Answer to Question #249488 in Accounting for OK MOLEFE

Question

An invoice received from Kamba Suppliers for the trading stock was recorded as R880 by the bookkeeper of Koo Traders. However, the statement received from Kamba
Suppliers showed the correct amount outstanding as R8 800. Correct the error. Show effects on the DEBIT AND CREDIT and on CREDITORS CONTROL


REASON FOR ERROR:

CALCULATIONS:


T-ACCOUNTS:





EXPLANATION OF T-ACCOUNTS:

Answer 1

Correct the error

The stock value and accounts payable are overstated with R80 as accountant has recorded the entry with overstatement of both the accounts by R80 so now accountant has to reduce the amount in both the accounts by making following entry.

Dr : Account Payable 80

Cr : Stock / Merchandise inventory 80

Effect on Debit and Credit

The accountant has made the following entry

Dr : Stock / Merchandise inventory 880

Cr : Accounts Payable 880

Instead of

Dr : Stock / Merchandise inventory 800

Cr : Accounts Payable 800

Which means merchandise inventory is overstated with debit balance of R80 and accounts payable balance is also overstated by R80.

Effect on Creditors control

Creditors control account is the account where all the accounts of creditor are shown. For instance, if a company has 10 accounts payable then total of each individual accounts payable ledger should match with the creditors control account. If the account has entered the same amount of R 880 in control account, then the balance of the control account and total of individual accounts payable ledgers will be matching. But if the accountant has entered R880 in individual accounts payable ledger and R800 in creditors control account then there must be a difference of R 80. 

Reason for error:

The accountant has mistakenly entered the stock purchase entry for R 880 instead of R800.

Calculations

Wrong amount Correct Amount Overstatement

Stock / Merchandise Inventory Debit 880 Debit 800 Debit 80

Accounts Payable Credit 880 Credit 800 Credit 80

T-Accounts

Stock account

Debit credit

Opening Balance 0

accounts payable 880 Account payable 80

Closing balance 800

Total 880 880

Accounts payable account

Debit Credit

Opening balance 0

Stock 880

Stock 80

Closing balance 800

Total 880 880

Explanation of T Accounts

Stock T account has opening balance of nill amount and during the period the account was debited for R880 against the purchased on credit. Then it again credited for the correction of overstatement amount of R80. And net closing balance having the debit balance is R 800.

Accounts payable T account has the opening balance as nill. Then this account was credited for R 880 against the purchase of stock on credit. then it was debited for the correction of account to settle the overstatement of account by R 80. Closing credit balance is R 800.