Closing Inventory Error in the Trial Balance
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Skill: Analyse
Stimulus
| Item | Debit (RM) | Credit (RM) |
|---|---|---|
| Capital | 55,000 | |
| Drawings | 4,000 | |
| Opening inventory | 7,000 | |
| Closing inventory | 8,000 | |
| Purchases | 40,000 | |
| Sales | 58,000 | |
| Rent | 6,000 | |
| Salaries | 14,000 | |
| Debtors | 11,000 | |
| Creditors | 7,000 | |
| Bank | 13,000 | |
| Equipment | 25,000 | |
| Total | 128,000 | 120,000 |
Trial balance prepared by Amir as at 31 December 2025 (not balanced).
Question
(a) Analyse the cause of the RM8,000 difference between the total debits and total credits of the trial balance.
(b) Based on the relationship among the trial balance, closing inventory and the financial statements, explain where the closing inventory of RM8,000 should be recorded and the effect on gross profit if Amir's error is not detected.
Thinking steps
- Recall the basic rule: only opening inventory (the balance of the inventory account) appears in a trial balance; closing inventory does not appear because it is not a ledger balance but additional information from the stock-take.
- Identify the wrongly placed item: Amir entered closing inventory of RM8,000 in the debit column, while opening inventory of RM7,000 is already there.
- Compare the totals: debits RM128,000 exceed credits RM120,000 by RM8,000. This difference is exactly the value of the closing inventory that was entered.
- Confirm the cause: if the closing inventory of RM8,000 is removed from the debit side, both sides become RM120,000 and the trial balance balances.
- Determine the correct place for closing inventory: (i) deducted in the trading account to compute cost of sales, and (ii) recorded as a current asset in the statement of financial position.
- Evaluate the effect: if the error stands, closing inventory is not deducted in the trading account, so cost of sales is overstated and gross profit is understated by RM8,000.
Model answer
(a) The cause of the difference is that Amir entered the closing inventory of RM8,000 in the debit column of the trial balance. Closing inventory cannot be recorded in a trial balance because it is not a ledger balance but additional information from the stock-take at the balancing date. Because this item was added on the debit side, total debits became RM128,000 while total credits remained RM120,000. The RM8,000 difference is exactly the value of the closing inventory, proving it is the cause. Once the closing inventory is removed, both sides equal RM120,000 and the trial balance balances.
(b) The closing inventory of RM8,000 should be recorded in two places: (i) in the trading account as a deduction when computing cost of sales (Opening inventory + Purchases − Closing inventory), and (ii) as a current asset in the statement of financial position. If Amir's error is not detected, closing inventory is not deducted in the trading account; cost of sales is therefore overstated by RM8,000 and gross profit is understated by RM8,000, which in turn understates net profit and owner's equity.