5 Trial Balance and Adjustments UD

Chapter 5
Trial Balance and Adjustments
Preparing the trial balance

After the journals have been posted and the ledger account balances determined, a trial balance is
extracted from the general ledger. A trial balance is a list of all titles of the accounts and their
respective debit or credit balances at the end of a specified period, for example, a month, a
quarter, half-year or a year. Preparing a trial balance may prove the equality of the debits and
credits in recording business transactions in a double-entry system.
The Chart of Accounts is useful in preparing a trial balance to ensure that no account has been
omitted from the list. All accounts with debit balances are listed in one column marked "debit"
and all accounts with credit balances are listed in an adjacent column marked "credit". The total
of the debit column should equal the total of the credit column otherwise some error must have
occurred.
Using the illustrative appendix at the end of Chapter Four, a trial balance for B. Asha Grocers is
extracted as follows:
B. Asha Grocers
Trial Balance as at 31st July, 20X1
Debit Credit
Cash 1,236,000
Trade Debtors 192,000
Stock, 1st July 500,000
Shop Supplies 18,000
Shop Furniture 65,000
Trade Creditors 194,000
B. Asha, Capital 2,000,000
B. Asha, Drawings 10,000
Sales 370,000
Sales Returns 8,000
Purchases 500,000
Purchase Returns 6,000
Carriage Inward 5,000
Rent Expense 30,000
Wages 6,000
Total 2,570,000 2,570,000
68 Introductory Financial Accounting
Errors in extracting a trial balance

There are a number of errors which can be made during extraction of the trial balance. These
errors are either arithmetic or clerical in nature.
a) Arithmetic errors
Arithmetic errors occur where there is an incorrect arithmetic computation during

addition or subtraction. These can occur at any stage from the initial recording of a
source document in books of original entry up to the stage of summing the trial balance
debit and credit columns.
b) Clerical errors
These errors are a result of shortcomings in recording other than computational. They
manifest themselves through inaccurate recording of transactions or in omissions to
record transactions or entries altogether. For example, the amount recorded in the
journal is shs. 1,000 and this was posted to the ledger as shs. 100. Or there could be a
transposition of digits when copying an amount, let us say shs. 7,910 being entered as
shs. 7,190. It is also possible to fail to post either a debit or a credit amount from the
journal to the ledger.
These errors may result in inequality of the trial balance totals. When this happens, it is
necessary to locate the error by checking all arithmetical computations and clerical recording.
The following steps are usually taken:
i] re-casting of the trial balance, establishing the exact difference, looking for any
entry with the amount similar to the difference that may not have been listed on
the trial balance,
ii] checking whether all ledger balances have been correctly transferred to the
appropriate debit and credit columns of the trial balance. It is common practice
to divide the trial balance difference by two and the resulting amount might be a
debit balance posted as a credit or vice versa,
iii] re-casting and balancing of ledger accounts,
iv] ensuring that all posting from books of original entry to the ledger accounts are
correct, and
v] checking whether all recording and summaries of transactions from source

documents to books of original entries are correct.
Nevertheless, the equality of the trial balance totals does not guarantee that no errors have been
made in the recording process. There are a number of errors which a trial balance may not
disclose. Following are some of such errors:
a) Error of omission
If a transaction is completely left out, both the debit entry and credit entries are omitted
and therefore the trial balance totals will still be equal. For example, a sales invoice
might have been overlooked and not recorded in the journal. This missing entry will not
Trial Balance and Adjustments 69
be disclosed by preparation of the trial balance. Ensuring that all source documents are
stamped or marked to show that they have been recorded may prevent this error.
b) Error of commission
This type of an error occurs when a transaction is recorded as a debit and credit but in a
wrong account, which has a resembling title. Since both the debit and credit amounts
have been entered correctly, the trial balance totals will be equal. For example, a credit
to Tanzania Grocers instead of Tanzania Growers for purchases on account will not
affect the equality of the trial balance. Such errors may be discovered when a firm
confirms balances with customers and suppliers, or when a customer settles an invoice
which is not on her account.
c) Error of principle
This kind of error is similar in effect, to error of commission in that a wrong account is
used in recording a transaction. However, the error may be due to lack of knowledge or
oversight in accounting principles. For example, purchase of office supplies recorded as
a debit to purchases account instead of the office supplies account. This error will not
affect agreement of the trial balance. Checks on reasonableness of balances in accounts
involved may guide to existence of errors. For example office supplies may have a large
amount above the norm. This kind of error is difficult to discover and may be prevented
only by employing trained and competent bookkeepers and accountants.
d) Compensating errors
These errors occur when an incorrect entry on the debit side is offset by another error on
the credit side in the same or different account. For example a discount allowed of shs.
1,000 debit was not posted and similarly a purchase returns of shs. 1,000 credit was
omitted. In this case both the debit and credit totals of the trial balance will be short by
shs. 1,000 but will still be equal. This type of error may also go undetected unless careful
routine review of the records is made by competent personnel.
e) Error of original entry
This type of error originates from the books of prime entry. These errors arise when a
source document is incorrectly recorded in books of prime entry. If for example a sales
invoice for shs. 600,000 is recorded in the sales journal as shs. 60,000 all subsequent
posting of both debit and credit entries will be based on an incorrect figure. The trial
balance will not discover such an error. Checking for reasonableness of account balances
and confirmation of balances with customers and suppliers may lead to detection of such
errors.
f) Error of complete reversal
This type of error occurs when the double entry is completely reversed during posting.
For example a payment for wages being recorded as a debit to the bank account and as a
credit to the wages expense account. Checking for reasonableness of account balances
and confirmation of balances with banks, customers and suppliers may lead to detection
of such errors.
Correction of errors
Errors committed in recording and posting should be corrected by means of another journal entry
known as a correcting general journal entry. In preparing correcting entries, the following
procedure is helpful:
a) analyze the wrong entry as it was actually recorded,
b) determine the correct entry as it should have been recorded.
c) prepare the correcting general journal entry which should cancel and correct the error
made.
For example, a payment of shs. 5,000 for office supplies was erroneously charged to utilities
expense.
a) Incorrect entry recorded:
Date Description Folio Debit Credit

