UNIT OF COMPETENCY

ESTABLISHING AND MAINTAINING AN ACCRUAL

ACCOUNTING SYSTEM

Lo1:- . Manage the chart of accounts

Lo2:- . 2. Process invoices, adjustment notes and other general ledger transactions
Lo3:- Manage contra entries
Lo4:- . Identify and process bad debts
Lo5:- Manage debt recovery
Lo6:- Prepare and produce reports and trial balance

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Lo1:- . Manage the chart of accounts
- Chart of accounts - is a listing of the account titles and account numbers being used by a
given business. In numbering accounts in the ledger it is preferable to use a flexible system of
indexing so that it permits a later insertion of new accounts in their proper sequence without
distributing the other account numbers. A list of account in the ledger is called chart of
account.
Example - the chart of Account Nilexs computer center -
Chart of Accounts
1. Asset 2.Liabilities
Cash ---------------------111 Alp --------------------------- 211
A/R ----------------------112 N/p --------------------------- - 212
Supplies ---------------113 Unearned Revenue ------- 213
Prepaid Rent -----------114 Interest payable------------ 214
Prepaid insurance -----115 Salary payable -------------- 215
3. Owner’s equity 4. Revenue
Hiwot capital ------------ 311 Fees earned -------------- 411
Hiwot Drawing ----------- 312
Income summary -------- 313
5. Expenses.
Supplies expense ------------------- 511 Insurance expense ------------------ 514
Salary expense --------------------- 512 Interest expense -----------------------515
Rent exp expense ------------------- 513 Depreciation ------------------------516
Miscellaneous expense ---------------517
1. Transaction.
- Transactions can be recorded directly in to the accounts. But this method makes it very
difficult to identity individual transactions or finds errors b/c the debit is recorded in one
account and the credit in another -A transaction involves the transfer of something of value
b/n the business and another party. It resulted in a change in the economic resources (assets),
obligations (liabilities) or residual interest (owner's equity).
Transaction could be - External - purchase of equipment
- Internal - using equipment (according deprecation).
2. Source document
- The business documents (or source documents) relating to the transactions are used in the
accounting system as initial input information for the recording process. Ex – sales invoices,
checks, freight bills etc

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 LEARNING OUTCOME # 2
2. PROCESS INVOICES, ADJUSTMENT NOTES AND OTHER
GENERAL LEDGER
2.1 Raising and allocating Invoices to debtors and is to creditors.
Negotiable instruments are unconditionalorders or promise to pay, and includechecks, drafts,
bearer bonds, some certificates of deposit, promissory notes, and bank notes (currency).
In order to be negotiable, an instrument must meet several qualifications:
 it must be in writing;
 it must contain an unconditional promise to pay a certain sum in money, on demand
or at a fixed and determinable future time;
 it must be made payable to bearer or order; and
 it must be signed by the maker of a promissory note or the drawer of the instrument,
 An exact sum of money (with or without interest in a specified amount or at a
specified rate)
 To a specific person, or to order, or to its bearer
Negotiability: signatures
For an instrument to be negotiable, it must be signed by the maker/drawer. A signature may
be any symbol made by the maker or drawer with the present intention to be a signat
Negotiability: unconditionality
Promise or Order: A negotiable instrument must contain an express order or promise to
pay.
 A mere acknowledgment of a debt is not sufficient without evidence of an affirmative
undertaking on the part of the debtor to repay the debt.
 The exception to this rule is a Certificate of Deposit.
Unconditionality of Promise or Order: A promise or order is conditional (and, therefore,
not negotiable) if it states:
(1) An express condition to payment,
(2) That the promise or order is subject to or governed by another writing, or
(3) That the rights or obligations with respect to the promise or order is stated in writing.

