Errors

Errors
Errors not affecting trial balance agreement Errors affecting trial balance agreement

Errors not affecting trial balance agreement

E.g. Errors of commission Errors of principle Errors of original entry Errors of omission Compensating errors Complete reversal of entries

Errors affecting trial balance agreement

Suspense account

Examples of account
1.
2. 3.

Correcting entry

4.
5.

Asset Purchases Expenses Returns Inwards Drawings

Increase Debit Decrease - Credit

Examples of account 1. Liabilities/Capital 2. Sales 3. Income 4. Returns Outwards

Correcting entry

Increase Credit Decrease Debit

Errors Not Affecting Trial Balance Agreement

Errors of Commission

The correct amount is entered but in a wrong personal account

Example

A purchase of goods from C.Lee has been posted to the credit side of C.Lais account in error, amounting to $500. The correcting entries should be:
Original entry: Dr Purchase $500 Cr C Lee $500
Wrong entry: Dr Purchase $500 Cr C Lai $500

The journal
$
C.Lai C.Lee 500 500

Purchases entered in wrong personal account, now corrected.

C. Lai $ C.Lee 500 Purchases

$
500

C. Lee C.Lai $ 500

Errors of Principle

An item is entered in the wrong type of account due to misunderstanding of the nature of the item.

Example

Office equipment purchased for $1,000 in cash has been debited to an office expenses account. The correcting entries should be:
Original entry: Dr Office Equipment $1000 Cr Cash $1000
Wrong entry: Dr Office Expenses $1000 Cr Cash $1000

The journal
$
Office Equipment Office Expenses 1,000 1,000

Purchase of office equipment wrongly entered in the office expenses account, now corrected.

Office Expenses $ Cash 1,000 Office Equipment

$
1,000

Office Equipment $

Office Expenses

1,000

Errors of Original Entry

Wrong original figure is entered in the journals, and hence posted incorrectly to the accounts.

Example

A payment of $1,200 to a creditor, M.Wong, has been entered as both a debit and credit as $1,000. The correcting entries should be:
Original entry: Dr Mr. Wong $1200 Cr Bank $1200
Wrong entry: Dr Mr. Wong $1000 Cr Bank $1000

The journal
$
M Wong(1200-1000) Bank 200 200

Payment of $1,200 incorrectly entered as $1,000, now corrected.

M. Wong

$
Bank Bank 1,000 200

Bank

$
M. Wong M. Wong 1,000 200

Errors of Omission

A transaction has been completely omitted from the accounts.

Example

A sale of $400 to John Leung has been completely omitted from the accounts. The correcting entries should be:

Original entry: Dr John Leung $400 Cr Sales $400

Wrong entry: No entry

The journal
$
John Leung Sales 400 400

A sale of $400 was omitted, now corrected.

Sales

$
John Leung 400

John Leung $

Sales

400

Compensating Errors

Debit side errors are equal to credit side errors.

Example

The purchases account was undercast by $2,200, and the sales account was also undercast by $2,200. The correcting entries should be:

The journal
$
Purchases Sales 2,200 2,200

Purchases and sales accounts were undercast by $2,200, now corrected.

Purchases $ Sales 2,200

Sales $ 400

Purchases

Complete Reversal of Entries

The correct amounts are entered in the wrong sides of the two appropriate accounts.

Example

The purchase of goods on credit from M. Lok for $60 was entered on the debit side of M. Loks account and the credit side of the purchases account. The correcting entries should be:
Original entry: Dr Purchase $60 Cr M Lok $60

Wrong entry: Dr M Lok $60 Cr Purchase $60

The journal
$
Purchases ($60 x 2) M. Lok ($60 x 2) 120 120

Purchases from M. Lok incorrectly debited to his account and credited to the purchases account, now corrected.

Purchases $ M. Lok 120 M. Lok

$
60

M. Lok $ $

Purchases

60 Purchases

120

Errors Affecting Trial Balance Agreement

Errors affecting trial balance agreement may occur when

(i) recording transactions in the accounts:

(1) omitting a debit or credit entry (2) posting a wrong amount to one of the accounts (3) recording an entry on the wrong side
E.g. a debit entry entered as a credit or a credit entry as a debit

(ii) Balancing of accounts:

Incorrect calculation of a balance E.g. overcast or undercast

(iii) Drawing up a trial balance:

(1) omitting a balance from the trial balance (2) incorrectly posting an amount to the trial balance (3) incorrectly posting a balance to the wrong side of the trial balance

Suspense Account

When the trial balance does not agree, the amount of the difference is entered in a suspense account.

