91Ó°ÊÓ

Indicate which of the following errors, each considered individually, would cause the trial balance totals to be unequal: a. A payment of \(\$ 7,000\) for equipment purchased was posted as a debit of \(\$ 700\) to Equipment and a credit of \(\$ 700\) to Cash. b. Payment of a cash withdrawal of \(\$ 12,000\) was journalized and posted as a debit of \(\$ 21,000\) to Salary Expense and a credit of \(\$ 12,000\) to Cash. c. A fee of \(\$ 1,850\) earned and due from a client was not debited to Accounts Receivable or credited to a revenue account, because the cash had not been received. d. A payment of \(\$ 1,475\) to a creditor was posted as a debit of \(\$ 1,475\) to Accounts Payable and a debit of \(\$ 1,475\) to Cash. e. A receipt of \(\$ 325\) from an account receivable was journalized and posted as a debit of \(\$ 325\) to Cash and a credit of \(\$ 325\) to Fees Earned.

Step by step solution

01

Analyzing Error (a)

We have a payment of $7,000 for equipment that was posted as a debit of $700 to Equipment and a credit of $700 to Cash. The correct entry should have been a $7,000 debit to Equipment and a $7,000 credit to Cash. The error has resulted in both the debit and credit sides being understated by $6,300 ($7,000 - $700), hence the trial balance totals will equal.

02

Analyzing Error (b)

In this error, the withdrawal was journalized and posted as a debit of $21,000 to Salary Expense instead of $12,000, while correctly crediting Cash for $12,000. This results in an overstatement of debits by $9,000 ($21,000 - $12,000) because only $12,000 is credited; hence, the trial balance totals will be unequal.

03

Analyzing Error (c)

The fee of $1,850 earned was omitted from both Accounts Receivable and a revenue account. Neither a debit nor a credit was made for this transaction, so both sides are missing $1,850. Therefore, the trial balance totals will remain equal.

04

Analyzing Error (d)

A payment of $1,475 to a creditor was mistakenly posted twice as debits to Accounts Payable and Cash. There should have been a $1,475 debit to Accounts Payable and a $1,475 credit to Cash. Instead, debits increased by $2,950 (twice $1,475) with no credit, causing inequality in the trial balance totals.

05

Analyzing Error (e)

A receipt of $325 was incorrectly posted as a debit to Cash and a credit to Fees Earned, which both are valid accounts. The issue is the wrong account being credited, but the amounts are equal on both sides; hence, the trial balance totals will still equal.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Debit and Credit Errors

In accounting, transactions are recorded using the double-entry system, meaning for every debit, there is a corresponding credit. Errors with debits and credits can lead to discrepancies in financial records.
Common debit and credit errors include:

• Misposting amounts: This occurs when a transaction is recorded incorrectly, for instance, posting $700 instead of $7,000.
• Using incorrect accounts: A transaction might be recorded in the wrong account, such as recording a cash transaction in a salary expense account.
• Unequal posting: If debits and credits do not match, this leads to an imbalance in the trial balance.

Understanding how debits and credits should be correctly recorded is crucial for maintaining accurate financial records.

Accounting Principles

Accounting principles serve as the foundation for preparing financial statements. They ensure consistency and reliability in financial reporting.
Key principles include:

• Accrual principle: Revenue and expenses are recorded when earned or incurred, not necessarily when cash is received or paid.
• Consistency principle: Companies must consistently use the same accounting methods each period unless a change is justified and disclosed.
• Matching principle: Expenses should be recorded in the same period as the revenues they help generate.

These principles guide accountants in recording transactions and help in identifying errors, ensuring financial statements reflect the true financial position of a business.

Financial Statements

Financial statements are structured reports detailing the financial performance and position of a business. They rely on accurate journal entries.
Main financial statements include:

• Balance Sheet: Shows assets, liabilities, and equity at a specific point in time.
• Income Statement: Details revenues and expenses over a period, showing profit or loss.
• Cash Flow Statement: Focuses on cash inflows and outflows from operations, investing, and financing activities.

Errors in journal entries can lead to inaccurate financial statements, affecting stakeholders' decisions. Understanding and detecting errors, such as incorrect debits and credits, is essential to ensure the reliability of financial statements.

Journal Entries

Journal entries are the first step in the accounting cycle, recording daily transactions. They include specific details of each transaction, such as date, accounts affected, and amounts debited and credited.
Steps in making journal entries:

• Identify transactions: Recognize events that have economic impact.
• Analyze transactions: Determine accounts affected and classify as debit or credit.
• Record transactions: Write the entry detailing the accounts and amounts.

Errors in recording journal entries can lead to incorrect financial statements. Addressing and correcting these errors promptly is critical for maintaining the accuracy of accounting records. Entries must be checked against supporting documents like receipts or invoices to ensure they reflect the actual economic events.