2.2 Adjusting credit notes.

Two types of short-term notes may be received: (1) those bearing interest on the face amount
of the note and (2) non-interest-bearing notes. These are discussed in the following sections.
1. Short –term interest-Bearing Notes Receivable

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Interest bearing note is a promise written by the maker to pay the face amount plus interest at
a specified rate. It involves explicit provision of interest. Thus, for interest bearing note, the
face amount is the present value of the note.
Face amount is the amount written on the face of the promissory note. On the other hand,
future amount or maturity value represents the amount to be received at maturity. If a note
bears a fair rate of interest, its face amount and present value are the same on the date of
issuance.
When an interest- bearing note is issued the amount borrowed (the principal) is listed as the
face value and the interest charged is expressed as a specific rate applied to this face value. At
issuance the note receivable account is debited for the face value. After issuance interest
revenue on the note is recorded in the usual fashion, including any necessary year-end
adjustments for interest receivable.
2. Short-term Non-Interest-Bearing Notes Receivable
Non-interest bearing note is type of note where the interest involved is not stated explicitly or
the stated interest rate is unrealistically low than the market interest rate. Thus, the face
amount includes the interest charge; i.e. interest is included as part of the face amount or is
implicit on the face amount. In this type of note, the face amount represents the future value;
i.e. the amount to be received upon maturity.
It is often confused that non-interest bearing notes have no interest charges. In its strict sense,
there is no a non-interest bearing note. It only implies that it doesn’t contain the stated
provision for interest charge.

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 LEARNING OUTCOME # 3
3. MANAGE CONTRA ENTRIES
3.1 Recording Contra Entries
Contra Entries need to be processed in instances where two or more invoice transactions for
the same organization, acting as both a customer and supplier, are recorded but where the
money that is paid or received is only for the difference of the transactions and for not the full
amounts.
Contra entries are passed when:
 Cash is deposited into bank by office: It is payment from cash and receipt in bank.
Therefore, enter on credit side, cash column "By Bank" and on debit side bank
column "To Cash". The reason for making two entries is to comply with the principle
of double entry which in such transactions is completed and therefore, no posting of
these items is necessary. Such entries are marked in the cash book
 Cheque/Check is drawn for office use: with the letter “C" in the folio column It is
payment by bank and receipt in cash. Therefore, enter on the debit side, cash column
"To Bank" and on credit side, bank column "By cash”
2.1. ADJUSTMENTS
Some of the trial balance amounts are not correct. The amounts listed for prepaid expenses
are normally overstated. This is because of the day to day consumption or expiration of these
assets has not been recorded. There are two effects on the ledger when the daily reduction in
prepaid expenses is not recorded:
1. Asset accounts are overstated, and
2. Expense accounts are understated, then the net income will be overstated or the net
loss understated.
For example, salary expense incurred between the last payday and the end of the accounting
period would not be recorded in the account. The entries required to record at the end of an
accounting period to bring the accounts up to date and to assure the proper matching of
revenues and expenses are called adjusting entries.
Adjusting Entries
Adjusting entries are journal entries that are required at the end of an accounting period to
bring the ledger up to date. Adjusting entries can be classified as either deferrals or accruals.

