This document discusses correcting errors in financial accounting. It defines different types of errors that do or do not affect the trial balance, such as errors of omission, commission, principle, reversal of entries, and compensating errors. It also discusses errors discovered by the trial balance, including single entry errors, inaccurate double entries, and errors in calculations. The effects of correcting errors on the financial statements and net profit are also explained through adjustments and examples. Finally, hints are provided on preparing suspense accounts to temporarily balance the trial balance when errors are discovered.
This document discusses correcting errors in financial accounting. It defines different types of errors that do or do not affect the trial balance, such as errors of omission, commission, principle, reversal of entries, and compensating errors. It also discusses errors discovered by the trial balance, including single entry errors, inaccurate double entries, and errors in calculations. The effects of correcting errors on the financial statements and net profit are also explained through adjustments and examples. Finally, hints are provided on preparing suspense accounts to temporarily balance the trial balance when errors are discovered.
Original Description:
Explain on how to correct error in accounting transactions
This document discusses correcting errors in financial accounting. It defines different types of errors that do or do not affect the trial balance, such as errors of omission, commission, principle, reversal of entries, and compensating errors. It also discusses errors discovered by the trial balance, including single entry errors, inaccurate double entries, and errors in calculations. The effects of correcting errors on the financial statements and net profit are also explained through adjustments and examples. Finally, hints are provided on preparing suspense accounts to temporarily balance the trial balance when errors are discovered.
This document discusses correcting errors in financial accounting. It defines different types of errors that do or do not affect the trial balance, such as errors of omission, commission, principle, reversal of entries, and compensating errors. It also discusses errors discovered by the trial balance, including single entry errors, inaccurate double entries, and errors in calculations. The effects of correcting errors on the financial statements and net profit are also explained through adjustments and examples. Finally, hints are provided on preparing suspense accounts to temporarily balance the trial balance when errors are discovered.
learning to identify and correct several errors that could take place when recording business transactions in the books.You will be introduced to a suspense account and learn to prepare it, as it is important to balance off the trial balance ERRORS THAT DO NOT AFFECT THE AGREEMENT OF THE TRIAL BALANCE
The following are the errors that do not affect the agreement of the trial balance: (a) Errors of omission; (b) Errors of commission; (c) Errors of principle; (d) Complete reversal of entries; (e) Compensating errors; and (f) Errors of original entry or transposition error. ERRORS OF OMISSION
This error occurs when a transaction is not recorded in any account (the entries are made neither in the debit nor credit columns of the account). However, the amount of the trial balance is still balanced. Example 1 On 30th January 20X1, a total of RM300 for salary expense was paid by cash, but the transaction was neither recorded in any amount ERRORS OF COMMISSION
This error occurs when a transaction is posted in the wrong account, although the correct amount is used CORRECT ENTRY IN A GENERAL JOURNAL ERRORS IN PRINCIPLE
This error happens when a transaction is recorded according to the
double entry rule, but is posted in the wrong account. ON 10TH JANUARY 20X1, A PURCHASE OF A FAX MACHINE OF RM800 WAS WRONGLY DEBITED IN THE PURCHASE ACCOUNT AND CREDITED IN THE CASH ACCOUNT COMPLETE REVERSAL OF ENTRIES
This error happens when the correct amount of a business transaction is entered on the wrong side of the account. This means that the account that should have been debited is being credited, and vice versa. In order to capture the entries correctly, the adjusting entry must be made in the books, which usually involves doubling-up the amount affected. COMPENSATING ERRORS
This error happens when an error occurring in the debit column is compensated by an error in the credit column.The compensating amount is equal. Example 5 In 20X1, a payment of RM400 by cheque for the maintenance expense was wrongly debited in the maintenance account as RM450. In the discount received account, the amount was overstated by RM50. ERRORS OF ORIGINAL ENTRY OR TRANSPOSITION ERROR
This error occurs when the original amount (usually from the source documents) first entered into the books is incorrect. However, the double entries had been correctly recorded in the books using the incorrect figures ERRORS THAT AFFECT THE AGREEMENT OF THE TRIAL BALANCE
