Correction of errors - Accounting Tuition

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:

Errors not affecting trial balance
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.

Example: A 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.

Example: A 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.

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