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Accounting for deferrals
The word “defer “means to delay or postpone. In accounting, Deferrals are the delay (or post
ponment) in the recognition of an expense already paid or revenue already received.
Deferred items consist of adjusting entries involving data previously recorded in accounts.
These entries involve the transfer of data already recorded in asset and liability accounts to
expense and revenues accounts.
Types of Deferrals
Deferred items could be grouped into two major types:
 Deferrals to apportion prepayments
 Deferrals to apportion advance receipts
 Deferrals - 1. Prepaid Expenses. Expense that are paid in cash before they are used or consumed.
2. Unearned Revenues. Revenues received in cash before delivering goods or services.
 Accruals - 1. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.
2. Accrued revenues. Revenues earned but not yet received in cash or recorded
Accounting Treatment for Prepayments (Deferred Expenses)
There are two alternative methods of recoding prepayment at the initial point of payment.
 The asset method
 The expense method
We have tried to discuss the asset method of recording prepayments in the previous chapters.
In this chapter, we will see both methods to help you understand the alternative methods of
recording prepayments.
To illustrate the alternative methods of recording prepayments, assume on Jan. 1,2007
Sunrise Company paid Br. 36,000 for rent for the coming three years for office it has rented
from XYZ Company. Also, assume that the fiscal year of Sunrise Company ends on
December 31.
Recording Prepayments (Deferred Expenses) Initially in an Asset Account (The Asset
Method)
The total advance payment is debited to an asset account, in Sunrise Company case to a
Prepaid Rent Account. Recording the total advance payment in an asset account does not
imply that it will remain to be an asset. As we mentioned earlier, at the initial point of
payment, the total amount paid in advance is an asset. However, as each day passes, part of
the asset expires and becomes an expense. In accounting, we don’t transfer the expired
portion each day from the asset to an expense account. Rather we delay it until the end of the
accounting period.
The adjusting entry used in this case, debits an expense account and credit an asset for the
amount that has expired i.e. the portion for which service has been received.
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Lets see these for Sunrise Company, On Jan. 2, 2007 the following journal entry will be
made by Sunrise Company.
Prepaid Rent ………………………… 36,000
Cash ………………………………… 36,000
To record advance payment of rent for 3 years.
As you can notice, the total advance payment was debited to an asset account, and obviously
as cash was paid the cash account is credited.
After one year on Dec. 31, 2007, the company has used the office for one year. We say from
the total advance payment, Br. 12,000 (= Br. 36,000/3 Br. 12000) has expired. But until
adjustment, the used portion Br. 12000 remains in the asset account; it is through adjustment
that we transfer the used portion to an expense account.
The adjusting entry that transfers the used portion to the expense account forSunrise
Company. Made on Dec. 31, 2002 is:
Rent Expense ……………… Br. 12,000
Prepaid Rent ………… ………….. Br. 12,000

After the adjusting entry has been posted, the Rent Expense account will have a balance of
Br. 12,000 and prepaid Rent now shows the correct balance of Br. 24,000 (The portion that
has not expired or used).
Recording Prepayments Initially in an Expense Account (The Expense Method)
In our illustration for Sunrise Company, advance payments for rent that will benefit three
years operation were recorded by a debit to an asset account, Prepaid Rent. However, each
time the service is used (i.e. stay in the office) it is obvious that the asset will be converted to
an expense account. As a result some companies follow an alternative practice of recording
prepayments directly to an expense by the assumption that the prepayment will be finally
converted to an expense. Remember that, though the pre-payment is recorded initially
(directly) in an expense account, it still remains to be an asset to the company as far as the
service is not received.
In Sunrise Company case the following journal entry will be made on Jan. 1, 2006, the date
of advance payment.
Rent Expense ………………….. 36,000
Cash …………………………36,000
To record advance payments made for rent for three years.
Recording the prepayment directly in an expense account doesn’t necessarily indicate that the
total advance payment will expire during the year. That is, part of the prepayment might
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remain unexpired (unused) at the end of the year. When there is unused portion, an
adjustment is needed to transfer the unused portion from the expense account to the asset
account. The adjusting entry will debit an asset account and credit an expense account for the
amount for which no service is received (unexpired petition).

On Dec. 31, 2007, the following adjusting entry is made by Sunrise Company
Prepaid Rent…………………………. 24000
Rent Expense………………………..24000
To record the adjustment that transfers the unexpired portion from an expense to asset
account.
The unexpired amount is computed as:

36,000
Yearly expiration = =
3Years
Br. 12,000 per year. Therefore, after one year only
1/3 (12,000) expires, the remaining balance Br. 24,000 (=Br. 36,000 – 12,000) is unexpired
and reported as an asset.
This alternative method leads to the same results in the balance sheet and income statement,
as does the asset method of recording. Here also, the balance of prepaid rent that will appear
on the balance sheet is Br. 24,000 and the amount of rent expense for the year is Br. 12,000.

