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INSTRUCTION: ANSWER FIVE(5) QUESTIONS ONLY
(1a)
The fundamental bookkeeping equation, also known as the accounting equation, represents the core principle underlying the double-entry bookkeeping system. It shows the relationship between a company’s resources and the claims on those resources. The equation states that the total assets of a business are always equal to the sum of its liabilities and owner’s equity. This ensures that every financial transaction affects at least two accounts, keeping the accounting records balanced and accurate. The equation is the foundation for preparing the balance sheet and reflects the financial position of a business at any given time.
(1b)
(i) Assets: These are resources owned by a business.
(ii) Liabilities: These are obligations or debts the business owes to outsiders (e.g., loans, accounts payable).
(iii) Owner’s Equity: This represents the owner’s claims or residual interest in the business after liabilities are deducted from assets.
(1c)
The fundamental bookkeeping equation is:
Assets = Liabilities + Owner’s Equity
(i) Owner’s Equity Equation:
Owner’s Equity = Assets – Liabilities
This equation shows that the owner’s equity is the difference between what the business owns and what it owes.
(ii) Liabilities Equation:
Liabilities = Assets – Owner’s Equity
This form expresses liabilities as the difference between assets and owner’s equity, indicating the amount financed through.
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(2a)
(i) Omission of posting in one account: When a transaction is posted to the debit side of one account but not posted to the credit side of the corresponding account, it causes imbalance in the trial balance totals.
(ii) Double posting in one account: Posting the same amount twice on either the debit or credit side of an account results in an excess amount on one side, causing the trial balance to not agree.
(iii) Errors in totaling or balancing accounts: Mistakes in adding up the debit or credit sides of ledger accounts or errors in balancing accounts lead to incorrect balances being transferred to the trial balance, causing disagreement.
(2b)
(i) Errors of omission: When a transaction is completely omitted from the books, both debit and credit sides are missing, so the trial balance still balances though the accounts are incomplete.
(ii) Errors of principle: Recording a transaction in the wrong type of account (e.g., recording a capital expenditure as revenue) does not affect the debit-credit equality, so the trial balance still agrees.
(iii) Compensating errors: When two or more errors cancel each other out (for example, an understatement in one account is offset by an overstatement in another), the trial balance totals remain equal.
(2c)
A suspense account is a temporary ledger account used to record discrepancies or uncertain amounts when the trial balance does not agree. It holds the difference until the errors causing the imbalance are located and corrected, after which the suspense account is cleared.
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