12

The following facts are discussed in this chapter.

12.1 The need to correct accounting errors

12.2 The occasions when accounting errors occur

12.3 Identification of accounting errors

12.4 Errors that do not affect the agreement of trial balance

12.5 Accounting errors that affect the agreement of the trial balance

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12.1 The need to correct accounting errors 04. When the trial balance is prepared
Errors may occur in the preparation of the trial balance using the balances of the
Accounting is expected to provide accurate information to stakeholders in making ledger accounts.

decisions. However, errors may occur when business transactions are recorded in Examples :-
prime entry books, posted to the ledger, balancing the ledger accounts as well as The balance of the electricity bill account of Rs. 15 000 has not
when extracting accounting balances for the trial balance. If such errors had occurred been extracted to the trial balance.
in the accounting process, correct information cannot be supplied to the stakeholders
to make decisions. Therefore, such errors should be corrected before the financial
statements are prepared. The balance of the insurance account of Rs. 10 000 has been
entered as Rs. 1 000 in the trial balance.
12.2 The occasions when accounting errors may occur
Errors may occur in this way at different stages in the accounting process. There-
The occasions when accounting errors may occur is stated below. fore, as the first step, a business should identify such errors.

01. When transactions are recorded in the prime entry books

Errors may occur when recording transactions in prime entry books. 12.3 Identification of accounting errors
Examples :-
Transactions of a business are recorded according to the double entry principle.
A sales invoice of Rs. 20 000 of credit sales has not been recorded in
Accordingly, every debit entry should have a corresponding credit entry. As a result,
the sales journal.
the total of the debit column should be equal to the total of the credit column of the
A purchase invoice of Rs. 50 000 has been entered erroneously as trial balance prepared by the business.
Rs. 5 000 in the purchases journal.
If both the totals are not equal, it is an indication that errors have occurred in the
02. When the transactions are posted to the ledger from the prime accounting process. However, even if the totals agree, still there might be errors.
entry books Hence, the agreement of credit and debit balances in the trial balance only
Errors may occur when transactions are posted to the ledger accounts. confirms that similar value of debits have been recorded as credits and the accounts
are balanced.
Examples :-
The total of the purchases journal that amounts to Rs. 50 000 has Accordingly, accounting errors can be categorized in to two.
not been posted to the purchases account.
The total of the sales journal that amounts to Rs. 155 000 has been Y Errors that do not affect the agreement of the trial balance
entered erroneously as Rs. 150 000 in the sales account. Y Errors that affect the agreement of the trial balance

03. When balancing of ledger accounts Accordingly, errors should be corrected using the general journal. There after, the
Errors may arise when balancing ledger accounts at the end of the period. erroneous ledger accounts need to be corrected.

Examples :- Now, let us study how each of the errors mentioned above is corrected.
Total of the sales account has been totaled less by Rs. 10 000
Total of the rent account is overstated by Rs. 5 000
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12.4 Errors that do not affect the agreement of trial balance Example :-
A credit sales invoice of Rs. 20 000 has been recorded as Rs. 2 000
Some errors that occur in the accounting process might not affect the agreement of in error in the sales journal.
the trial balance. Therefore, even if such errors had occurred, the total of the debit
Here, both the debtor's account and the sales account have been understated by
column would be equal to the total of the credit column of the trial balance. These
Rs. 18 000 (Rs. 20 000 - Rs. 2 000) and therefore, both accounts should be corrected
errors are also known as "the errors that are not revealed by the trial balance."
by recording Rs. 18 000. The journal entry to correct this error is as follows.
Examples for such errors are stated below.
General Journal
01. A complete commission of a transaction from the books Voucher Dr. Cr.
Date Description L/F
No. Rs. Rs.
If a particular transaction is not recorded in the prime entry book, such a transaction Debtor's account Dr. 18 000
would not be entered in the ledger accounts as well. These errors are known as Sales account 18 000
"errors of omission." The double entry of the omitted transaction should be entered (Correction of under statement of sales
properly in the relevant ledger accounts to correct this error. and debtor's account by Rs. 18 000)