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 LEARNING OUTCOME # 4
4. IDENTIFY AND PROCESS BAD DEBTS
4.1 Verifying Bad debt status
When a seller provides goods or services on credit, the resultant account receivable is
normally considered to be an unsecured claim against the buyer's assets.

Accounting for Uncollectible Accounts Receivable

When credit is extended, some amount of uncollectible receivables is generally inevitable
regardless of the care taken in granting credit and the control procedures used. The operating
expense incurred because of the failure to collect receivables is called Uncollectible
Accounts Expense or Bad Debts Expense or Doubtful Accounts Expense.

There are two methods of accounting for uncollectible receivables. The allowance method,
which provides an expense for uncollectible receivables in advance of their write-off
(removal from the ledger) and the direct write-off method, which recognizes the expense only
when accounts receivable is judged to be worthless. We will discuss each of these methods
next.
Allowance Method
The allowance method of accounting for bad debts matches the expected loss from
uncollectible A/R against the sales they helped produce. We must use expected losses since
management cannot exactly identify the customers who won’t pay their bills at the time of
sale. This means at the end of each period the allowance method requires us to estimate the
total bad debts expected to result from that period’s sales. An allowance is then recorded for
this expected loss. This method has two advantages over the direct write-off method:

(1) Bad debt expense is charged to the period in which the related sales are recognized, and
(2) A/R is reported on the Balance Sheet at the estimated amount of cash to be collected.

The allowance method estimates bad debt expense at the end of each accounting period and
records it through an adjusting entry. To illustrate this method, assume the A/R account has a
balance of Br. 50,000 and based on careful study of the experience of other companies, Nile
Co. estimates that a total of Br. 2000 will be uncollectible.
This estimated expense is recorded through the following adjusting entry.
Dec. 31 Uncollectible Accounts Expense 2000
Allowance for Doubtful Accounts 2000
To record estimated bad debts

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The amount Br. 2000 is an estimated reduction in A/R; but it cannot be credited to specific
customer accounts or to the A/R controlling account. Instead, a contra asset account entitled
Allowance for Doubtful Accounts is credited.

As with all periodic adjustments the above entry serves two purposes. First, it reduces the
value of the receivable to the amount of cash expected to be realized in the future. This
amount, which is Br. 48,000 (Br. 50,000 – Br. 2,000), is called the Net Realizable value of
the receivables. Second, the adjusting entry matches the Br. 2000 expense of uncollectible
account with the related revenues of the period.

Write-off to the Allowance Account

When specific accounts are identified as uncollectible, they are written-off against the
Allowance for Doubtful Accounts. Assume after spending some time trying to collect from
Shalla Co., Nile Co. decides that Shalla’s Br. 200 accounts receivable is uncollectible and
makes the following entry to writ-it off.
Jan. 25 Allowance for Doubtful Accounts 200
A/R-Shalla Co. 200
To write-off uncollectible accounts.

Note two aspects of this entry and its related accounts

Before Write-off After Write-off
A/R 50,000 49,800
Less Allowance for D. a/cs 2,000 1,800
Net Realizable Value 48,000 48,000
Neither total assets nor net income are affected by the Write-off of a specific account. But
both total assets and net income are affected by the recognized bad debts expense for the year
in the adjusting entry.

The Adjustment Process

The adjustment process is the result of the revenue recognition and the matching principles
that demand adjustments commonly in the following areas at the end of the accounting
period.
i) To apportion prepayments of expenses and revenues. This includes:
a. Apportionment of recorded costs (prepayments)
b. Apportionment of recorded revenue (unearned revenue)

