Trial balance that will not tally
At the Directorate of Handicrafts, Jammu, you are preparing the trial balance as on 31 March 2025. The debit total is ₹18,42,000 and the credit total is ₹17,07,000, a difference of ₹1,35,000. While checking the books you find: (i) a cheque of ₹75,000 received from a debtor was entered in the cash book but not posted to the debtor's account; (ii) salary of ₹60,000 paid by bank was posted twice to the salary account; (iii) office furniture of ₹1,20,000 purchased by cheque was debited to Repairs account. The accountant wants to force the trial balance by putting the difference in a Suspense Account and close the year. The DDO has asked for a note before signing the accounts. No other discrepancy has been traced.
1. Which of the three errors explain the ₹1,35,000 difference? Show the direction of each effect and explain why the furniture error does not disturb the trial balance.
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Reasoning:
- Error (i): the debit to bank is already in the cash book, but the credit to the debtor is missing. Credits are understated by ₹75,000, so the debit column exceeds the credit column by ₹75,000.
- Error (ii): salary is debited twice. Debits are overstated by ₹60,000, adding another ₹60,000 to the debit excess.
- Total unexplained debit excess = ₹75,000 + ₹60,000 = ₹1,35,000, which matches the difference exactly.
- Error (iii) replaces a debit to Furniture with a debit to Repairs. Both are debit entries, so total debits do not change and the trial balance still agrees. It misstates assets and expenses, but not the trial balance totals.
2. Pass the rectification entries and state the effect on the profit for the year.
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Rectification entries:
- Dr Suspense A/c ₹75,000; Cr Debtor A/c ₹75,000 - to record the omitted credit posting.
- Dr Suspense A/c ₹60,000; Cr Salary A/c ₹60,000 - to reverse the duplicate debit.
- Dr Furniture A/c ₹1,20,000; Cr Repairs A/c ₹1,20,000 - to reclassify capital expenditure.
Effect on profit: the salary credit reduces expense by ₹60,000; the repairs credit reduces expense by ₹1,20,000. Profit increases by ₹1,80,000 in total. The furniture correction increases assets, not profit, though depreciation may need to be provided separately.
3. After rectification, what should be the balance in the Suspense Account, and why is forcing the trial balance unacceptable?
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The original difference was a debit excess of ₹1,35,000, so the Suspense Account would have been credited with ₹1,35,000. The rectification entries debit Suspense with ₹75,000 + ₹60,000 = ₹1,35,000, closing it at nil.
Forcing the trial balance is unacceptable because it hides one-sided errors, misstates debtors and expenses, and can conceal misappropriation. The DDO should require corrections, supporting vouchers and a signed reconciliation before the accounts are closed.