Trial Balance as at 31 December 1996

$
Total balances extracted Suspense account 90 10

$
100

100

100

Suspense Account 1996 Dec 31 Difference per trial balance 10 $

How To Show a Suspense Account on the Balance Sheet

Debit Balance of the Suspense Account

T form
Balance Sheet $ Fixed Assets Current Assets Suspense Account X X X X

Vertical form Balance Sheet

$
Fixed Assets Current Assets X

$
X

Less Current Liabilities

Working Capital Suspense Account

X
X X X

Credit Balance of the Suspense Account

T form
Balance Sheet $ Capital Long-term Liabilities Current Liabilities X X X

Suspense Account

X X

Vertical form
Balance Sheet

$
Fixed Assets Current Assets X

$
X

Less Current Liabilities

Working Capital Suspense Account

X
X (X) X

Correction of Errors

To correct the errors, students should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.

Example
A credit sale of $150 to Mr Chan has been omitted from his account.
Original entry: Dr Mr Chan $150 Cr Sales $150
Wrong entry: Dr Cr Sales $150 Correct entry: Dr Mr. Chan $150 Cr Suspense $150

Example
A sale to C. Lee for $230 was correctly entered in the sales book but entered in C. Lees account as $320.
Original entry: Dr C Lee $230 Cr Sales $230
Wrong entry: Dr C Lee $320 Cr Sales $230 Correct entry: Dr Suspense $90 Cr C Lee $90

Example
A credit sale of $97 has been credited to H. Cheungs account.

Original entry: Dr H Cheung $97 Cr Sales $97

Wrong entry: Cr H Cheung $97 Cr Sales $97 Correct entry: Dr H Cheung (97*2) 194 Cr Suspense $194

Example

Sales day book was overcast by $200.

$200 $200

Correct entry: Dr Sales Cr Suspense

Example

Sales day book was undercast by $40.

$40 $40

Correct entry: Dr Suspense Cr Sales

Correction of Errors

A single entry in the suspense account. This occurs when errors are made in extracting balances, rather than in the recording phase.

Example

The total of the sales account of $1,500 has been omitted from the trial balance.

Correct entry: Dr Suspense

$1500

Example

The total of the sales account of $1,500 has been extracted as $1300 in the trial balance.
Correct entry: Dr Suspense $200

Example

The total of the sales account of $1,500 has been extracted to the debit column of the trial balance.
Correct entry: Dr Suspense (1500*2) $3000

Correction of Errors and Effects on the Profit and Balance Sheet

For errors affecting the final accounts (I.e. profit calculation and balances carried down) Corrections are also required for the profit/loss and balances in the balance sheet.

Trading account:
Sales - Cost of good sold = Gross Profit Sales - (Opening stock + Purchases Closing stock) = Gross Profit

Sales - Opening stock - Purchases + Closing stock = Gross Profit

1st order

2nd order

3rd order

Sale increase Opening stock increase Purchases increase

Closing stock increase

Cr. Sales Dr. Stock Dr. Purchases

Dr. Stock

Increase in Net Profit Decrease in Net Profit Increase in Net Profit

Increase in Net Profit

Profit and loss account:

Gross Profit + Income (e.g. Rent received) Expenses (e.g. Motor expenses) = Net Profit 1st order 2nd order 3rd order

Income increase Expenses Increase

Cr. Income Dr. Expenses

Increase in Net Profit Decrease in Net Profit

Example of errors

Action required on the profit

Action required on the balance sheet

Purchases undercast
Purchases overcast Sales undercast Sales overcast Income undercast Income overcast Expenses undercast

Subtract
Add Add Subtract Add Subtract Subtract

Expenses overcast

Add

Example of errors

Opening stock undervalued Opening stock overvalued

Action required on the profit Subtract

Add

Action required on the balance sheet -

Closing stock undervalued Closing stock overvalued

Add
Subtract

Increase closing stock Decrease closing stock

Example of errors

Action required on the profit Add

Action required on the balance sheet Increase prepayments (current assets)

Prepayments of expenses omitted

Accruals of expenses omitted

Fixed/current assets undervalued Liabilities understated

Subtract

Increase accruals (current liabilities) Increase fixed/ current asset Increase liabilities