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ii) To record accrued expenses and revenues
a. Accrual of unrecorded expenses
b. Accrual of unrecorded revenues
iii) Valuation of certain assets and liabilitiesE.g. A/R, inventories, etc.
Every adjusting entry affects a minimum of one balance sheet and one income statement
account.
(i) Apportionment of recorded costs
Costs that will benefit more than one accounting period frequently are incurred.
Prepayments can be recorded in two ways upon payment. Accordingly, the type of adjusting
entry required at the end of the period depends on the initial recording of the prepayment.
The following table summarizes policies that may be adopted initially upon the cash
payment, the nature of adjusting entries required at the end of the period, and whether or not
reversing entries are required at the beginning of the next fiscal period.
Initial Recording Adjustment Required at the Requirement for
Policy End of the Period Reversing Entries
Prepayments recorded To transfer amount expired from No reversing entry
initially as asset (balance the asset account to expense required
sheet approach) account
Prepayments recorded To transfer amount unexpired Reversing entry required
initially as expense from the expense account to
(income statement asset account
approach)
In general, when balance sheet approach is used to record prepayments, no reversing entry is
required as the unexpired portion of the prepayment still remains in the asset account
consistent with the original policy adopted. However, when an income statement approach is
used, reversing entry would be required at the beginning of the next fiscal period as the
temporary account, expense, would be closed at the end of the period and turned into zero
balance. The unexpired portion of the prepayment would also remain into an asset account,
contrary to the original policy maintained. Thus, reversing entry is required to overturn the
balance in the asset account to expense.
(i) Apportionment of recorded costs
Costs that will benefit more than one accounting period frequently are incurred.
Prepayments can be recorded in two ways upon payment. Accordingly, the type of adjusting
entry required at the end of the period depends on the initial recording of the prepayment.

11
The unexpired portion of the prepayment would also remain into an asset account, contrary to
the original policy maintained. Thus, reversing entry is required to overturn the balance in the
asset account to expense.
Example
Assume that KK Enterprise records all prepayments or deferred costs as an asset and works
on a calendar year basis. Selected transactions that occurred during year 3 are presented as
follows:
January1: paid $30,000 cash as rent for two years;
May 13: Purchased supplies on account for $15,000. At the end of the period the cost of
supplies on hand was determined to be $3,400.
June 1: paid $12,000 cash as insurance premium for one year
The initial recording and adjusting entries required at the end of year 2 are presented as
follows:
Initial Recordings:
January1 Prepaid rent 30,000
cash 30,000
May 13 Supplies 15,000
Accounts payable 15,000
June 1 Prepaid insurance 12,000
cash 12,000
Adjustments at December 31, year 3:
Date of Monthly Expired portion as at Account Dr Cr
payment expiration December 31,year 3
January1 1250 1 year Rent expense 15000
prepaid rent 15000
May 13 15000-3400=11600 Supplies expense 11,600
supplies 11,600

June 1 1,000 7 months Insurance expense 7,000

prepaid insurance 7,000
(ii) Apportionment of recorded revenues
These are amounts collected in advance before services are rendered. Thus, they are
considered as liability. Advance collections can be recorded in two ways upon cash receipt.
Policies that may be adopted initially for deferred revenues, adjusting entry required
accordingly at the end of the period, and the need for reversing entries are summarized
Example
Assume again that Bishoftu Enterprise records all unearned revenues as liability upon
collection of the cash and adopts a fiscal period from January 1 to December 31. Given the
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 following selected transactions for year 3, the initial recording and adjustments required at
the end of year 2 are shown below:
April 1: Received $18,600 cash from customer as subscription fee of
newspaper for 1 year;
November 2: Received $24,000 cash from customers for magazine subscription fee.
At the end, of the period, it is determined that $10,000 represents
amount received for magazines to be delivered in subsequent periods.
Initial Recordings:
April 1 Cash 18,600
Unearned newspaper subscription 18,600

