MOUNT KENYA UNIVERSITY

BAF1101 FINANCIAL ACCOUNTING I

CAT
QUESTION ONE
(a) Briefly explain the following types of errors:
(i) Error of commission (2 marks)
(ii) Error of principle (2 marks)
(iii) Complete reversal of entries (2 marks)
(iv) Compensating errors (2 marks)

1. Error of commission :
As errors of commission are often caused due to the mistake committed by the clerk, they are
also called as clerical errors. Also known as error of inadvertence.
If we debit or credit an account, other than the correct account, but with the correct amount, the
total debits and credits in the ledger will remain equal and hence the trial balance will not
disclose the error.

2. Error of principal

An error of principle is caused by a lack of knowledge of accounting principles. The common

error is the treatment of capital expenditure as revenue expenditure or vice versa. Capital
expenditure is expenditure on purchase of fixed assets whereas revenue expenditure is incurred
on day to day running of the business. Thus the purchase of a motor car is a Capital Expenditure
while the purchase of fuel for the car is revenue expenditure.

3. Complete reversal of entries

If a transaction is so recorded that the account to be debited is credited and the account to be
credited is debited, both with the correct amount, the debit and credit entries in the ledger would
be equal and the trial balance will remain unaffected.

Effect on accounts
The account to be debited is credited and the account to be credited is debited.

Rectification entry
The correct entry should be made with twice the amount to erase the effect of the incorrect entry
and to establish the correct entry.

4. Compensating Errors – Definition

In the case of compensating errors, we observe that one of the errors already committed being
offset by another error or more than one errors. That means, compensating errors are caused due
to the errors committed to compensate each other or offset each other.

(b) The trial balance of Amanda Ltd as at 30 April 2018 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 2018 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 2017 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
(15 MARKS)

Answer
DR. CR
Shs. Shs
1 Loan a/c 4,000,000
Suspense a/c 4,000,000
To correct an error in the loan a/c
2 Motor vehicle a/c 2,860,000
Motor expense a/c 2,860,000
Supplies a/c 5,720,000
To correct error done in posting entries for
purchase of motor vehicle
3 Bank charges 38,000
cashbook 38,000
To update cashbook with the bank statement
4 Bad debtors recovered a/c 80,000
Debtor Ogola a/c 80,000
To correct error of principle
5 Discount allowed a/c 184,000
Suspense a/c 184,000
Suspense a/c 397,000
Discount received a/c 397,000
 To record discount allowed and received to their
respective a/c
6 Plant a/c 1,600,000
Plant repair a/c 1,6000,000
To correct error of principle
7 Depreciation expense a/c 320,000
Provision for depreciation a/c 320,000
To record depreciation change for the year
omitted.

AMANDA LTD
SUSPENSE ACCOUNT
As at 30th April 2014
Shs Shs
Discount received 397,000 Balance b/d 4,213,000
Loan a/c 4,000,000 Discount received 184,000
4,397,000 4,397,000

Question Two
The following balances were extracted from the books of Bashara Kabwa Enterprises, a wholesale
business, as at 31 October 2018:
Drawings 660,000
Trade receivables 990,000
Purchases 2,303,840
Sales returns 79,420
Capital 4,101,100
Trade payables 330,000
Sales 4,691,280
Purchases returns 120,340
Discount received 93,720
Provision for depreciation: Motor vehicles 176,000
Fixtures and fittings 63,800
Allowances for doubtful debts 44,000
15% bank loan 220,000
Salaries and wage 1,034,000
Discount allowed 54,560
Bank balance 568,260
Cash in hand 26,400
Electricity expenses 103,840
Rent and rates 54,560
Freehold premises (cost) 1,569,700
Fixtures and fittings (cost) 334,400
Motor vehicles (cost) 462,000
Stationery 34,320
Postage and telephone expenses 44,000
Insurance premiums 13,200
Bad debts written off 15,840
Motor vehicle expenses 84,920
Inventory (1 November 2017) 1,393,480
Interest on bank loan 16,500
Additional information:
1. The value of inventory as at 31 October 2018 was Sh. 1,036,400
2. Sales includes Sh. 300,000 worth of goods sold by Bashara Kabwa Enterprises agents, who
are allowed 15% commission on such sales. This transaction has not been recorded in the
books.
3. Depreciation is to be provided as follows:
Fixtures and fittings – 10% per annum on reducing balance basis.
Motor vehicle – 15% per annum on straight line basis.
4. Annual insurance premium amounted to Sh. 12,000.
5. As at 31 October 2017, there was a balance of Sh. 65,000 received from a customer in cash.
6. Salaries and wages were in arrears of Sh. 35,000
7. The Electricity bill for the month of October of Sh. 14,500 was received on 5 November
2018.
8. An allowance of 5% is to be maintained for doubtful debts.
9. Goods worth Sh. 48,840 had been distributed to potential customers as free samples.

Required:
a) Income statement for the year ended 31 October 2018
b) Statement of Financial position as at 31 October 2018 (15 MARKS)
BASHARA KABWA ENTREPRISES Income statement for the year ended October 31st, 2018

Particulars Shs Shs

Sales 4,691,280
Less sales return -79,420
Less discount allowed -54,560
Net sales 4,557,300

Less cost of goods sold

Inventory as on 1 Nov 2017 1,390,480
Purchases 2,255,000
Less Return outwards - 120,340
Less discount received - 93,720
Less inventory as on 31 Oct 2018 -1,036,400
Cost of Goods sold 2,395,020
Gross Income 2,162,280
Less operating expenses
Salaries and wages 1,069,000
Electricity expenses 118,340
Rent and rates 54,560
Stationery 34,320
Postage and telephone expenses 44,000
Insurance premiums 12,000
Bad debts written off 18,090
Advertisement expense 48,840
Motor vehicle expenses 84,920
Commission expense 45,000
Depreciation expense- Fixtures and fittings 27,060
Depreciation expense –Motor vehicle 69,300
 Total operating expenses 1,625,430
Operating Income
Non- operating Items 536,850
Interest on bank loan -16,500
Total Non-operating Items - 16,500
Net Income 520, 350

BASHARA KABWA ENTREPRISES Balance Sheet as on Oct 31, 2018

Assets Shs. 000 Equity Shs. 000

Capital 4,101,100
Fixed Assets Add :
Freehold premises 1,569,700 Net profit 520,350
Fixtures and fittings 243,540
Motor vehicles 216,700 Less :
Drawings (660,000)
Current Assets
Cash in hand 91,400 Liabilities
Trade receivables 925,000 Salary payable 35,000
Allowances of doubtful debts -46,250 878,750 Electricity expense payable 14,500
Inventory 1,036,400 Commission payable 45,000
Bank balance 568,260 Trade payables 330,000
15% loan 220,000

Total Assets 4,605,950 Total liabilities 4,605,950