The accountant of Leo Ltd. recorded a payment by cheque to a creditor for supply of materials as 1,340.56. The bank recorded the cheque at its correct amount of 3,140.56. The Company has not passed any rectification entries and the error is not detected through the bank reconciliation. The impact of this error is
Correct answer: B. The favorable bank balance as per Pass Book is less than the Bank balance as per Cash book
- A. The Trial Balance will not agree
- B. The favorable bank balance as per Pass Book is less than the Bank balance as per Cash book
- C. The purchases are understated
- D. The balance of creditors is understated
Explanation
The cash book records a payment that is 1,800 lower than the amount actually debited by the bank, so the pass-book balance is 1,800 less than the cash-book balance. The creditor and purchases are not understated; the creditor is actually left overstated.
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About Accounting Principles
Accounting principles explain the rules used to record, classify and report business transactions. Coverage includes the accounting equation, double-entry system, accrual and cash bases, matching and prudence concepts, consistency, going concern, business entity, and the difference between capital and revenue items.
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