Accounting Appendix
Worked Examples and Error Diagnosis
Repair errors by locating the broken stage in the accounting chain
When an answer is wrong, “practise more” is not a diagnosis. Locate the failed stage:
Diagnostic table
| Symptom | Likely failure | Repair question |
|---|---|---|
| Debits do not equal credits | Entry mechanics | Is a line missing or reversed? |
| Trial balance agrees but profit is wrong | Classification, omission or cut-off | Was the right event and period recorded? |
| Ratio is correct but conclusion is weak | Comparison or causal reasoning | What benchmark, driver and note support the claim? |
| Decision includes every ledger cost | Relevance | Which future cash flows actually differ? |
| NPV changes dramatically | Forecast or discount-rate sensitivity | Which assumption has least evidence? |
Example 1: cash is not revenue
Northstar receives £24,000 on 1 December for twelve monthly services beginning immediately.
A student records all £24,000 revenue.
Repair
- Fact: one month is delivered by 31 December.
- Rule: revenue follows performance.
- Calculation: £24,000 / 12 = £2,000 earned.
- Entry at receipt: Dr cash £24,000; Cr contract liability £24,000.
- Adjustment: Dr contract liability £2,000; Cr revenue £2,000.
- Report: closing contract liability £22,000.
The error began at the fact-to-rule stage, not the debit/credit stage.
Example 2: lower unit cost can hide overproduction
Fixed factory overhead is £120,000.
| Production | Fixed overhead per unit | Units sold | Fixed overhead deferred if no opening stock |
|---|---|---|---|
| 1,000 | £120 | 1,000 | £0 |
| 1,500 | £80 | 1,000 | 500 × £80 = £40,000 |
Producing 500 unwanted units makes absorption profit look higher by deferring £40,000, but:
- total fixed spending did not fall;
- cash is tied up in inventory;
- storage and obsolescence risk rise.
The calculation is correct; the performance interpretation is wrong.
Example 3: a ratio needs a denominator audit
Receivable days rise from 35 to 50.
Before blaming collections, check:
- Was credit sales used in both periods?
- Were average receivables used?
- Did a year-end acquisition add receivables but little annual sales?
- Did sales mix or payment terms change?
- Does the aging report confirm slower collection?
One ratio is a signal, not a verdict.
Example 4: allocated cost is not avoidable cost
A product shows:
- contribution £90,000;
- traceable fixed cost £60,000, of which £45,000 is avoidable;
- allocated head-office cost £40,000 that remains.
Reported segment result is a £10,000 loss, but dropping it:
The product should not be dropped on these numbers alone.
Final answer checklist
- Did I describe the event before naming accounts?
- Did I state framework, period and assumptions?
- Does every calculation reconcile?
- Did I separate profit, cash and value?
- Did I distinguish estimate from rule?
- Did I explain what evidence would reverse my conclusion?