November 2 Cash 24,000

Unearned magazine subscription 24,000
Adjustments at December 31, year 3:
Date of Earned Portion Adjusting Entry Dr Cr
Receipt Monthly as at December
Earning 31,Year 3
April 1 1550 9 months Unearned newspaper subscription 13950
Newspaper subscription revenue 13950
November 2 24,000 - 10,000 = Unearned magazine subscription 14,000
14,000 Magazine subscription revenue 14,000
If the policy of Bishoftu Enterprise was to record unearned revenues as revenue, the above
transactions would have been recorded as:
Initial Recordings:
April 1 Cash 18,600
Newspaper subscription revenue 18,600

November 2 Cash 24,000

Magazine subscription revenue 24,000
Adjustments at December 31, year 3:

Date of Unearned

Receip Monthl Portion as at Adjusting Entry Dr Cr

December 31,
t y
Year 3
Earning
April 1 1550 3 months Newspaper subscription revenue 4650
Unearned newspaper subscription 4650
Nov. 2 10,000 Magazine suscriptions revenue Unearned 10,000
magazine subscription 10,000
(iii) Accrual of unrecorded expenses
Some expenses are accrued through the passage of time and recorded only when paid, except
when end of accounting period occurs between the time the expense is incurred and cash is

13
paid. In general, these are amounts unpaid at the end of an accounting period after expenses
are incurred or goods or services have been received.
Thus, at the end of the period, adjusting entry is required to record the expense in the period
in which it is incurred along with the related liability.
Example
Below are given selected transactions for KK Company. Assume that the fiscal period ends
on December 31, year 3.
(a) At the end of the period it is determined that $1,400 is accrued as two days’ salaries;
(b) Estimated income tax expense for year 3 amounted to be $30,000;
(c) Utility bills for $800 are unsettled at the end of the period;
(d) Interest on notes payable of $200,000 is paid last on september30, year 3. Consider
interest rate of 10%.
The adjustments required at December 31, year 3 for the aforementioned transactions are
given below:
Again, this approach necessitates for reversing entries at the beginning of the next fiscal
period. The ending balances of accounts at December 31, year 3 are the same for both cases
and given below:
Item Account Dr Cr
(a) Salary expense 1,400
Salary payable 1,400
(b) Income tax expense 30,000
Income tax payable 30,000
(c) Utility expense 800
Utility payable 800
(d) Interest expense 5,000
Interest payable 5,000
This is accrued interest for two months: September 30 to
December31. Thus it is computed as (200,000x10%x3/12= 5,000)
As it will be indicated later, reversing entries for the above adjustments are optional.
(iv) Accrual of unrecorded revenue
Revenues that are earned with no related cash inflow must be recognized at the end of an
accounting period. These are amounts not received after they are earned. Thus, adjusting
entry is required to record the receivable and revenues earned in the proper period.
Example
Assume that interest amounting to $4300has been realized but not collected as at December
31, year 3. The adjusting entry at the end of the period in order to state the period’s revenues
and assets correctly follows to be:
14
Interest receivable 4300
Interest revenue 4300

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 LEARNING OUTCOME # 5
5. MANAGE DEBT RECOVERY
5.1 Reviewing activities and communication with debtors.
The Credit Decision-Making Process
 The Credit Analyst(s) may request whatever information needed from the Branch
Manager/Loan officer and the customer in order to independently conduct detail
credit and risk analysis/appraisal.
 After finalizing his/her/their analysis/appraisal report, the Credit Analyst(s) will
submit the analysis with recommendation for the respective Head office credit
Committees for approval through Head, Credit Analysis Division
 The Credit Analyst(s) shall present themselves as resource persons during the
respective credit committee meetings.
 The appropriate credit committee shall deliberate and decide on the credit proposal.
 All credit committee members must sign on the LAF.
 Decision is expected to be made on consensus basis. However, decision shall be made
by majority vote and reservation of any committee member shall be put in writing.
5.2 Measuring to collect monies, including the initiation of legal action.
Stages in collection
There are six stages in the routine of collection
(i) Notification. (ii) Reminder. (iii) Stronger Reminder. (iv) Discussion. (v) Urgency.
(vi) Legal Action.
(i) Notification Stage (Statement of Account). A statement of Account is sent to the
debtors at stated periods. It is a copy of the customer’s account in the ledger showing the
balance to be paid as on a particular date. Usually it is sent towards the end of each month.
It shows the balance due at the beginning of the period, the dates and the quantity of goods
supplied, the payments already received, the claims admitted and the balance still payable for
the period. It also specifies the terms of payment. It may contain an offer of cash discount if
payment is made earlier. It may also indicate that a specified rate of interest may be charged
incase payment is not received by a particular date.
(ii) Reminder Stage. If the Statements of Account does not bring the payment, a formal
reminder may be sent inviting the debtor’s attention to the overdue account. The reminder
should not be curt but courteous in style and contents. Expressions like “Your Account is
overdue since two months, kindly remit the amount by return of post” may be used to remind
the debtors. Series of such reminders may be sent at intervals.