Example :- Example :-
An invoice of credit purchase Rs. 50 000 has been completely The discount received of Rs. 1 500 from a creditor has been recorded
omitted from the accounting books. as Rs. 1 300 in the discount received column of the cash book column.
The above error is corrected as,
Here, both creditors and the discount received accounts have been recorded less
General Journal by Rs. 200 (Rs. 1 500 - Rs. 1 300) and should be adjusted in both accounts.
Voucher Dr. Cr.
Date Description L/F General Journal
No. Rs. Rs.
Voucher Dr. Cr.
Purchases account Dr. 50 000 Date Description L.P.
No. Rs. Rs.
Creditor's account 50 000
(Correction of error of omission of Creditor's account Dr. 200
purchase invoice of Rs. 50 000) Discount received account 200
(Correction of the recording less of Rs.
200 in creditor's and discount received
02. Recording incorrect value of a transaction in the prime entry accounts)
books
03. Recording same transaction twice in the accounting books
This refers to recording lesser or higher than the correct value of the transaction in Sometimes, a transaction might have been recorded twice in the prime entry books, and
the prime entry books. Then, both the values entered as debit and credit entries have accordingly, posted to ledger accounts twice. This error can be corrected by reversing
the erroneous value. However, there is no impact on the agreement of the trial bal- the additional entry with the value of the transaction in both of the relevant accounts.
ance because both the values recorded as debits and credits are the same.Therefore,
recording the difference between the correct and incorrect value that was recorded Example :-
is sufficient to correct the error. Purchase invoice of Rs. 10 000 on credit has been entered twice in
the books.

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 General Journal
Voucher Dr. Cr. Activity 01
Date Description L/F
No. Rs. Rs.
Creditor's account Dr. 10 000 An apprentice bookkeeper has prepared a trial balance on 31-12-20xx and says
Purchases account 10 000 that it is not necessary to check again the accounts as both the balances of debit
(Correction of recording a purchase invoice
and credit columns of the trial balance agree, as well as the final accounts can be
of Rs. 10 000 on credit twice in the
accounts) prepared correctly.
Comment on the above statement.
04. Recording the value of a transaction in an incorrect account instead
of the relevant account
Activity 02
There are occasions when the value of a transaction is recorded in an incorrect
account instead of the relevant account. However, there is no impact on the agreement Even though the totals of the trial balance prepared by a business as at 31-12-20xx
of the trial balance due to this error, as the same value had been recorded as both
agree, the following errors were identified subsequently.
debit and credit entries.
i. A purchase invoice of Rs. 20 000 has been completely omitted from the
Example :- books of accounts.
Office equipments that had been purchased for the business use for
Rs. 200 000 is debited in the purchases account. ii. A computer bought for office use to the cost of Rs. 40 000 has been
debited to the purchases account.
The purchases account shows the value of the goods bought for the purpose of resale
by the business. Here, the office equipment were purchased only for the business use, iii.Payment of electricity charges of Rs. 5 000 has been erroneously
and therefore, it should be debited to the asset account known as the office equipment debited to the Insurance charges account.
account. iv. Withdrawals of goods worth of Rs. 12 000 by the owner for his own
General Journal use has not been recorded in the books.
Voucher Dr. Cr.
Date Description L/F Required:
No. Rs. Rs.
Office equipments Dr. 200 000 Write the necessary journal entries to correct of the above errors.
Purchases account 200 000
(The correction of recording Rs. 200 000
worth of office equipment that was
purchased for the business use, which
12.5 Accounting errors that affect the agreement of the
was erroneously recorded in the purchases trial balance
account)
A difference would arise between the total of debit and credit columns of a trial
balance due to certain errors that had occurred in the process of accounting. These
errors are known as the errors which affect the agreement of the trial balance. The
ledger accounts should be checked to identify what such errors are. However, it
would take a considerable amount of time to detect such errors. Therefore, such a
difference should be posted to a suspense account until those errors are identified
and corrected.