20X1
Jun 30 Utilities expense 5,000
Cash 5,000
b) Correct entry which should have been recorded:

20X1
Jun 30 Office Supplies 5,000
Cash 5,000
c) Correcting general journal entry:

20X1
Jun 30 Office Supplies 5,000
Utilities Expense 5,000
Note that the error made was in debiting Utilities Expense instead of Office Supplies. Therefore
in the correcting general journal entry, Utilities Expense was credited to cancel the error and
Office Supplies was debited as should have been.
The suspense account

When the trial balance totals fail to agree, it is possible that the difference between the credit and
debit totals is due not to a single error but to a combination of errors. The process of locating
errors may take a long time and it may be necessary in the meantime to proceed with the
preparation of the financial statements. In such a case, the difference in the trial balance totals
could temporarily be placed in a suspense account. The main purpose of this account is to "hold
in suspense" the error or errors until discovered.
If a suspense account is not cleared until annual financial statements are finalised, it must be
carried over as a balancing item. It was suggested also at times that such a suspense balance
could be treated either as a revenue or expense item, if the amount involved is immaterial. The
deficiency of this approach is that a seemingly immaterial suspense balance could be a result of
compounded material errors whose net effect is a small value. For example, an understatement
of sales by shs. 1,000,000 and an overstatement of purchase returns by shs. 1,000,010 would
produce a net difference of shs. 10. Although a small figure, it is a product of much larger
values. For this reason all trial balance differences must be investigated and cleared.
Opening a suspense account
Example
A firm has extracted a trial balance on 30 June, 20X1 which has the following totals:
Debit - shs. 6,578,000. Credit - shs. 6,585,000
Since the credit side is greater than the debit side by shs. 7,000, in order for the trial balance to
"agree" a debit balance of shs. 7,000 needs to be made up. This is effected by opening a
suspense account with a starting debit balance of shs. 7,000 as follows:
Suspense Account no. 00

Date Details Fol. Debit Date Details Fol. Credit
20X1
Jun30 Difference in trial GJ6 7,000

balance
Making corrections through a suspense account
Example
Extending the previous example, the following errors were discovered:
a) Twiga Company, a customer, was debited by shs. 22,000 when the correct amount was
shs. 25,000. This amount was appropriately credited to sales account.
b) The Discount Allowed account was credited by shs. 8,000 when it should have been
debited.
c) A purchase return of shs. 12,000 was not recorded in the purchase returns account.
Entries to correct the above errors will be recorded in the general journal as follows:
Error (a):
The debit entry in Twiga Company account was understated by shs. 3,000, while the
corresponding entry in the sales account was correctly made. This error caused
disagreement of the trial balance because the double entry was incomplete. Its correction
must therefore, end up in the suspense account as follows:

20X1
Jun 30 Twiga Company 3,000
Suspense 3,000
To correct error of undercasting a

customer's account.
Error (b):
This error resulted because a debit entry was recorded as a credit entry. In essence, two
errors occurred; firstly a wrong entry of shs. 8,000 was made on the credit side of the
discount allowed account, and secondly a debit entry of shs. 8,000 was not made in the
discount allowed account. Again, since a debit entry was recorded as a credit entry, this
error affects agreement of the trial balance. Consequently, its correction also ends up in
the suspense account as follows:

20X1
Jun 30 Discount Allowed 8,000
Suspense 8,000
To eliminate a credit entry

wrongly recorded.
30 Discount Allowed 8,000
Suspense 8,000
To record the debit entry omitted.
The above two entries could be combined into just one entry as follows:

20X1
Jun 30 Discount Allowed 16,000
Suspense 16,000
To correct error of shs. 8,000

credited instead of being debited.
Notice that to correct a debit entry wrongly recorded as a credit entry, the original amount of the
error was doubled. This is the standard approach for errors of this nature, if a compound entry is
made.
Error (c):
This is an omission of only one part of the double entry. This error therefore also affects
agreement of the trial balance and must be corrected through the suspense account. To
correct the error the omitted part of the double entry is recorded and the double entry is
made to the suspense account as follows:

20X1
Jun 30 Suspense 12,000
To record omission of a shs.

12,000 entry in Purchase Returns

account.
After the foregoing correcting entries have been made the suspense account will appear as
follows:
Suspense Account no. 00

20X1 20X1
Jun30 Difference in trial GJ6 7,000 Jun30 Twiga Company GJ6 3,000
balance
30 Purchase Returns GJ6 12,000 30 Discount Allowed GJ6 16,000
19,000 19,000
The other affected accounts, that is Purchase Returns, Discount Allowed and Twiga Company
will also be corrected and the corrected balances will be shown in a corrected trial balance which
shall now have equal totals.
End of Period Adjustments