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(iii) Stronger Reminder Stage. The debtor should be told that he owes an amount and that
he must pay immediately. The tone should be friendly but the contents should be blunt. This
type of reminder may express sense of disappointment over the debtor’s failure to pay in
time.
(iv) Discussion Stage. The debtor may be invited for frank discussion in an attempt to solve
the collection deadlock.
He should be told to explain his attitude, and difficulties which come in his way to make
payment. A human touch may characterize this type of reminder while at the same time firm
demand should be made for payment.
(v) Urgency Stage. If the previous letters do not bring any response from the debtor, the
credit and collection manager may adopt a stern attitude. He may stress upon the need of
urgent payment and ask for immediate payment. The letter may express the misgivings about
debtor’s attitude in regretful terms and should point out that unreasoned indolence on the part
of any customer creates hitch in business relationships which has to be avoided at all costs.
(vi) Legal Action Stage. The debtors would be informed that his account is going to be
entrusted to the solicitor for legal action. Even in this letter a chance may be given to the
debtor to clear his dues by a definite date to avoid unpleasant and uneconomical litigation.

LEARNING OUTCOME # 6
6. PREPARE AND PRODUCE REPORTS AND TRIAL
BALANCE
Proof Provided By the Trial Balance
The trial balance does not provide complete proof of accuracy of the ledger. It indicates only
that the debits and credits are equal. If the two totals of trial balance are not equal, it is
probably due to one or more of the following types of errors:
1. Error in preparing trial balance:
a. One of the columns of the trial balance was incorrectly added.
b. The amount of an account balance was incorrectly recorded on the trial
balance.
c. A debit balance was recorded as credit, or vice versa, or a balance was
omitted entirely.
2. Error in determining the account balance:
a. A balance was incorrectly computed.
b. A balance was entered in the wrong balance column.
3. Error in recording a transaction in the ledger
a. An erroneous amount was posted to the account.
b. A debit entry was posted as a credit, or vice versa.
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 c. A debit or credit posting was omitted.

Among the types of errors that will not cause an inequality in the trial balance totals are the
following:
1. Failure to record a transaction or to post a transaction.
2. Recording the same erroneous amount for both the debit and credit parts of a
transaction.
3. Recording the same transaction more than one.
4. Posting a part of a transaction correctly as a debit or credit but not to the wrong
account.

DISCOVERY OF ERRORS
The existence of an error can be determined in various ways:
1. By audit procedures
2. By chance discovery, or
3. Through the medium of the trial balance.

