Question

Rachel a sole trader prepares her accounts to 30th June each year each year. She keeps her records manually and does not use control accounts. Her trial balance at 30th June 2016 revealed that the total debits exceeded the total credits by £6. She decided to place this difference into a suspense account and continued to prepare her year end accounts. She treated the suspense account as an expense item in the profit and loss account. The net profit for the year was £17,500. She checked her accounting records and found the following mistakes: 1. A credit purchase from Brown for £453 was correctly recorded in the purchases account but shown as £534 in Brown’s account. 2. Her cash drawings of £1,200 had been debited to the salaries account. 3. The purchases account had been overcast by £300. 4. A credit purchase from Smith of £3,000 had been omitted completely from the accounts. 5. Bank interest payable of £213 had been shown in the cash book only. You are required to: (i) Prepare journal entries to correct the above mistakes (narratives are not required) (ii) Write up the suspense account, incorporating the errors identified by Rachel. (iii) Calculate Rachel’s corrected net profit for the year ending 30th June 2016

Answer 1

1) Journal Entries:
Date	Accounts Title	Debit	Credit
1	Accounts Payable	81		534-453
	Suspense account		81
2	Drawings	1200
	Salaries A/c		1200
3	Suspense account	300
	Purchase account		300
4	Purchase account	3000
	Accounts Payable		3000
5	Bank Interest exp.	213
	Suspense account		213

ii) Suspense Account :
DEBIT	AMOUNT$	CREDIT	AMOUNT $
Pur A/c	300	OB	6
		AP	81
		Bank Int.	213
Total	300	Total	300
iii) Rachel's Correct Net Profit:
	Amount
Net Profit	17500
add: Salary reversal	1200
Less: Bank Interest exp	-213
Correct Net Profit	18487