LC Accounting common mistakes
LC Accounting · Understand the traps and how to avoid them.
Recording a transaction on the wrong side or in the wrong account because the candidate reasons from the effect on profit rather than from the debit/credit rule for the account type (e.g. debiting a liability to increase it).
Candidates learn the accounting equation quickly but then try to 'work out' each entry intuitively under time pressure, and the intuition for liabilities and income runs opposite to that for assets and expenses.
What to do instead
Before writing any entry, name the two accounts and classify each (asset, liability, capital, income, expense), then apply the fixed rule: assets and expenses increase on the debit side, liabilities, capital and income increase on the credit side. Practise by writing the classification in the margin next to every journal until it becomes automatic.
Using the trial balance as proof that the ledger is correct, then failing to look for errors that do not disturb the trial balance (omission, commission, principle, original entry, reversal, compensating errors).
The trial balance does balance after these errors, so candidates stop investigating and lose the marks that ask them to identify which type of error has occurred.
What to do instead
Memorise the six errors that leave the trial balance in agreement and test each scenario against them by asking two questions: are both entries present, and are they in the correct accounts and on the correct sides? Only errors of transposition, addition, single entry and one-sided posting affect the trial balance.
Posting the correcting journal to the suspense account when the original error was two-sided, or omitting the suspense entry when only one side was posted, so the suspense balance never clears.
Candidates treat every correction as needing a suspense entry, and they do not check whether the original error left the trial balance out of agreement.
What to do instead
For each error, first decide whether it caused a difference in the trial balance. If both sides were posted (even to the wrong account), correct account-to-account only. If one side is missing or duplicated, the correction must pass through the suspense account. Track the suspense balance after every journal and confirm it reaches zero when all errors are corrected.
Preparing the bank reconciliation by adjusting the cash book for unpresented cheques and uncredited deposits, or by adjusting the bank statement balance for items already on it.
Candidates mix up which items belong to the cash book and which belong to the bank statement, especially for standing orders, direct debits, bank charges and dishonoured cheques.
What to do instead
Split the reconciliation into two separate lists. Items the business did not know about (bank charges, interest, direct debits, standing orders, dishonoured cheques, direct credits) go into the cash book. Items recorded by the business but not yet processed by the bank (unpresented cheques, uncredited lodgements) go into the bank reconciliation statement. Never put the same item in both lists.
Charging a full year of depreciation or a full year of expense in the year of acquisition or disposal, and forgetting to remove the accumulated depreciation of a disposed asset.
Candidates apply the annual figure without checking the ownership period, and they debit the disposal account with proceeds but leave the asset's accumulated depreciation sitting in the provision account.
What to do instead
For every disposal, write out four lines: transfer cost out of the asset account, transfer accumulated depreciation out of the provision, record proceeds, and balance the disposal account to profit or loss. For acquisitions and disposals mid-year, apply the depreciation policy on a time-apportioned basis unless the question states a full-year convention, and state the convention you used.
Valuing inventory at selling price, or including inventory that is on sale-or-return, in transit without the correct terms, or obsolete stock at original cost, and then computing cost of sales without adjusting for the closing inventory.
Candidates equate 'value' with what the goods will sell for and forget the lower-of-cost-and-net-realisable-value rule; they also lose marks by omitting the closing inventory adjustment from the cost of sales calculation.
What to do instead
Apply lower of cost and net realisable value line by line, and deduct any costs to complete and sell to get NRV. For cost of sales, use the fixed structure: opening inventory plus purchases less returns plus carriage inwards less closing inventory. Explicitly test each inventory item for damage, obsolescence and slow movement before choosing the figure.
Building the statement of financial position by listing balances from the trial balance without making the year-end adjustments for accruals, prepayments, depreciation, bad and doubtful debts and closing inventory.
Candidates run out of time and treat the trial balance as the final answer, or they make the adjustments in the income statement only and forget the corresponding asset or liability in the statement of financial position.
What to do instead
Work through a checklist of adjustments before drafting: accruals, prepayments, depreciation charge and accumulated depreciation, bad debts written off, increase or decrease in the allowance for doubtful debts, closing inventory. For each, write the double entry so the income statement effect and the statement of financial position effect are both captured, and reconcile the resulting profit to the change in capital.
In partnership questions, dividing profit in the old ratio after a change in the profit-sharing ratio or after a partner's admission, and omitting interest on capital, interest on drawings or partner salaries from the appropriation account.
Candidates treat the appropriation account as a simple profit split and forget that the partnership agreement changes the amount available before the residual ratio is applied.
What to do instead
Set out the appropriation account in a fixed order: profit for the year, less interest on capital, less partner salaries, add interest on drawings, then divide the residual in the agreed ratio. When the ratio changes mid-year, time-apportion the profit and apply each ratio to its own period. Show each partner's current account separately.
In incomplete records, calculating the missing figure (sales, purchases or cash) by plugging numbers into a formula without first reconstructing the control account or the statement of affairs to establish opening capital.
Candidates memorise the margin and mark-up formulas but cannot decide which direction to work, so they produce a plausible but internally inconsistent figure.
What to do instead
Draw the relevant T-account (receivables, payables, cash or inventory) with the known figures and let the missing figure be the balancing item. For opening capital, prepare a statement of affairs from the opening assets and liabilities. Check the answer by confirming the reconstructed account balances and that the final profit agrees with the change in capital plus drawings.
In ratio analysis, computing ratios from inconsistent figures (mixing year-end and average figures, using profit before tax for return on capital employed with a capital figure that includes only equity) and then drawing conclusions without a comparator.
Candidates learn formulas as isolated calculations and do not check that numerator and denominator come from the same basis; they also state that a ratio is 'good' or 'bad' without a prior year, budget or industry benchmark.
What to do instead
For each ratio, state the formula and the basis used before calculating. Use average capital employed or average inventory where the formula calls for it, and be consistent across years. Always compare with at least one benchmark and explain the underlying cause (e.g. a fall in gross margin may reflect increased competition, discounting or higher purchase costs) rather than simply labelling the movement.