Error not affecting the trial balance *error of principle help*

System

Hi,

I am going through errors and suspense accounts before my exam in June, (i just about know how to construct a trial balance, now it's time to deconstruct one!)

Anyway, i'm stuck on a particular journal entry for an error of principle:

"The withdrawal of stock by the owner; cost value £28.00, was credited to the sales a/c"

My guess for the journal entry would be:


DR Sales A/C 28.00
CR Stock A/C 28.00

Can anyone confirm this as the correct entry, or am i barking up the wrong tree completely?

Thanks,

Ben.

System

Re:Error not affecting the trial balance *error of principle help*

I would have expected the entry to debit sales and credit drawings.

System

Re:Error not affecting the trial balance *error of principle help*

Hi,


I think both answers are correct. I thought like this

Dr Sales 28.00
Cr stock 28.00


(or)

Dr sales 28.00
Cr Drawings 28.00

System

Re:Error not affecting the trial balance *error of principle help*


Answer to correct

Debit Sales £28
Credit Purchases £28

because closing stock is valued at the end of the financial period.

Therefore original entry for withdrawal of stock if posted correctly would have been:

debit Drawings £28
credit Purchases £28

System

Re:Error not affecting the trial balance *error of principle help*

I thought that when an owner removes goods from his business then they are removed at arms length, therefore you should debit sales and credit drawings. If you credit purchases you are taking the stock out at cost of sales price, not sales price.

Annette

System

Re:Error not affecting the trial balance *error of principle help*

Post edited for being completely wrong

:oops:

Chris

System

Re:Error not affecting the trial balance *error of principle help*

I'm kinda with Roy on this one!

I just remember doing this in class and the original entry should be

Dr Drawings
Cr Purchases

L x

System

Re:Error not affecting the trial balance *error of principle help*

Well that'll teach me to look things up before I open my big mouth. You're quite right Lou and Roy.

Chris (who's feeling a bit of an idiot right now!)

System

Re:Error not affecting the trial balance *error of principle help*

Chris

Don't worry - it got me to be honest and I was thinking on your lines before, then I remembered the exercise in class!

Hey thats what we're all here for - to help one another!!

L x

System

Re:Error not affecting the trial balance *error of principle help*

It's just as well I've already passed FRA :?

My mind is full of costing right now - well that's my excuse anyway.

Chris

System

Re:Error not affecting the trial balance *error of principle help*

Hi,

Drawings will also be a Dr as the owner is taking money/goods out of the business and keeping them, this is recorded in the drawings account. Drawings will only have an entry on the CR side if there is a correction by journal.

Hope this helps

System

Re:Error not affecting the trial balance *error of principle help*

Yep I realise I was having a no brain day but I still think that they have to be taken out of purchases at sales price not cost price so it should be dr drawings and cr sales.

I'm sure this came up when I was doing foundation and this was the treatment we were told to use, oh well, I'll keep doing it my way (not that it ever comes up in my line of work).

Annette

System

Re:Error not affecting the trial balance *error of principle help*

Hope I am not too late.

error or principle is used when a transaction affect the same "type" of account, i.e two accounts that carry debit balances such as motor vehicles and purchases or drawings and expenses.

if sales and drawings account was affected for this transaction, this would involve a suspense transaction because:
a) drawings is a debit account
b) sales is a credit account

so you see it can not be error of principle if we are using two different types of account.

First we open two accounts - drawings and sales and post the error (which would be to place 28 cr to sales)

The correction for this transactions would be to
1) debit the sales account with 28(this clears the error from the sales account)
2) credit the drawings account 28(which is still incorrect because drawings is suppose to have a debit balance)

So to complete the corrections we:

3) debit drawings with 28 (now you have a debit and credit in drawings which only make the balance in the account zero) and open an account called suspense account and credit the suspense account with 28 (apply the double entry rule)

4) to be able to show the 28 balance in the drawings account you have to now make another debit entry of 28 and a credit entry in the suspense account for 28

so the corrected journal entry would be

DR - Drawings Account 56
CR - Suspense Account 56

Remember the double entry rule: For every debit entry you must make a credit entry for the same amount.

Sure hope this help

System

Re:Error not affecting the trial balance *error of principle help*

Excellent,

Thanks for the help!

Ben.

System

Re:Error not affecting the trial balance *error of principle help*

No problem Ben. Happy to help

System

Re:Error not affecting the trial balance *error of principle help*

Hi

Not sure which support material you are using but in the Osbourne tutorial book it explains both the goods for owners use journal and the error of principle journal pgs 405 and 425 respectively.

Based on this I would say that is should be:
Debit sales 28
Credit purchases 28

Please let me know if I am wrong.
:P
Sel.

System

Re:Error not affecting the trial balance *error of principle help*

When an owner takes anything from the business that is considered drawings and therefore the drawings account should show that it was affected. So if you Dr sales and Cr purchases, how would you show the drawings accounts being affected?

System

Re:Error not affecting the trial balance *error of principle help*

Hi

The drawings would have been debited when the transaction was placed originally.

The only part that has been incorreclty entered is the fact that they should have credited sales originally and not purchases.

Sel.

System

Re:Error not affecting the trial balance *error of principle help*

The question was "widthdrawal of stock by the owner cost 28 was credited to sales account". The error is that it was credited to sales account and not posted to the drawing account where it should have been posted originally. So yes making a debit to the sales account would be correct. But don't forget the double entry rule says when a debit is made a credit must also be made for the same amount.

Which to me means since a debit was made in sales then a credit must be made in Drawings and again drawings is an expense and should be debited so the credit entry would be incorrect.

The way i see it a credit should never be made in the purchases account instead a Returns Outwards Account is used to show any adjustment to purchases.

System

Re:Error not affecting the trial balance *error of principle help*

If the question states that the withdrawal of the stock of £28 was credited to the sales a/c only where no other entry is made, then double entry would be (1) debit sales £28 credit purchases £28
(2) debit drawings £28 credit Suspense £28.

However if the question states that the withdrawal of the stock of £28 was credited to the sales a/c and correctly debited to the drawings a/c, then debit sales £28 credit purchases £28.

System

Re:Error not affecting the trial balance *error of principle help*

The only time I have seen the purchases account credited if the purchases was overcast or a debit entry was incorrectly made in the purchases account and in this case it was not. I cannot see how the purchases account is affected.

Business Accounting I by Frank Wood and Alan Sangster states that "a purchase account is used to record purchases of stock (as debit entries in the account) and that the term 'purchases' refers to the purchases of stock."