Financial statements are required to be prepared at regular intervals, usually once a year as a
minimum. The preparation of such periodic statements requires the determination of expenses
and revenues in the particular period. The difference between revenues and expenses is the profit
or loss for that period. If only one profit and loss account were prepared during the whole life of
the firm, the problem of periodic determination of expenses and revenues would not arise.
Periodic determination of profit or loss can only be achieved when revenues are matched against
expenses. As part of the matching procedure preparers of financial statements must make sure
that accounts reflect every income earned and expense incurred during a particular period. This
involves making a number of adjustments.
There are generally six types of adjustments that are commonly made at the end of an accounting
period. These are:
a) Those relating to expenses paid for in advance, alternatively known as prepaid expenses.
b) Those relating to revenues received in advance, alternatively known as deferred or

unearned revenues.
c) Those related to expenses incurred during the accounting period, but unpaid for.
Alternatively known as accrued expenses.
d) Those related to revenues earned during the accounting period but payments for which
have not been received. These are alternatively known as accrued revenues.
e) Those related to the apportionment of cost of fixed assets over their expected useful
lives. This is the depreciation ajdustment.
f) Those related to the actual and potential non-payment of receivables. These involve
adjustments for bad and doubtful debts.
Prepaid Expenses
Payments may be made for items which benefit a business for over more than one accounting
period. Examples are Rent or Insurance premiums which can be paid for period covering more
than one accounting period. At the end of an accounting period the portion of the expired time
period has to be transferred to the profit and loss account as an expense. The unexpired portion
of the payment not used in the current accounting period will be carried forward as an asset to the
next accounting period, which it is expected to benefit.
Example
A firm paid its insurance premium of shs. 200,000 for two years in advance on 1 January 20X1.
The original entry was:

20X1
Jan 1 Insurance Premium Prepaid 200,000
Cash 200,000
To record payment of insurance

premium for two years.
At the end of 20X1 the insurance expense for the year must be calculated and recorded.
The entry for this adjustment would be:

20X1
Dec 31 Insurance Expenses 100,000
Insurance Premium Prepaid 100,000
To record the expired portion of

insurance premium as expense.
The above entry will leave a balance of shs. 100,000 in the Insurance Premium Prepaid account
which is an asset and will appear as such in the balance sheet as at 31st December 20X1. The
ledger accounts for the above example would appear as follows:
Insurance Premium Prepaid Account no. 00

20X1 20X1
Jan1 Cash 200,000 Dec31 Insurance Expense 100,000
31 Balance 100,000
200,000 200,000
20X2
Jan1 Balance 100,000
Insurance Expense Account no. 00

20X1 20X1
Dec31 Insurance Premium 100,000 Dec31 Profit and loss 100,000

Prepaid
100,000 100,000
The Insurance Expense is transferred to the Profit and Loss account as shown in the above entry.
Alternative treatment
In the foregoing example, depending on a firm's accounting policies, the original entry at the time
of payment could have been made to the Insurance Expense account as follows:

20X1
Jan 1 Insurance Expenses 200,000
Cash 200,000
To record payment of insurance

premium for two years.
In this instance the adjustment entry at the end of 20X1 would be:

20X1
Dec 31 Insurance Premium Prepaid 100,000
Insurance Expenses 100,000
To record the unexpired portion of

insurance premium as an asset.
Note that this entry will result in a shs. 100,000 balance in the Insurance Expense Account which
will be transferred to the Profit and Loss Account as previously illustrated. The Insurance
Premium Prepaid of shs. 100,000 will be shown in the balance sheet as a current asset.
The two accounts will appear in the ledger as follows:

20X1 20X1
Jan1 Cash 200,000 Dec31 Profit and loss 100,000
31 Insurance Premium 100,000

Prepaid
200,000 200,000
Insurance Premium Prepaid Account no. 00

20X1 20X1
Dec31 Insurance Expense 100,000 Dec31 Balance 100,000
100,000 100,000
20X2
Mixed Accounts
In the example on a prepaid expense adjustment, two alternatives were implemented for the
recording of the entry on 1st January, 20X1. The first alternative recorded the payment in an
asset account, while the second alternative recorded that payment in an expense account. In these
alternative treatments, an effort was made to distinguish an asset from an expense account.
However, at the end of the year after adjustments were made both alternatives yield similar
results; an expense of shs. 100,000 and an asset of shs. 100,000.
A mixed account retains features of both either an asset and an expense or a liability and a
revenue in a single account. Mixed accounts are used as a convenient mechanism for reducing the
number of accounts and entries one has to deal with during end-of-period adjustments. The
example on prepaid insurance premium would be recorded in a mixed account as follows:

20X1 20X1
Jan1 Cash 200,000 Dec31 Profit and loss 100,000
31 Balance 100,000
200,000 200,000
20X2
Normally an expense account does not retain a balance, however, the account above does have a
balance and this is what makes it a mixed account. A mixed account has an expense component,
shs. 100,000 and also an asset component, shs. 100,000. The asset component is carried forward
to a subsequent accounting period.
Revenues Received in Advance

Sometimes firms receive cash prior to rendering services or supplying the goods to which the
payment relates. Only revenues earned in the accounting period should be included in the profit
and loss account for that period. Any portion of revenue received which relates to goods to be
provided or services to be rendered in the future should be carried forward to future accounting
periods. Such revenues are carried forward as liabilities because they represent an obligation for
the firm to provide goods or services in the future. If such goods or services are not delivered the
amount received would have to be paid back.
Example
A landlady offers her property at Mbezi Beach for rent. The rent agreement requires rent to be
paid two years in advance. On 1st January 20X1, shs. 2,400,000 was received and the entry
made was as follows:

20X1
Jan 1 Cash 2,400,000
Rent Revenue 2,400,000
To record receipt of rent for three

years
At the end of the year, 31 December, 20X1, the portion of the rent received in advance but not
yet earned (one year) will have to be reflected in the accounts as unearned. The adjusting general
journal entry would be as follows:

20X1
Dec 31 Rent Revenue 1,200,000
Unearned Rent Revenue 1,200,000
To record unearned rent portion of

rent received
The above entry will leave a balance of shs. 1,200,000 in the Rent Revenue Account, which is
the amount earned for 20X1. This shall be transferred to the Profit and Loss Account.
The ledger account for the above example would appear as follows:
Rent Revenue Account no. 00

