Chapter 10 - Correction of errors


According to dual aspect concept every debit entry has a corresponding credit entry with the same amount. Therefore, if all accounting entries are correctly recorded in journals and posted to ledgers, trial balance should balance. A trial balance is prepared to check the arithmetical accuracy of the double entries made in the ledger and as a basis to prepare financial statements. In case the trial balance fails to agree, an investigation is made to detect errors in the ledger. There are two types of errors:

  1. Errors not affecting trial balance
  2. Errors affecting trial balance

Errors in the ledger are corrected using the general journal with an explanatory note (Narration).

Errors not affecting trial 

Error of principle

This arises when a transaction is recorded in the wrong class of account without due regards to the fundamental accounting principle.

ExampleA machine purchased for $10 000 cash has been debited to purchases account.


Correct entry


Error

DR                          Machinery Account                            CR

DR                          Purchases Account                              CR

Cash

10 000



Machinery

10 000



Correct




Wrong




DR                             Cash Account                                   CR

DR                             Cash Account                                    CR



Machinery

10 000



Machinery

10 000



Correct




Correct



General Journal

Details

DR          $

          $             CR

Machine Account (DR)

10 000


To Purchases Account


10 000

(Being entries for machine purchased for $10 000 cash debited to purchases account)




Error of Commission 

 This arises when a transaction is recorded in the wrong personal account. It occurs when a transaction is recorded in wrong account but to the correct type of account.

Example$400 paid to P. Collins by cheque was recorded in the account of J. Collins.


Correct entry


Error

DR                          P. Collins Account                            CR

DR                          J. Collins Account                              CR

Bank

400



Bank

400



Correct




Wrong




DR                             Bank Account                                   CR

DR                             Bank Account                                    CR



P. Collins

400



P. Collins

10 000



Correct




Correct



General Journal

Details

DR          $

          $             CR

P. Collins (DR)

400


To J. Collins Account


400

(Being entries for an amount of $ 400 paid to P. Collins recorded in J. Collins account)




Error of omission

This occurs where a transaction has been completely omitted from the books.

ExampleA sale invoice to D. Riley $ 575 was completely omitted from the books.


Correct entry

DR                                                                                     D.Riley Account                                                                                 CR

Sales

575



Correct




DR                                                                                        Sales Account                                                                                    CR



D.Riley

575



Correct



General Journal

Details

DR          $

          $             CR

D. Riley (DR)

400


To Sales Account


400

(Being entries for a sales invoice to D. Riley completely omitted from the books.)




Complete Reversal of Entries

In this case the debit account is credited and the credit account is debited with correct amount. The correction of this error requires the figure to be doubled. (One to correct error and one for original entry)

Example: Rent paid $300 by cheque wrongly recorded as rent received.


Correct entry


Error

DR                               Rent Account                                 CR

DR                         Rent Account                             CR

Bank

300





Bank

300

Correct






Wrong


DR                             Bank Account                                   CR

DR                             Bank Account                                    CR



Rent

300

Rent

300





Correct


Wrong





General Journal

Details

DR          $

          $             CR

Rent  (DR)

600


To Bank Account


600

(Being entries for rent $ 300 paid by cheque wrongly recorded as rent received)




Error of original entry

This occurs where the wrong amount is posted to both accounts although the accounts to which entries were made are correct. It arises when there is an error in amount in the source document before posting to the ledger.

Example: Goods returned from P. Wedge $639 was recorded in both accounts as $369.


Correct entry


Error

DR                           P. Wedge Account                              CR

DR                           P. Wedge Account                              CR

Purchases Ret.

639



Purchases Ret.

369



Correct





Wrong



DR                   Purchases return Account                        CR

DR                   Purchases return Account                        CR



P. Wedge

639



P. Wedge

369



Correct





Wrong


General Journal

Details

DR          $

          $             CR

Purchases Return (DR)

270


To P. Wedge Account


270

(Being entries for goods returned from P. Wedge $639 recorded in both accounts as $369)




Compensating Error

These are two or more errors which cancel themselves out. Errors on one side of the ledger are compensated by errors of the same amount on the other side

Example: The sales and purchases account are both understated by $ 1 000.


Correct entry

DR                                                                            Purchases Account                                                                                CR

Supplier’s account

1 000



Correct




DR                                                                                 Sales Account                                                                                     CR



Customer’s account

1 000



Correct



General Journal

Details

DR          $

          $             CR

Purchases (DR)

1 000


To Sales


1 000

(Being entries for sales and purchases account understated by $ 1 000)




Errors affecting trial balance

When a trial balance fails to agree, the difference between the two sides is recorded in a suspense account. This is simply used to balance the trial balance. Errors affecting the trial balance are then corrected through the suspense account. The main errors affecting the trial balance are:

1, Transaction recorded only once in the books

a) The transaction may be debited but not credited

b) The transaction may be credited but not debited.


2. Transaction recorded twice on same side

a) Transaction may be debited and again debited

b) Transaction may be credited and again credited.


3. Understatement or overstatement in one side

a) Transaction may be well debited but understated on the credit side

b) Transaction may be well debited but overstated on the credit side

c) Transaction may be well credited but understated on the debit side

d) Transaction may be well credited but overstated on the debit side


Effect of correcting errors on Gross profit and Profit for the year



Effect on



Gross Profit

Profit for the year

Revenue / Sales

DR – Decrease

Decrease

Decrease


CR – Increase

Increase

Increase





Return inwards

DR – Increase

Decrease

Decrease


CR – Decrease

Increase

Increase





Opening inventory

Increase

Decrease

Decrease


Decrease

Increase

Increase





Closing inventory

Increase

Increase

Increase


Decrease

Decrease

Decrease





Purchases

DR – Increase

Decrease

Decrease


CR – Decrease

Increase

Increase





Return outwards

DR – Decrease

Decrease

Decrease


CR – Increase

Increase

Increase





Other income

DR – Decrease

No effect

Decrease


CR – Increase

No effect

Increase





Expenses

DR – Increase

No effect

Decrease


CR – Decrease

No effect

Increase


Worked Example

Catherine prepared a trial balance on 30 April 2019. The trial balance did not agree.  She opened a suspense account. On inspection of the books she found the following errors.

  1. Motor vehicle expenses, $500, had been debited to the bank account and credited to the motor vehicle expenses account.
  2. Wages, $800, had been debited in the rent payable account.
  3. A return of goods to a supplier, Ahmed, $595, had been incorrectly recorded in the purchases returns journal as $295.
  4. The discount received total in the cash book, $68, had not been entered in the discount received account.
  5. A cash sale, $125, had been entered in the sales account as $215.

REQUIRED

a) Prepare journal entries to correct the errors 1 – 5. Narratives are not required.

b) Prepare the suspense account after the correction of errors 1 – 5. Show the original difference recorded in the trial balance.


General Journal

Details

Dr

Cr


$

$

Motor vehicle expenses (DR)

1000


To Bank


1000




Wages (DR)

800


To Rent payable


800




Ahmed (DR)

300


To Purchases returns


300




Suspense (DR)

68


To Discount received


68




Sales (DR)

90


To Suspense


90


DR

Suspense Account

CR

Date

Details

$

Date

Details

$

30 April

Balance b/f

22

30 April

Sales

90


Discount rec’d

68






90



   90