Question

Two students are discussing the use of a trial balance. They wonder whether the following errors, each considered separately, would prevent the trial balance from balancing. (a) The bookkeeper debited Cash for $600 and credited Salaries and Wages Expense for $600 for payment of wages. (b) Cash collected on account was debited to Cash for $900 and Service Revenue was credited for $90. What would you tell them

Answer 1

Answer:

The use of a trial balance:

a) This error will not cause the two sides of the trial balance to disagree. A compensating error has occurred, because the Cash Account should have been credited and the Salaries and Wages Expense debited with $600.

b) This error will cause the two sides of the trial balance to disagree.  The amount debited is not the same amount credited.  The Accounts Receivable should have been credited with $900, not the Service Revenue.

Explanation:

a) The trial balance ensures that the total values of the debit and credit sides agree.  It shows that accounts have been correctly debited and credited in the general ledger, with equal amounts.

b) Compensating errors arise when two accounting errors offset themselves, because the same mistake made on the debit side is made on the credit side