20X1 20X1
Dec31 Unearned Rent 1,200,000 Jan1 Cash 2,400,000

Revenue
31 Profit and loss 1,200,000
2,400,000 2,400,000
Unearned Rent Revenue Account no. 00

20X1 20X1
Dec31 Balance 1,200,000 Dec31 Rent Revenue 1,200,000
1,200,000 1,200,000
20X2
Jan1 Balance 1,200,000
The Unearned Rent Revenue of shs. 1,200,000 will be shown in the balance sheet as at 31
December, 20X1 among the current liabilities.
If a mixed account was used to record the entries the account would look as follows:
Rent Revenue Account no. 00

20X1 20X1
Dec31 Profit and loss 1,200,000 Jan1 Cash 2,400,000
31 Balance 1,200,000
2,400,000 2,400,000
20X2

Accrued Expenses
Businesses use certain services before they pay for them. Common examples are utilities like
electricity, water and telephones. It could take a month or more, for example, for TANESCO to
send a user an electricity bill. Each accounting period's profit and loss account should be charged
with the expenses incurred in that period regardless of whether such expenses have been paid for
or not by the end of the period. Any portion of the expense which has not yet been paid will be
carried forward into the next accounting period as a liability.
Example
A maize milling machine runs on electricity. The bill for the first six months of the year was shs
60,000. This was paid on 1st July. Up to December 31st, the end of the accounting year, the
electricity bill for the second half of the year had not been received. The electricity meter
showed 3,400 units of power had been consumed and TANESCO's charge per unit is shs. 20
including taxes.
On 1st July, the following entry was made:

20X1
Jul 1 Electricity Expense 60,000
Cash 60,000
To record payment of electricity

for first six months.
At the end of the year 31st Dec. 20X1, a full year's electricity bill must be recorded in the books
and transferred to the profit and loss account. Total electricity charges should include the shs.
60,000 already paid and shs. 68,000 not yet billed by TANESCO. The adjusting general journal
entry to record this would be as follows:

20X1
Dec 31 Electricity Expense 68,000
Accrued Electricity Expense 68,000
To record electricity consumed but

unpaid.
The charge to the profit and loss account will therefore be shs. 128,000. The balance on the
accrued electricity expense account of shs. 68,000 is a liability arising out of the six months
electricity consumption and will be shown as such in the balance sheet.
The ledger accounts for this example would look as follows:
Electricity Expense Account no. 00

20X1 20X1
Jan1 Cash 60,000 Dec31 Profit and Loss 128,000
31 Accrued Electricity 68,000

Expense
128,000 128,000
Accrued Electricity Expense Account no. 00

20X1 20X1
Dec31 Balance 68,000 Dec31 Electricity Expense 68,000
68,000 68,000
20X2
Jan1 Balance 68,000
If a mixed account was used in this example, transactions would be recorded as follows:
Electricity Expense Account no. 00

20X1 20X1
Jan1 Cash 60,000 Dec31 Profit and Loss 128,000
31 Balance 68,000
128,000 128,000
20X2
Jan1 Balance 68,000
Accrued Revenue
Sometimes a business may provide goods and services during a period that are neither billed nor
settled by the end of that period. However, the value of such goods and services is earned during
the period and the accounts should reflect such accrued revenues. A common example is that of
placing some amount of money with a bank in a fixed deposit account. Interest is received only
on expiry of the term although it accrues on a time basis. At the end of the accounting period,
the account should reflect interest earned whether received or not. Any portion of interest earned
but not yet received will appear as an asset in the balance sheet.
Example
A business firm placed shs. 3,000,000 on a six - month fixed deposit with National Bank of
Commerce on 1st April, 20X1. It carries a 30 percent interest rate per annum. On 30 September,
interest is received and the shs. 3,000,000 is left in the account for another six months. The year
end is 31 December. The entry to record receipt of interest on 30 September 20X1 will be as
follows:

20X1
Sep 30 Cash 450,000
Interest Income 450,000
To record interest earned for six

months.
On 31 December, the amount would have been deposited for an additional 3 months (October,
November, and December) for which interest of shs. 225,000 would have been earned but not
yet received.
This should be recorded by an adjusting general journal entry as follows:

20X1
Dec 31 Accrued Interest Income 225,000
Interest Income 225,000
To record interest earned for three

months but not yet received.
The relevant ledger accounts would be as follows:
Interest Income Account no. 00

20X1 20X1
Dec31 Profit and Loss 675,000 Sep30 Cash 450,000
Dec31 Accrued Interest 225,000

Income
675,000 675,000
Accrued Interest Income Account no. 00

20X1 20X1
Dec31 Interest Income 225,000 Dec31 Balance 225,000
225,000 225,000
20X2
The accrued interest income or interest receivable is a current asset and will be shown as such in
the balance sheet.
If a mixed account was used in this example, transactions would be recorded as follows:
Interest Income Account no. 00

20X1 20X1
Dec31 Profit and Loss 675,000 Sep30 Cash 450,000
Dec31 Balance 225,000
675,000 675,000
20X2
The Depreciation Adjustment

A fixed asset is acquired by a business to be used over several years to generate profits. It is
logical therefore, that the cost of such an asset should not be charged in total against revenues of
any one year, be it the year of acquisition or the year of disposal. Such cost should be spread and
charged against the profits for the years in which the asset is used. This is in line with the
matching concept. The spreading of the cost of a fixed asset over its expected life of benefit to a
business is what is known as depreciation.
To calculate depreciation one needs to determine the following variables:
a) The cost of the asset

b) The estimated useful life of the asset
c) The salvage value expected at the end of useful life, if any.
The cost of the asset as reduced by the salvage value is divided by the asset's estimated useful life
to obtain a figure of depreciation to be charged against profits every year during the useful life of
the asset.
Example
A business buys a delivery truck on 1.1.20X1 for shs. 12,000,000. Its expected useful life is 10
years with no salvage value. The depreciation charge each year will be:
shs. 12,000,000 ¸ 10 years = shs. 1,200,000 annually.
The depreciation charge can also be expressed in percentage terms. In the above example the
charge of shs. 1,200,000 a year is 10 percent per annum on the cost.
The adjusting general journal entry at the end of the year will be:

