Trial balance homework question. How is the book's answer correct?

[creditor]

Quick copies recorded a cash collection on account by debiting Cash at Bank and crediting Accounts Payable. What will the trial balance show for this error?

A. Too much for expenses
B. Too much for liabilities
C. The trial balance will not balance
D. Too much cash at bank

The answer is "Too much for liabilities" but i don't see how that is the answer.

Cash is debited, and Accounts Payable is credited. So there is a credit and a debit for the same amount. So in other words: they balance each other. So how will the trial balance show any error? It seems to me that the trial balance will balance and will not show the error as described above because there is a debit and a corresponding credit for the same amount. How will the trial balance show too much for liabilities then, as the book says it will?

I must be missing something obvious here. If you could point it out that would be great. Thanks.

 

[nonprofitjeff]

the book is correct

As I see it, if you debit cash you are receiving cash which means you should credit revenue or a receivable. In some cases you may have received the cash in error and will need to refund it, in this case it could become a liability. In other cases in it may be a credit to deferred. I don't think the book worded the question clearly. The book says "what will the trial balance show for this error". It’s not necessarily an error to record the amount as a credit to accounts payable; it’s just that it’s not customary. Given the choices B. seems to be the correct answer. Hope this helps

 

[ArcSine]

Creditor, it's true that you have a balanced entry and, as you note, the trial balance will balance. So "C" is out.

Expenses are unaffected, either by the incorrect entry, or by the correct entry (Debit Cash, Credit Accts Receivable). Hence "A" is eliminated.

The incorrect entry nevertheless got it right when it comes to debiting Cash, so Cash is properly stated and "D" can be scratched from contention.

But to see why "B" is correct (that is, if the "eliminate all other possibilities" approach leaves you a bit unsatisfied), note that the bad entry credited a liability (Accounts Payable) when Liabilities shouldn't have been involved in that JE at all. Thus, although the trial balance is nicely in balance in total, the liabilities portion of the trial balance is overstated. The reason the TB is in balance is that Assets are also overstated, as the asset Accts Receivable should have been reduced by that cash collection entry, but wasn't. Overstated Assets + Overstated Liabilities = Nicely Balanced TB.

 

[ladyrider]

Homework question

Because you are collecting a RECEIVABLE not a Payable.

The entry would be

DR Cash (bank, whatever)
CR AR

Quick copies recorded a cash collection on account by debiting Cash at Bank and crediting Accounts Payable. What will the trial balance show for this error?

A. Too much for expenses
B. Too much for liabilities
C. The trial balance will not balance
D. Too much cash at bank

The answer is "Too much for liabilities" but i don't see how that is the answer.

Cash is debited, and Accounts Payable is credited. So there is a credit and a debit for the same amount. So in other words: they balance each other. So how will the trial balance show any error? It seems to me that the trial balance will balance and will not show the error as described above because there is a debit and a corresponding credit for the same amount. How will the trial balance show too much for liabilities then, as the book says it will?

I must be missing something obvious here. If you could point it out that would be great. Thanks.

 

[creditor]

Creditor, it's true that you have a balanced entry and, as you note, the trial balance will balance. So "C" is out.

Expenses are unaffected, either by the incorrect entry, or by the correct entry (Debit Cash, Credit Accts Receivable). Hence "A" is eliminated.

The incorrect entry nevertheless got it right when it comes to debiting Cash, so Cash is properly stated and "D" can be scratched from contention.

But to see why "B" is correct (that is, if the "eliminate all other possibilities" approach leaves you a bit unsatisfied), note that the bad entry credited a liability (Accounts Payable) when Liabilities shouldn't have been involved in that JE at all. Thus, although the trial balance is nicely in balance in total, the liabilities portion of the trial balance is overstated. The reason the TB is in balance is that Assets are also overstated, as the asset Accts Receivable should have been reduced by that cash collection entry, but wasn't. Overstated Assets + Overstated Liabilities = Nicely Balanced TB.

Thanks for the logical, clear explanation, and for confirming that the trial balance does in fact balance. And yes, I can see that Liabilities have been overstated and so have Assets.

But, can you actually see this if you JUST look at the trial balance? If someone walked over to you on the street and showed you the trial balance with this error in it, without telling you that a mistake was made and what that mistake was, would you be able to spot the mistake? I can't see how you would be able to. So how would an accountant find out that an error has been made here? And it seems like the question is worded badly because it says "what would the trial balance SHOW for this error" but the trial balance doesn't show anything for this error. You only know it shows an error because you were given information about the exact error that was made. Correct?

 

[ArcSine]

But, can you actually see this if you JUST look at the trial balance? If someone walked over to you on the street and showed you the trial balance with this error in it, without telling you that a mistake was made and what that mistake was, would you be able to spot the mistake?

No. Absent any other information, the erroneous TB will appear just fine. Some errors are immediately evident on the face of a TB (a $1,000,000 credit in miscellaeous expense, say). Many others---such as the one in your question---are invisible on the TB, and require some additional info external to the TB for their discovery. In practice, the error would be detected via one of the following:

1. During a review of the journal entries, someone would note that a collection of cash from a customer was credited to AP instead of AR.
2. Most companies maintain a detailed record of receivables, on which the balances due from each customer are individually tracked. Ditto for AP, where the detailed record tracks the amounts due to each vendor. These records are separate from the TB and general ledger. This erroneous JE will cause the TB to differ from these detailed records, for both AP and AR. For example, the bad TB might show that AR (as overstated) is $100, whereas the detail receivables record shows that the true receivables were: Customer Bob, $55; and Customer Jane, $25. The bad journal entry would be discovered as a result of trying to run down that $20 discrepancy.

I agree the question's wording could've been better. By "what will the TB show for this error?", I think they're intending "What account(s) on the TB will be wrong as a result of this error?", and not "Where on the TB will the error be obvious?"; still, the wording doesn't completely preclude the latter interpretation.

 

[creditor]

No. Absent any other information, the erroneous TB will appear just fine. Some errors are immediately evident on the face of a TB (a $1,000,000 credit in miscellaeous expense, say). Many others---such as the one in your question---are invisible on the TB, and require some additional info external to the TB for their discovery. In practice, the error would be detected via one of the following:

1. During a review of the journal entries, someone would note that a collection of cash from a customer was credited to AP instead of AR.
2. Most companies maintain a detailed record of receivables, on which the balances due from each customer are individually tracked. Ditto for AP, where the detailed record tracks the amounts due to each vendor. These records are separate from the TB and general ledger. This erroneous JE will cause the TB to differ from these detailed records, for both AP and AR. For example, the bad TB might show that AR (as overstated) is $100, whereas the detail receivables record shows that the true receivables were: Customer Bob, $55; and Customer Jane, $25. The bad journal entry would be discovered as a result of trying to run down that $20 discrepancy.

I agree the question's wording could've been better. By "what will the TB show for this error?", I think they're intending "What account(s) on the TB will be wrong as a result of this error?", and not "Where on the TB will the error be obvious?"; still, the wording doesn't completely preclude the latter interpretation.

Thanks for your help!