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Suspense account The difference of the above trial balance should be recorded in a suspense account
as follows.
When there is a difference between the totals of debit and credit balances in the trial
balance, that difference should be recorded temporarily into an account called the Dr. Suspense account Cr.
Suspense account until such errors are identified and corrected.
Value
A suspense account is created in the following way. Date Description L/F Value Rs. Date Description L/F
Rs.
i. Identify the difference between the totals of the debit and credit balances
The difference in
of the trial balance. 5 000
the trial balance
ii. Insert that difference on the side where the deficit exists in the trial
balance and balance the trial balance.
iii. As the reason for this shortage is not known yet write the words Activity 03
"Suspense account" in front of the difference in the trial balance.
iv. Then, record the value of the shortage in a separate Suspense account. Following are the totals of the debit and the credit balances of the trial balance
prepared as at 31.03.20xx for Naveen's business.
Accordingly, if a difference exists on the credit column of the trial balance, record
such difference on the credit side of the suspense account. On the other hand, if the Total of the debit column - Rs. 545 000
difference exists on the debit column of the trial balance insert such difference on Total of the credit column - Rs. 520 000
the debit side of the suspense account.
The trial balance as at 31st of December 20xx of Janaka's business is given bellow. Find the value of the difference and record it in a suspense account.
It has been balanced temporarily by writing Suspense account in front of the
difference of the trial balance.
Correction of accounting errors that affect the agreement of trial
Janaka's Business
balance
Trial balance as at 31.12.20xx
Accounts Dr. Rs. Cr. Rs. The reason or reasons for the difference in the trial balance should be identified
Cash account 50 000 after recording the difference in a suspense account. Therefore, certain entries have
Transport expense account 11 000 to be made in the suspense account to correct the errors. The suspense account
will be eliminated from the books of accounts after the correction of all accounting
Sales account 350 000
errors that affects the agreement of the trial balance.The reasons for the balance in
Purchase account 130 000 the suspense account are only the errors which had affected the agreement of the
Capital account 360 000 trial balance. Therefore, when such errors are corrected one of the double
Motor vehicle account 520 000 entries for the correction should be entered in the suspense account.
Bank loan account 190 000 Let us now consider the errors that are revealed by the trial balance and how such
Drawings account 24 000 errors are corrected.
Equipment account 140 000
01. Omission of one entry from books
Electricity expense 20 000
Suspense account 5 000 Example :-
900 000 900 000 Payment of telephone charges of Rs. 15 000 has been recorded
only in the cash book.
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 The relevant general journal entry to correct this error is as follows
Here, the relevant value is not debited to the telephone
charges account. Therefore, the telephone charges General Journal
account should be debited to correct this error. On the Vouch- Dr. Cr.
Date Description L/F
other hand, the cash book is already credited correctly. er No. Rs. Rs.
The total of the debit column of the trial balance is Suspense account Dr. 9 000
less by Rs. 15 000 due to this error. As a result, a debit Sales account 9 000
(Correction of sales account by Rs. 9 000,
balance of Rs. 15 000 appears in the suspense
which was recorded less erroneously)
account. Accordingly, the relevant general journal
entry to correct this error is shown below, credit entry
of Rs. 15 000 should be made to correct this in the Figure 12.1 03. Recording of the double entries of a transaction in the same side of
suspense account. the accounts
Both the entries of a transaction may have been entered in the same side of the
accounts in error.
General Journal
Voucher Dr. Cr. Example :-
Date Description L/F
No. Rs. Rs. Cash received from the debtors of Rs. 5 000 has been debited to both
Telephone charges account Dr. 15 000 the cash book and the debtor's account.
Suspense account 15 000
(Correction of the ommision of the telephone Due to the above error, each account has been debited
charges of Rs. 15 000 in the telephone by Rs. 5 000. No account has been credited. Therefore,
charges account) the total of the credit column of the trial balance is
understated by Rs. 10 000. Therefore, the suspense
account has a credit balance of Rs. 10 000. Accordingly,
02. Making one of the double entries with the correct value and the other
Rs. 10 000 should be debited to cancel the suspense ac-
entry with the incorrect value of a transaction.
count. Rs. 5 000 should be credited to the debtor's ac-
count to cancel the amount debited incorrectly. In addi-
Example :-
tion, Rs. 5 000 should be credited to the debtor's account
Cash sales for Rs. 54 000 has been debited in the cash book correctly
to correct the error. Accordingly, the debtors account
and has been credited incorrectly as Rs. 45 000 in the sales account.
should be credited a total of Rs. 10 000 to correct the
error. The general journal entry is shown below. Figure 12.3
Here, the sales account has been credited less of Rs. 9 000.
Due to crediting Rs. 9 000 less in the sales account, the General Journal
total of credit column of the trial balance is Rs. 9 000 Voucher Dr. Cr.
Date Description L/F
less and a balance of Rs. 9 000 would appear in the No. Rs. Rs.
credit side of the suspense account. To correct the error, Suspense account Dr. 10 000
the suspense account should be debited with Rs. 9 000 Debtors account 10 000
and the sales account should be credited Rs. 9 000. By (Correction of the erroneous debiting of
Rs. 5 000 in the debtor's account for the
doing this, the suspense account will be removed. receipt of cash to the debtors account)
Figure 12.2