TYPES OF ERROR
a. Addition: For example, a difference of $10, $100, or $1,000 between totals is
frequently the result of error in addition.
b. Omission: A difference between totals can happen due to the omission of a debit
or a credit posting or, if it is divisible evenly by 2, to the posting of a debit or a
credit, or vice versa. For example, if the debit and credit totals of a trial balance
are $ 20,640 and $20,236 respectively, the difference of $404 may indicate that a
credit posting of that amount was omitted or that a credit of $202 was
erroneously posted as a debit.
c. Transpositions: It is the erroneous rearrangement of digit, such as writing $ 542
as $ 524 or $452.
Slide: It is the entire number is erroneously moved one or more spaces to the right or the left,
such as writing $542.00 as $54200 or $54.
There are 3 types of trial balance
1. Unadjusted trial balance - This is prepared after journalizing transactions and posting
them to the ledger. Its purpose is to test the equality between debits and credits after the
recording phase.
2. Adjusted trial balance - This is prepared after adjusting entries are made and posted. Its
purpose is to test the equality between debits and credits after adjusting entries are prepared.
It is also the basis in preparing the financial statements.
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An adjusted trial balance contains nominal and real accounts. Nominal accounts are those
that are found in the income statement, and withdrawals. Real accounts are those found in the
balance sheet.
3. Post-closing trial balance - This is prepared after closing entries are made. Its purpose is
to test the equality between debits and credits after closing entries are prepared and posted.
The post-closing trial balance contains real accounts only since all nominal accounts have
already been closed at this stage.
Example: Three years ago Olanna, Berhanu and Mezmur established MBO private company
as June 30, 2010 the end of the current fiscal year the MBO company trial balance is as
follow:
MBO Company
Trial balance
Dec 31 30 2014
Cash----------------------------------------3425
Fee receivable------------------------------7000
Supplies------------------------------------1270
Prepaid insurance--------------------------620
Office equipment------------------------51650
Accumulated depreciation--------------9700
A/p-------------------------------------------925
Unearned revenue -----------------------1250
MBO capital-----------------------------29,000
Drawing ------------------------------------5200
Fees earned ------------------------------59125131
Wage expense----------------------------22415
Rent expense-------------------------------4200
Utility expense-----------------------------2715
Mis expense--------------------------------1505
Additional information
a. Supplies on hand ---------------------------------------------------380
b. Insurance expired --------------------------------------------------315
c. Deprecation of equipment—-------------------------------------4950
d. Wage accrued but not paid at June 30, 2010 is birr ---------440
e. Accrued fees earned but not accrued by -----------------------1000
f. Unearned fee on hand birr ----------------------------------------750
Required
1. Adjustment
2. Income statement owner equity balance sheet
3. Closing entries
4. Post-closing entries

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Adjustment
1. Supplies expense-----------------890
Supplies----------------------------890
2. Insurance expense---------------315
Prepaid insurance -----------------315
3. Depreciation expense-------------4950
Accumulated depreciation-----------4950
4. Wage expense----------------------440
Wage payable--------------------------440
5. Fees receivable-------------------1000
Fees earned--------------------------1000
6. Un-earned fees ------------------750
Fees earned ----------------------750
MBO Company
Income statement
For the month of June 30 2010
Revenue:
Fees earned-----------------------------------------------------------60625
Operating expense:
Wage expense-----------------------------22855
Rent expense-------------------------------4200
Utility expense-- -------- ---- ----------- --2715
Mis expense---------------------------------1505
Supplies expense----------------------------890
Insurance expense--------------------------315
Depreciation expense---------------------4950
Total expense -------------------------------------------------------37430
Net income-----------------------------------------------------------23195
Mob Company
Owner equity
For the month ended June 30 2010
MBO capital----------------------------------29,000
Add: net income--------------23,195
Less: withdrawal-----------------5,200
Increasing capital-----------------------------17,995
Ending capital------------------------------------46995

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 Mob Company
Balance sheet
For the month of June 30 2010
Assets
Cash-----------------------------------3425
A/R------------------------------------8000
Supplies--------------------------------380
Prepaid insurance--------------------305
Office equipment---
Less: accumulated depreciation---
Total assets--------------------------------------------------49110
Liability
A/P--------------------------------------925
Unearned revenue---------------------750
Wage payable---------------------------440
Total liability--------------------------2115
Capital
MBO capital--------------------------46995
Total liability $ capital------------------------------------4911
Close entry

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