Question

The credit purchase of a new oven for $4,700 was posted to Kitchen Equipment as a $4,700 debit and to Accounts Payable as a $4,700 debit. What effect would this error have on the trial balance?

Answer 1

The misposting of a $4,700 debit to Accounts Payable when it should have been a credit will result in the trial balance not balancing, with debits exceeding credits by $4,700. To correct it, a reversing entry is necessary.

Step-by-step explanation:

When a credit purchase of equipment is made, the proper accounting entry should be a debit to the asset account representing the equipment (in this case, Kitchen Equipment), and a credit to Accounts Payable since the business has incurred a liability that it must pay in the future. The error described in your question has resulted in both accounts being debited, which is incorrect.

This error will cause the trial balance to not balance, as the total debits will exceed the total credits by $4,700. Specifically, the Kitchen Equipment account will be correct, but the Accounts Payable account will inaccurately reflect the company's liabilities and must be corrected to show a $4,700 credit, not a debit. This misposting could lead to an overstatement of assets and an understatement of liabilities, potentially leading to incorrect financial statements.

To correct this error, a reversing entry must be made that credits the Accounts Payable account and debits another account, typically an error correction account or the original misposted account, if identifiable. It's much like the keen observation by 'Noel' which prevented a significant financial oversight by reviewing a high-value bill.

Answer 2

The error would cause an imbalance in the trial balance. Debits will exceed credits by $4,700, overstating both Kitchen Equipment and Accounts Payable.

Step-by-step explanation:

This error would have the following effects on the trial balance:

1. Total Debits will exceed Total Credits by $4,700: The same amount ($4,700) has been debited to two accounts (Kitchen Equipment and Accounts Payable). This results in a "double counting" of the expense and inflates the total debits compared to the credits.
2. Kitchen Equipment will be overstated by $4,700: The account balance will reflect the cost of the oven twice.
3. Accounts Payable will be overstated by $4,700: This account will show a liability for the oven twice.

This error would create an overstatement in both the Kitchen Equipment and Accounts Payable accounts by $4,700 each on the trial balance. Since the credit purchase of the new oven was posted as a debit to both accounts, it doubled the impact. The Kitchen Equipment account, which should have a credit entry for the purchase, shows a $4,700 higher value due to the incorrect debit posting.

Simultaneously, the Accounts Payable account, where the credit entry should reflect the owed amount for the oven, also increases by $4,700 as a result of the erroneous debit posting. Consequently, the trial balance would reflect an inaccurate representation of the company's financial position, showing inflated values for both Kitchen Equipment and Accounts Payable by $4,700 each.

Therefore, the trial balance will be out of balance, making it difficult to determine the actual financial position of the business.