Question

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J. Savill's financial year end occurs on 30 April each year. He produced a trial balance as at 30 April 2007 and from this calculated his net profit for the year as £17 000. However, the trial balance showed debits exceeding credits by £4 200 and subsequent investigations revealed the following.
(1) A cheque for €3 000 received from J. Mander, a debtor, had been correctly recorded in the cash book but posted as a credit to T. Maunder.
(I) Goods purchased on credit for £2 400 from JD Supplies had been correctly recorded in the purchases account but the corresponding double entry had not been made.
(III) A payment of €760 for motor vehicle repairs was entered in error as a debit in the motor vehicles account. No entries have been made to record depreciations in relation to this payment. The correct depreciation has been made for motor vehicles held by the business.
(Iv) Discounts allowed of £850 had been entered as a credit entry in the discounts received
account
(V) A cheque received for £6 300 from R. Grant, a debtor, had been processed for the correct amount in the cash book but entered as £3 600 in R. Grant's account. (vl) Sales for the year ending 30 April 2007 had been undercast by £800.
REQUIRED
(a) Journal entries to correct the above errors (narratives are not required).
(b) The Suspense Account.
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(c) A statement showing the corrected net profit for the year ended 30 April 2007.
(d) Using an appropriate example from the above, explain what is meant by an error of principle.
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Answer 1

To correct the errors in the trial balance and calculate the corrected net profit, several journal entries need to be made. The Suspense Account is used to temporarily record the errors. After adjusting the errors, the corrected net profit for the year is calculated. An error of principle refers to a mistake made in applying the accounting principles or rules.

Step-by-step explanation:

(a) Journal entries to correct the above errors:

1. Cash Account – Debit: £3,000
   T. Maunder's Account – Credit: £3,000
2. Purchases Account – Debit: £2,400
   JD Supplies' Account – Credit: £2,400
3. Motor Vehicles Account – Debit: £760
   Cash Account – Credit: £760
4. Discounts Allowed Account – Debit: £850
   Discounts Received Account – Credit: £850
5. Cash Account – Debit: £6,300
   R. Grant's Account – Credit: £6,300
6. Sales Account – Credit: £800
   Income Statement Account – Debit: £800

(b) The Suspense Account:

The Suspense Account is used to temporarily record the errors and discrepancies in the trial balance. In this case, the Suspense Account would have entries for the £4,200 difference between debits and credits. Once the errors are corrected, the Suspense Account balance will be cleared.

(c) Statement showing the corrected net profit for the year ended 30 April 2007:

To calculate the corrected net profit, we need to adjust the errors identified:

1. Add the correct amount for J. Mander's payment (£3,000) to the debtor's account. This increases net profit by £3,000.
2. Add the missing double entry for the purchase of goods from JD Supplies (£2,400). This reduces net profit by £2,400.
3. Reverse the incorrect entry for motor vehicle repairs (£760) and record it as a payment in the correct account. This reduces net profit by £760.
4. Correct the entry for discounts allowed (£850) and record it in the correct account. This reduces net profit by £850.
5. Adjust the entry for the cheque received from R. Grant (£3,600) to the correct amount (£6,300). This increases net profit by £2,700.
6. Add the undercast of sales (£800) to the sales account. This reduces net profit by £800.

After making these adjustments, the corrected net profit for the year ended 30 April 2007 would be £19,750.

(d) An error of principle:

An error of principle is a mistake made in applying the accounting principles or rules. It occurs when a transaction is recorded in a way that doesn't comply with the established principles and rules of accounting. For example, if a company records an expenditure as an asset instead of an expense, it would be considered an error of principle.