Question

Requirement 1:

ABC Company adheres to a policy of depositing all cash receipts in a bank account and making all payments by check. The cash account as of December 31 has a credit balance of $1,850, and there is no undeposited cash on hand. (a) Assuming that no errors occurred during journalizing or posting, what caused this unusual balance? (b) Is the $1,850 credit balance in the cash account an asset, a liability, owner's equity, a revenue, or an expense?

Requirement 2:

Assume that DEF Company erroneously recorded the payment of $7,500 of owner withdrawals as a debit to Salary Expense. (a) How would this error affect the equality of the trial balance? (b) How would this error affect the income statement, statement of owner's equity, and balance sheet?

Answer 1

a) Assuming that no errors have occured during journalising or posting if the cash account has a credit balance of $1850 it means that the ABC company has overdrawn which means it has written checks for amount which is greater than the balance in the cash account.

b) The credit balance of $1850 in the cash account is a liability as it is bank overdraft and the amount will be required to be paid to the bank by the company

Requirement 2

The entry for withdrawal should have been Drawings acc ... Dr

Cash acc ... Cr

But the entry has been made as Salary expense acc...Dr   

Cash acc... Cr

a)The equality of trial balance will not be effected as both items come in the debit causing no effect and cash is already reduced in both entries

b) The effect of it will be that net income will be understated by $7500 as the expense is shown which isnt

Statement of equity will remain the same as Net income is understated which is added and drawings which is to be subtracted are not done so. So overall no change will be there due to wrong entry.

In balance sheet there is no effect on total as cash is credited in both entries and equity balance also remains same