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04. Errors which arise when balancing off the accounts Example :-
The balance in the building rent expense account of Rs. 10 000 has
Example :- not been extracted to the trial balance.
The correct total of the purchases account of Rs. 25 000 has been
erroneously totaled posted as Rs. 5 000 in the purchases account.
Here, as there is no impact on the building rent
The total of the debit column of the trial balance is expense account, it is not necessary to correct it.
Rs. 20 000 less due to the shtortage of Rs. 20 000 in However, the suspense account has a debit balance
the purchase account. Therefore, the suspense due to the debit column of the trial balance being
account has a debit balance of Rs. 20 000. Rs. 20 000 understated by Rs. 10 000. Therefore, the error of
should be credited to the suspense account to cancel understatement can be cancelled by crediting Rs.
this balance. The purchase account should be debited 10 000 to the suspense account and entering the
by Rs. 20 000 to correct the purchase account as it is building rent expense account to the trial balance.
understated by Rs. 20 000. Figure 12.5
Figure 12.4
General Journal General Journal
Voucher Dr. Cr. Voucher Dr. Cr.
Date Description L/F Date Description L/F
No. Rs. Rs. No. Rs. Rs.
Purchases account Dr. 20 000 Suspense account 10 000
Suspense account 20 000
(Correction of erroneous total of Rs. 5 000
in the purchase account for the correct value (Correction of the error for not
of Rs. 25 000) extracting the building rent expense
account balance to the trial balance)
05. Errors that arise when preparing the trial balance
Although all ledger accounts are correct, there is the possibility of errors to occur
when preparing the trial balance.

Following errors may occur when preparing the trial balance, When correcting errors that affect the agreement of the
Y Not extracting balances of certain accounts to the trial balance trial balance, one entry is recorded in the suspense ac-
count and the other entry is recorded in the relevant led-
Y Entering incorrect values of account balances instead of correct values in
ger account.
the trial balance
However, when correcting the errors which do not affect
Y Entering value of account balances to the incorrect column of the trial balance the agreement of the trial balance, only the two accounts
Errors that occur when the trial balance is prepared have a special feature in correc- which are affected should be identified and corrected,
tion when compared with other errors. Here, no error has occurred in the relevant and no entries are required in the suspense account.
ledger accounts. The errors had occurred only in the trial balance. Therefore, correction
of ledger accounts is not required. Nevertheless, the difference in the totals of the Figure 12.6
trial balance have to be recorded in the suspense account.

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 Example :- 02. Interest income account is an income account and should be shown on the
The trial balance prepared as at 31st of December 20xx by Kasuni's credit column of the trial balance. Therefore, the credit column total of the
business did not balance. That trial balance is given below. trial balance is in short of Rs. 20 000 because of entering the interest income
account balance of Rs. 10 000 in the debt column of the trial balance. Accordingly,
Kasuni's Business Rs. 20 000 should be entered in the credit column of the trial balance and the
trial balance as at 31-12-20xx suspense account should be debited with this value.
Description Dr. Rs. Cr. Rs.
03. When the part of the bank loan is repaid, the bank loan account should be debited.
Cash account 56 000 However, the bank loan account is not debited with repayment of Rs. 30 000.
Telephone charges account 5 000 Accordingly, the bank loan account is overstated by Rs. 30 000. Further, as a
Sales Account 300 000 result, the credit column of the trial balance is overstated by Rs. 30 000 and is
Purchases account 150 000 therefore included in the suspense account. Therefore, to correct this error,
Capital account 400 000 the bank loan account should be debited and the suspense account should be
Land and building account 500 000 credited with Rs. 30 000.
Bank loan account 200 000 04. The total of the debit column of the trial balance is overstated by Rs. 20 000
Drawings account 34 000 due to entering the purchase account balance as Rs. 150 000 instead of the
Furniture and equipment account 130 000 correct value of Rs. 130 000. This error has to be corrected.
Interest income account 10 000
Suspense account 15 000 05. The total of the debit column of the trial balance has been understated by
900 000 900 000 Rs. 9 000 due to the understatement in the drawings account by Rs. 9 000.
Therefore, Rs. 9 000 should be credited to the suspense account and debited
to the drawings account.
The following accounting errors have been identified, The journal entries to correct accounting errors explained above is shown below.
General journal
01. The balance of the electricity bill account of Rs. 16 000 has not been extracted
to the trial balance. Voucher Dr. Cr.
Date Description L/F
No. Rs. Rs.
02. The balance of the interest income account of Rs. 10 000 has been entered in Suspense account 16 000
(correction of not extracting the balance of the
the debit column of the trial balance. electricity bill account of Rs. 16 000 to the trial
balance)
03. Repayment of bank loan of Rs. 30 000 has been recorded only in the cash book. Suspense account Dr. 20 000
(Correction of extracting the balance of Rs. 10
04. The balance of the purchases account of Rs. 130 000 has been entered in the 000 of the interest income account to the debit
column of the trial balance)
trial balance as Rs. 150 000 in error.
Bank loan account Dr. 30 000
Suspense account
05. The drawings account has been balanced erroneously as Rs. 34 000, instead of (Correction of not debiting the loan repayment of 30 000
the correct value of Rs. 43 000. Rs. 30 000 to the bank loan account)
Suspense account Dr.
The correction of above errors of Kasuni's business can be explained as follows. (Correction of recording of the purchases account 20 000
balance as Rs. 150 000 erroneously, instead of Rs.
130 000)
01. The total of debit column of the trial balance has been understated by Rs. 16 000
Drawings account Dr.
due to not entering the balance of the electricity bill account. Therefore, Suspense account
Rs. 16 000 should be included in the debit column of the trial balance and (Correction of understating the total of the draw- 9 000
credited to the suspense account. ings account by Rs. 9 000) 9 000

