Accounting Appendix
Worked Examples and Error Diagnosis
Repair errors by locating the broken stage in the accounting chain
Worked Examples and Error Diagnosis
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?