20X1
Dec 31 Depreciation Expense 1,200,000
Accumulated Depreciation 1,200,000
To record depreciation charge for

the year.
The ledger accounts would appear as follows:
Depreciation Expense Account no. 00

20X1 20X1
Dec31 Accumulated 1,200,000 Dec31 Profit and Loss 1,200,000

Depreciation
1,200,000 1,200,000
Accumulated Depreciation Account no. 00

20X1 20X1
Dec31 Balance 1,200,000 Dec31 Depreciation Expense 1,200,000
1,200,000 1,200,000
20X2
Although it has a normal credit balance, the Accumulated Depreciation account is not a liability,
revenue or capital account item. It is an account in which the annual depreciation charge is
accumulated, rather than being deducted directly from the fixed asset account. Eventually at the
year end, the balance on the Accumulated Depreciation account is deducted from the asset value
in the balance sheet. The resulting value is known as the net book value. The Accumulated
Depreciation account is one example of what are titled contra-asset accounts, because they reduce
gross asset values of particular items on the face of a balance sheet. In this example fixed assets
will be reported in the balance sheet as follows:
Balance Sheet (extract only)

shs shs
Fixed Assets:
Motor Vehicles 12,000,000
less: Accumulated Depreciation 1,200,000
Net Book Value 10,800,000
Providing for Doubtful Debts

Any business selling goods on credit may suffer occasional loss as a result of customers' failure
to settle outstanding debts. A provision for doubtful debts arises out of this situation. In many
businesses there is virtual certainty that some debtor accounts will turn out to be bad, but the
amount cannot be quantified with certainty. In keeping with the prudence concept, profits must
be reduced by an estimated value of debts which may not be settled. To take care of this,
normally a certain percentage of debtors' accounts is taken to be doubtful of collection. This
amount is charged against profits through the creation of a doubtful debts expense account.
Because it is not intended to write off these debtors (at the moment the amounts are only
doubtful debts not bad debts) the credit entry is not passed through the debtors' account, instead it
is credited to a Provision for Doubtful Debts account. The balance of this account is deducted
from the debtors’ figure in the balance sheet to arrive at net debtors. Provision for Doubtful Debts
account is therefore, like the Accumulated Depreciation account a contra asset account.
Example
The debtors’ account of a business has a balance of shs. 3,000,000 at 31 December 20X1.
Provision is to be made for doubtful debts at 5 percent of total debtors at the end of the year. The
required provision is 5 percent of shs. 3,000,000 which is shs. 150,000. The adjusting general
journal entry to record this would be as follows:

20X1
Dec 31 Doubtful Debts Expense 150,000
Provision for Doubtful Debts 150,000
To record a 5 percent provision for

doubtful debts.
The ledger accounts would look as follows:
Provision for Doubtful Debts Account no. 00

20X1 20X1
Dec31 Balance 150,000 Dec31 Doubtful Debts 150,000

Expense
150,000 150,000
20X2
Doubtful Debts Expense Account no. 00

20X1 20X1
Dec31 Provision for Doubtful 150,000 Dec31 Profit and Loss 150,000
Debts
150,000 150,000
Since the Provision for Doubtful Debts account is a contra-asset account its credit balance is used
to reduce to net book value the gross value of debtors in the balance sheet. Debtors will be
reported in the balance sheet as follows:
Balance Sheet (extract only)

shs shs
Current Assets:
Debtors 3,000,000
less: Provision for Doubtful Debts 150,000
Net Book Value 2,850,000
Example
Extending the illustrative problem in Appendix I of Chapter Four, the Trial Balance for B. Asha
Grocers as at 31 July, 20X1, is reproduced below with adjustment requirements:
B. Asha Grocers
Trial Balance as at 31st July, 20X1
Debit Credit
Cash 1,236,000
Sales 370,000
Sales Returns 8,000
Purchases 500,000
Rent Expense 30,000
Wages 6,000
Total 2,570,000 2,570,000
Adjustments required:
a) The shop furniture is estimated to have a useful life of 10 years and shall have an
estimated salvage value of shs. 5,000 at that time.
b) It is estimated that 5 percent of the trade debtor accounts might be doubtful of collection.
c) The electricity bill from TANESCO for July consumption amounts to shs. 1,400.
d) The rent has been paid three months in advance.
The adjusting entries will be recorded in the General Journal as follows:

20X1
Jul31 Depreciation 500

Accumulated Depreciation 500
doubtful debts.
Doubtful Debts 9,600
doubtful debts.
Electricity Expense 1,400
Accrued Electricity 1,400
To record unpaid July bill from
TANESCO.
Prepaid Rent 20,000
Rent Expense 20,000
To record the two months rent paid in
advance.
Ordinarily, a business prepares adjusting journal entries only at the year-end when the financial
statements are required. For this illustrative problem, adjustments were prepared at the end of the
month to only illustrate the steps in the accounting cycle. After the adjusting entries have been
posted, it is advisable to prepare an Adjusted Trial Balance to prove the equality of total debits
and total credits and ensure that all adjusting entries have been posted correctly. B. Asha Grocers'
adjusted trial balance is as follows:
B. Asha Grocers
Adjusted Trial Balance as at 31st July, 20X1
Debit Credit
Cash 1,236,000
Prepaid Rent 20,000
Accrued Electricity Expense 1,400
Sales 370,000
Sales Returns 8,000
Purchases 500,000
Rent Expense 10,000
Wages 6,000
Electricity Expense 1,400
Debit Credit
Depreciation Expense 500
Doubtful Debts Expense 9,600
Accumulated Depreciation 500
Total 2,581,500 2,581,500
Review questions
1. What is the purpose of adjusting entries?
2. What type of accounts are affected by adjusting entries?
3. List the six major types of adjustments based upon the components of each.
4. What is the purpose of an adjusted trial balance?
5. If the adjusted trial balance shows an equal amount of debits and credits, does this prove
that there were no errors in the recording of transactions?
6. Give a list of errors which will not affect agreement of trial balance totals.
7. What are the errors which will cause the trial balance to go out of agreement?
8. What is a suspense account? Is it an asset account or a liability account? Would this

account be listed on a balance sheet?
9. What is depreciation? Give a simple example illustrating this phenomenon.
10. For fixed assets, as reported on the balance sheet, explain:

a) cost
b) accumulated depreciation, and
c) net book value.
11. Why are Accumulated Depreciation and Provision for Doubtful Debts Accounts known
as contra-asset accounts?
Exercises
1. State whether the following will be included as a liability or an asset in the balance
sheet:
a) Rent paid in advance at the year-end.

b) Income from the sale of goods overseas; details on foreign currency exchange
rates are not received prior to the year-end.
c) Two years subscriptions in advance received by the Daily Noise, a tabloid
published by Tanganya Newspapers.
d) Wages for the last week of the accounting period to be paid on the first week of
the new financial year.
2. Why is it desirable to record in the books not only revenues already receipted but
revenues for which payment has not been demanded?
3. Amkeni & Co. collected shs. 600,000 rent for the period December 15, 20X0, to January
15, 20X1. The shs. 600,000 was credited to Unearned Rent Revenue Account on
December 15, 20X0. Give the adjusting general journal entry required on December
31st, 20X0 which is the end of the accounting period.
4. On December 31st 20X1, Risasi & Co recorded the following adjusting general journal
entry:

20X1
Dec 31 Rent Receivable 50,000
Rent Revenue 50,000
Explain the situation that gave rise to this entry.
5. On July 1, 20X1 Malizetu Enterprises paid a two-year insurance premium of shs.

400,000 and debited Prepaid Insurance with that amount. Assuming the accounting
period ends in December, give the adjusting entries that should be made at the end of
20X1, 20X2 and 20X3.
6. Rahisi & Co. has completed its first year of operations on December 31, 20X1. All of
the 20X1 entries have been recorded except the following:
a) At the year-end, employees have earned wages of shs. 60,000. These wages will
be paid on the next payroll date, January 6, 20X2.
b) At the year-end, interest revenue of shs. 20,000 has been earned by the company
but not yet received. This amount will be collected March 31, 20X2.
Give the required adjusting general journal entry for transaction (a) and (b) above. Give
appropriate dates and provide a brief narration of each entry.
7. Mazimbu Car Hire, completed its first year of operations on December 31, 20X1.
Because this is the end of the annual accounting period, the company bookkeeper
prepared the following provisional income statement:
Income Statement for the year 20X1

Shs Shs
Car hire revenue 1,020,000
Expenses:
Salaries and wages 264,000
Maintenance and repairs 100,000
Office rent 80,000
Water and electricity 30,000
Petrol, diesel and oils 20,000
Miscellaneous expenses 4,000
Total expenses 498,000
Profit 522,000
An independent accountant reviewed the income statement and developed additional

data as follows:
a) Wages for the last three days of December amounting to shs. 6,000 were neither
recorded nor paid.
b) The telephone bill for December, 20X1 amounting to shs. 2,000 has not been
recorded or paid.
c) Depreciation on vehicles, amounting to shs. 200,000 for 20X1, was not

recorded.
d) Interest on a shs. 200,000 one year 12 percent loan from National Bank of
Commerce was not recorded.
e) Car Hire Revenue includes shs. 20,000 car hire revenue for the month of January
20X2.
f) Maintenance and Repairs expense includes shs. 10,000, which is the cost of
replacement parts still in store at December 31, 20X1. These will be used next
year.
Required:
a) Give the adjusting entries at 31 December, 20X1, for each of the additional
items. If none is required explain why?
b) Prepare a correct income statement for 20X1.
8. By using good examples explain the following phrases:-
a) Error of Commission.
b) Error of Omission.
c) Compensating Error.
d) Error of Principle.
(ATEC-1, May 1991)
Problems
1. A. Mwangota, a sole proprietor had prepared a trial balance for the year ended 31/12/87.
Unfortunately, the trial balance did not agree and it was necessary to open a suspense
account with a debit entry of shs. 40,000. Further investigations revealed the following
errors:
i) A sales ledger debit balance of shs. 150,000 for A. Mgaye had been omitted
from the trial balance.
ii) The purchase daybook had been overcast by shs. 440,000.
iii) The total of the discount allowed column in the cashbook of shs. 210,000 had
been incorrectly credited to the discounts received account and no entry had
been made in the discounts allowed account.
iv) Goods returned inwards by Msichoke Company for shs. 90,000 had been
recorded in the return inwards account but had not been entered in Msichoke
Company's account.
Required:
a) Journal entries, where necessary to correct the above errors with suitable
narration.
b) A suspense account after all the above corrections have been made.
c) Five types of errors which do not affect the agreement of the trial balance, giving
an example of each.
(NABOCE, May 1988)