Once the totals of the trial balance do not agree, it shows that there are errors. These errors that could cause the trial balance to become unbalanced are as follows: (a) Arithmetic errors ă the incorrect calculation of the total and/or balance of an account; (b) Posting errors ă an entry is omitted from one side, entered twice on the same side, or wrong amount on one side. For example: transposed figure; and (c) Extraction errors in preparing the trial balance SUSPENSE ACCOUNT When the totals, debit and credit of a trial balance, do not agree, this means that there are errors. In order to balance off the trial balance temporarily, a suspense account is prepared. The functions of the suspense account are: (a) To identify errors that occurred, so that corrections can be made; and (b) To act as a temporary account until the corrections are made and the proper account is prepared. A suspense account is temporarily prepared due to the following reasons: (a) To show the difference in amount between debit and credit of the trial balance ă this difference is stated based on the deficient side of the trial balance; and (b) To ensure the trial balance is balanced. LOCATION OF A SUSPENSE ACCOUNT ILLUSTRATION OF THE PREPARATION OF A SUSPENSE ACCOUNT ERRORS THAT ARE DISCOVERED BY THE TRIAL BALANCE
The following errors discovered by a trial balance are due to the following reasons: (a) Single entry; (b) Inaccuracy of double entry; (c) Both entries being recorded in the same side, either debit or credit; (d) Wrong calculations; and (e) Errors during the preparation of the trial balance. SINGLE ENTRY Single entry occurs when a transaction is recorded as either debited only or credited only, without following the double entry rule. This situation will cause the trial balance not to be balanced Example : On the trial balance date, the single entry error was identified. A cheque of RM1,000 received from sales was recorded in the sales account, but not in the bank account. INACCURACY OF DOUBLE ENTRY Inaccuracy of double entry means that the amount debited is not equal to the amount credited. Example of Cempaka Sdn Bhd again, with the following balances as at 31 December 20X3 BOTH ENTRIES BEING RECORDED IN THE SAME SIDE, EITHER DEBIT OR CREDIT When entries are recorded in the same side (either debited only or credited only), errors will also occur. Let us look at the example of Cempaka Sdn Bhd again, with the following balances as at 31 December 20X3: WRONG CALCULATIONS Wrong calculations cause the incorrect amounts to be posted from the journal to ledger. Let us look at the example of Cempaka Sdn Bhd again, with the following balances as at 31 December 20X3 After preparing the above trial balance, an error was identified.
The RM340 paid by Rose, debtor was correctly debited in the Bank account, but was credited in the Rose, debtor account as RM430 ERRORS DURING THE PREPARATION OF TRIAL BALANCE
Sometimes, errors occur in the trial balance due to negligence by the person in charge of setting up the account. Several factors resulting in the unbalanced trial balance are, as follows: (a) The balance of an account has been overlooked in the trial balance; (b) Wrong calculation of the total amount of the trial balance; and (c) The balance of an account is placed on the wrong side of the trial balance. EFFECTS OF ERRORS ON FINANCIAL STATEMENT After the identification and correction of errors that caused a difference in the trial balance, the financial statement has to be adjusted to report the correct amount. The following are the adjustments that need to be made to asset, liability, expenses and revenue: EFFECTS OF CORRECTION OF ERRORS ON NET PROFIT
Any changes in expenses and revenues have effects on the net profit, in the way that profit decreases with expenses, and increases with revenues. As for the expenses, any overstated expenses can cause the profit to be less than it actually is. Therefore, any overstated expense has to be added to profit to obtain the correct amount. Whereas, any understated expense can cause the profit to be more than it actually is. Therefore, any understated expense has to be deducted from the profit to obtain the correct amount EFFECTS OF CORRECTION OF ERRORS ON NET PROFIT…CONT’
As for the revenues, any overstated revenue can cause the profit to be more than it actually is. Therefore, any overstated revenue has to be deducted from the profit to obtain the correct amount. Whereas, any understated revenue can cause the profit to be less than it actually is. Therefore, any understated revenue has to be added to the profit to obtain the correct amount ILLUSTRATION OF THE PREPARATION OF STATEMENT OF REVISED NET PROFIT General journal entries :
The following are the errors identified after
the preparation of trial balance: (a) Discount of RM240 has been received but not recorded in the revenue account; (b) A cash purchase of RM360 has not been recorded in any book; (c) A total of RM100 was overstated in the closing of inventory; and (d) The rental expense of RM730 was correctly recorded in the cash account, but was debited as RM860 in the rental account. COMPARISON OF PROFIT/(LOSS) BEFORE AND AFTER REVISED
BEFORE ADJUSTMENT AFTER ADJUSTMENT
SOME HINTS ON PREPARING SUSPENSE ACCOUNTS
Does a correction involve the suspense account?
The type of error determines this. Practice, and study of Table 1 should ensure that you see immediately which errors affect the balancing of the records and hence the suspense account.
Which side of the suspense account must an entry go?
This is one of the most awkward problems in preparing suspense accounts. The best way of solving it is to ask yourself which side the entry needs to be on in the other account concerned. The suspense account entry is then obviously to the opposite side.
Look out for errors with two aspects.
In the illustrative question earlier, error 1 is a case in point. An entry has been made to the wrong account, but also to the wrong side of the wrong account. Both errors must be corrected. It is very easy to fall into the trap of correcting only one of the errors, especially when working quickly under examination conditions.