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The suspense account prepared based on the above correction entries is as follows,
Activity 05
Dr. Suspense account Cr.
Value Value The total of the debit column of the trial balance of a business exceeds the total of
Date Description E/P Date Description E/P the credit column by Rs 8 000.
Rs. Rs.
The difference in trial bal. 15 000 ................................. 16 000 Later, following errors were revealed.
...................................... 20 000 Bank loan account 30 000 i. Insurance premium paid of Rs 5 600 has been debited in the insurance account
Drawings account
as Rs. 6 500.
...................................... 20 000 9 000
ii. Rent received of Rs. 9 000 has been debited only in the cash book.
55 000 55 000
iii. The cash drawings of Rs. 1 500 is recorded only in the cash book.

iv. The debit entry for the cash payment of Rs. 7 500 for the loan repayment has not
Activity 04 been made.

v. Balance of the salary account Rs. 7 100 has not been extracted to the trial
The trial balance prepared as at 31 of December 20xx of Samitha's business did balance.
not tally. The difference of the trial balance of Rs. 5 500 was credited to the sus-
Required :-
pense account. On subsequent examination, the following errors were found.
1. Journal entries for the correction of the above errors.
2.Suspense account.
01. Total of the telephone charges account is understated by Rs. 5 000.

02. Payment of building repair expense of Rs. 30 000 has been correctly credited Activity 06
to the cash account, but it has been debited to building account in error.
The trial balance prepared for Dinithi's business as at 31.12.20xx did not balance
03. A cheque issued for purchases of Rs. 45 000 of trade stocks has been correctly and the difference was posted to a suspense account. Later the reasons were found
recorded in the bank account, but it has been debited to the purchases account and corrected by passing journal entries.
as Rs. 54 000 in error.
Following suspense account is prepared by the accounts clerk when the errors
04.The balance of the salary account of Rs . 5 000 has been extracted to the trial were corrected.
balance as Rs. 500 in error. Dr. Suspense account Cr.
Value Value
Date Description L/F Date Description E/P
05. The total of the sales account has been understated by Rs. 6 000. Rs. Rs.
Sales account 11 000 Office equipment acc. 10 000
Required :- Insurance account 2 000 Wages account 5 000
1. Write the journal entries for the correction of the above errors. Purchases account 4 000

2. Write-up the suspense account.

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Answer the following questions.
1. What was the balance in the trial balance before these corrections were made?
2. Which column of the trial balance is understated?
3. If the total of the debit column of the trial balance is Rs. 25 455 before the
difference is entered in the suspense account, what should had been the total of
the credit column?
4. List out as much as possible of possible errors that might have occurred in the
ledger accounts of this business. Get the help of your friend in answering this question.

Activity 07

The totals of the debit and the credit columns of the trial balance which was
prepared for Sanduni's business as at 31.12.20xx did not tally. The difference was
posted to a suspense account and the following errors were identified later.
01. Machine repair expense of Rs. 20 000 has been debited to the machine account.
02. The total of the purchase account has been overstated by Rs. 5 000.
03. Payments of electricity bill of Rs. 7 000 has been debited as Rs. 700 in the
electricity changes bill account.
04. Payment of telephone charges of Rs. 8 000 has been recorded as Rs. 10 000 in
the telephone charges account and interest income received Rs. 16 000 has been
credited in the interest income account as Rs. 18 000.
05. Withdrawal of goods by the owner for his personal use has been debited
twice in the drawings account.
06. A credit sale of goods for Rs. 25 000 has been completely omitted from the books.
07. Additional capital of Rs. 60 000 invested by the owner has been debited to the
cash account and credited to the sales account.
08. Travelling expenses of Rs. 250 in the petty cash book (total of the travelling
expense column) has not been entered in the travelling expense account.
Required :-
01. List the errors and give the journal entries for the correction of errors above
that do not affect the agreement of the trial balance.
02. Write-up the suspense account and find the difference which had existed
between the totals of the trial balance.
(All the pictures appeared in this book have been downloaded from the internet)
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