2. The Trial Balance presented below for Mpakani Video Repair Service does not balance.
Mpakani Video Repair Service

Trial Balance June 30th, 20X0
Debit Credit
Cash 102,400
Debtors 36,500
Supplies Inventory 900
Equipment 50,000
Accrued Salaries 8,100
Owner's Capital 172,000
Owner's Drawings 52,000
Repair fees 142,000
Salaries expense 51,000
Rent expense 32,000
Total 288,300 382,600
In examining the accounting records of the business the following particulars were
discovered:-
i) A purchase of supplies for shs. 3,000 paid in cash was erroneously recorded as a
purchase of equipment.
ii) The beginning balance plus the credits to trade creditors totaled shs. 186,000; the
debits to trade creditors totaled shs. 132,000.
iii) The balance in the accrued salaries account was rechecked and determined to be
shs. 1,800.
iv) A shs. 4,000 payment received from a customer on account was not posted to
the cash account.
v) The debit to record the withdrawal of shs. 6,000 in cash by the owner was not
posted.
vi) The balance in the Utilities Expense Account of shs. 35,000 was omitted from
the trial balance.
Required:
Prepare a corrected trial balance.
3. The following is a list of errors discovered in the books of a trader:-
i) A shs. 2,400 debit to cash was posted as credit.
ii) Receipt of a payment on account from a customer was recorded as a debit to

cash for shs. 13,500 and a credit to trade creditors for shs. 13,500.
iii) A purchase of supplies for shs. 8,900 on account was recorded as a debit to
supplies inventory for shs. 8,900 and as a credit to trade creditors for shs. 9,800.
iv) A shs. 25,000 credit to fees revenue was not posted.
v) A shs. 43,200 withdrawal was debited to the Capital Account and credited to
Cash Account.
Required:
For each of the errors:
i) Indicate if the error would cause the trial balance to have unequal totals.
ii) Determine whether the error would cause the debit total or the credit total to be
greater.
4. The following errors were detected in the accounts of Zawadi Ltd. for the year ended
30th June 1988:-
i) A builder's bill for shs. 270,000 for the construction of a small shed was debited
to repairs account.
ii) A cheque for shs. 30,000 received from Ariff Ltd. was dishonored and debited to
allowances account.
iii) Goods to the value of shs. 15,000 returned by Chekereni Ltd. were included in
stock but no entry was made in the books.
iv) Repairs to plant amounting to shs. 56,700 had been charged to Plant and
Machinery account.
v) Wages paid to the company's own workers for making certain additions to a
finished goods store amounting to shs. 55,000 were posted to wages account.
vi) A cheque for shs. 7,500 received from Ilala Ltd. was credited in the account of
Lalai Ltd. and debited correctly to cash account.
vii) A sum of shs. 10,000 paid to the company's employee as a Staff Loan was
debited to traveling expenses account.
Required:
a) Give journal entries to correct these errors.
b) Which of these errors (if any) will cause disagreement of the trial balance? Give
reasons for your answer.
(NABOCE, May 1990)
5. From the following information of Magomeni Trading, owned by Juma Mohammed

prepare the Profit and Loss Account and Balance Sheet as at 31st December, 1989.
Shs
Bank charges 16,400
Discounts allowed 12,000
Carriage inward 23,000
Motor Vehicles 150,000
Rates, taxes, etc 22,000
Patents and trade marks 60,000
Opening Stock 266,000
Purchases 493,000
Wages 522,000
Fuel 25,200
Buildings and Plant 800,000
Goodwill 67,000
Debtors 160,200
Advertising 33,000
Trade expenses 41,000
Bad debts 10,200
Cash 7,200
Loan interest 4 percent p.a. up to 30th June 16,000
Drawings 20,000
Capital, Juma Mohammed 241,400
Loan 800,000
Bank Overdraft 302,800
Creditors 96,200
Sales 1,303,800
You are further given the following additional information:-
i) to write off depreciation as follows:
Buildings and Plant 10%

Motor Vehicles 25%
Patents and Trade Marks 10%
ii) to provide shs. 8,600 for Bad Debts.
iii) to allow 2½ percent on Debtors for Discount.
iv) closing stock is valued at shs. 143,000
(NABOCE, May 1990)

6. The Trial Balance extracted from the books of K.K. ENTERPRISES on December 31st
1989 failed to agree. The firm's accounts assistant (a NABOCE holder) placed the
difference to a suspense account and prepared the following Trading and Profit and Loss
Account and Balance Sheet:-
K.K. Enterprises
Trading Profit and Loss Account
Shs Shs Shs
Sales 3,033,800
Less: Returns 66,200
Net Sales 2,967,600
Opening Stock 325,600
Purchases 1,927,800
Add: Carriage in 228,400
2,156,200
Cost of Goods Available for sale 2,481,800
Less: Closing Stock 371,200
Cost of Goods Sold 2,110,600
Gross Profit 857,000
Add: Discount Received 18,400
875,400
Operating expenses:
Wages and Salaries 142,800
Discount allowed 40,400
Carriage out 23,800
Rent and Rates 107,400
Office expenses 36,400
Insurance 19,200
Motor vehicle depreciation 42,000
Electricity 35,000
Drawings 224,000
Total Operating Expenses 671,000
Net Profit 204,400
K.K. Enterprises
Balance Sheet
Shs Shs Shs
Fixed Assets:
Motor Vehicles 420,000
Less: Accumulated depreciation 42,000
378,000
Furniture 130,000
Office Machines 76,000
Total Net Fixed Assets 584,000
Current Assets:
Debtors 392,800
Stocks 371,200
Bank 48,000
Suspense 44,000
856,000
Less: Current Liabilities:
Creditors (435,600)
Net Current Assets 420,400
Total Net Assets 1,004,400
Financed by:
Capital 800,000
add: Net Profit 204,400
Total Capital 1,004,400
A careful re-examination of the books revealed the following errors. These are
additional errors apart from those which you may have noticed in the above statements.
a) The total of the Returns Outwards Book shs. 63,600 has not been posted to the
ledger.
b) A purchase of a typewriter for shs. 7,200 was debited to Office Expenses

