iii) Perpetual method is preferable because it provides the real time details of inventory, sale and
purchases.
(iv) As per accounting standards, the inventory should be measured at lower of cost of NRV,
NRV or net realizable value means the amount at which the inventory can be sold in the open
market.
Part-B
(i) Identifying the approach and method adopted for below items on the basis of Annual Report
2017 of Super Retail Group:
(a) Revenue Recognition - Revenue is measured at the fair value of the consideration
received or receivable. Amounts disclosed as revenue are net of returns, trade allowances,
duties and taxes paid.
(b) Inventory Valuation - Inventories are measured at the lower of cost and net realisable
value. Costs are assigned to individual items of stock on the basis of weighted average
costs.
(c) Depreciation of non-current assets - Depreciation and amortisation are calculated on a
straight line basis for accounting and on a diminishing value basis for tax. Depreciation
and amortisation allocates the cost of an item of property, plant and equipment net of
residual values over the expected useful life of each asset to the consolidated entity.
(ii) The company makes the following statement:

(a) Ethical Practice - We are committed to promoting better working conditions in our
global supply chain and ensuring the products we provide to our customers are ethically
and sustainably sourced.
(b) Sustainability - At Super Retail Group we share your passion to make our world a
cleaner, healthier and happier place. We recognise the important role we have to play
ensuring the well-being of the environment and the communities in which we operate.
References:
AccountingCoach.com. (2018). What is the matching principle? | AccountingCoach. [online] Available
at: https://www.accountingcoach.com/blog/what-is-the-matching-principle [Accessed 4 May 2018].
Accounting-simplified.com. (2018). Trial Balance | Explanation & Example. [online] Available at:
http://accounting-simplified.com/trial-balance.html [Accessed 4 May 2018].
Jan, O. (2018). Qualitative Characteristics of Financial Information. [online] accountingexplained.com.
Available at: https://accountingexplained.com/financial/principles/qualitative-characteristics [Accessed 4
May 2018].
Cliffsnotes.com. (2018). Estimating Bad Debts—Allowance Method. [online] Available at:
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/receivables/estimating-bad-
debts-allowance-method [Accessed 4 May 2018].