Account.
c) The Sales Daybook was overcast by shs. 200,000.
d) The Closing Stock has been over-valued by shs. 40,000.
e) Though an invoice for shs. 17,000 was received from a supplier and the amount
debited to the purchases account, the supplier's personal account was credited
less by shs. 5,400.
f) A cheque for 21,500 issued to a creditor was posted on the credit side of his
personal account.
g) No records have been made in the books in respect of the following:-
i) Drawings in the form of goods for shs. 24,200 made by the owner.
ii) Bank charges of shs. 800 already deducted by the bank.

iii) Accrued rent shs. 12,000; prepaid rates shs. 3,000.
iv) Bad debts shs. 2,800 are to be written off and a provision for bad debts
to be created at 2 percent of remaining debtors.
Required:
a) Journal entries to make corrections of the errors observed.
b) Suspense Account.
c) Revised final accounts.
(NABOCE, Nov 1990)
7. J. Maneno's first year in business as a retailer and general dealer ended on 31/12/87. He
has no confidence in his bookkeeper, so he submits to you for checking his final
accounts for the year to 31/12/87. These show a net profit of shs. 1,634,000 and his
Balance Sheet as at 31/12/87, as prepared by the bookkeeper, is shown below:
Balance Sheet for the first year ending 31.12.87

Shs. Shs.
Stocks 1,830,000
Cash in hand 36,000
Vehicles 1,660,000
Debtors 2,442,000
Drawings 1,900,000
less: Net Profit 1,634,000
266,000
Fixtures and Fittings at cost 530,000
Cash at Bank 108,000
Total 6,872,000
Creditors 2,072,000
Loan 800,000
Capital, 1.1.87 4,000,000
Total 6,872,000
You agree with the profit calculation and with the amounts shown for the items in the
Balance Sheet, apart from the following:
i) No depreciation had been included in the profit calculation. Depreciation should

have been calculated by the "straight line" method assuming for the
fixtures and fittings a life of 10 years, with no salvage value (residual
value), and for the vehicles a life of 4 years and a residual value of shs.
140,000.
ii) The loan was obtained from the Cooperative and Rural Development Bank
(CRDB) on 1st September 1987 and interest is payable from that date at the rate
of 15 percent per annum. The loan is to be repaid in full on 31/10/88. No
interest has been paid so far and no entries in respect of the loan interest have
been made in the accounts.
iii) Mr. Maneno pays the rent of his business premises monthly in advance. The
rent for January 1988, shs. 32,000 was paid in December 1987 and charged by
Mr. Maneno's bookkeeper against the profits of the first year's trading.
iv) Mr. Maneno's bookkeeper had included the unsold stock in the final accounts at
selling price (shs. 1,830,000). To determine the selling price of his goods Mr.
Maneno adds 50 percent to the cost price.
Required:
a) To re-calculate the net profit for the first year (show all your workings).
b) To re-draft the balance sheet, improving the presentation and incorporating any
changes needed in view of items (i) to (iv) above.
(NABOCE, Nov 1988)

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Chapter 5

Trial Balance and Adjustments

Preparing the trial balance

Errors in extracting a trial balance

Arithmetic errors occur where there is an incorrect arithmetic computation during

iii] re-casting and balancing of ledger accounts,

v] checking whether all recording and summaries of transactions from source

e) Error of original entry

f) Error of complete reversal

a) analyze the wrong entry as it was actually recorded,

b) determine the correct entry as it should have been recorded.

a) Incorrect entry recorded:

Date Description Folio Debit Credit

b) Correct entry which should have been recorded:

Date Description Folio Debit Credit

c) Correcting general journal entry:

Date Description Folio Debit Credit

The suspense account

Opening a suspense account

Debit - shs. 6,578,000. Credit - shs. 6,585,000

Suspense Account no. 00

Jun30 Difference in trial GJ6 7,000

Making corrections through a suspense account

Extending the previous example, the following errors were discovered:

Date Description Folio Debit Credit

To correct error of undercasting a

Date Description Folio Debit Credit

To eliminate a credit entry

To record the debit entry omitted.

Date Description Folio Debit Credit

To correct error of shs. 8,000

Date Description Folio Debit Credit

To record omission of a shs.

12,000 entry in Purchase Returns

Suspense Account no. 00

End of Period Adjustments

b) Those relating to revenues received in advance, alternatively known as deferred or

The original entry was:

Date Description Folio Debit Credit

To record payment of insurance

The entry for this adjustment would be:

Date Description Folio Debit Credit

To record the expired portion of

Insurance Premium Prepaid Account no. 00

Jan1 Cash 200,000 Dec31 Insurance Expense 100,000

Jan1 Balance 100,000

Insurance Expense Account no. 00

Dec31 Insurance Premium 100,000 Dec31 Profit and loss 100,000

Date Description Folio Debit Credit

To record payment of insurance

Date Description Folio Debit Credit

To record the unexpired portion of

The two accounts will appear in the ledger as follows:

Insurance Expense Account no. 00

Jan1 Cash 200,000 Dec31 Profit and loss 100,000

31 Insurance Premium 100,000

Insurance Premium Prepaid Account no. 00

Dec31 Insurance Expense 100,000 Dec31 Balance 100,000

Jan1 Balance 100,000

Insurance Expense Account no. 00

Date Details Fol. Debit Date Details Fol. Credit

Jan1 Cash 200,000 Dec31 Profit and loss 100,000

Jan1 Balance 100,000