CORRECTION OF ACCOUNTING

ERRORS,CONTROL ACCOUNTS AND

BANK RECONCILIATION
STATEMENT
LECTURE THREE
Learning Objectives
 Explain the different types of accounting errors
 Explain how accounting errors can be corrected
 Explain the use of control accounts
 Prepare control accounts from given transactions
 Outline items that cause differences between the cashbook balance
of the bank account and the bank statement balance
 Prepare an adjusted cash book and a bank reconciliation statement
from given transactions.
Accounting Errors
What are accounting errors?
Accounting errors result from inaccuracies and accidental mistakes
while recording journal entries, matching them, or preparing financial
reports.
Accounting error is unintentional and doesn’t aim to change or hide
accounting records for a company’s benefit. Although these errors are
unintentional but can be costly.
There are two broad categories of accounting errors;
1. Those that are not disclosed by the trial balance
2. Those that are disclosed by the trial balance.
Errors Not Affecting the Agreement Of The
Trial Balance
These are errors which when committed do not throw the trial balance
out of agreement. Such errors in most cases do not affect the double
entry principles. These errors are corrected through journal entries.
They include;
1. Error of omission; this is where no entry is made of a given
transaction at all. This error occurs when a transaction is totally or
completely unrecorded. That is there is neither double entry nor
single entry
how these errors occur
Due to oversight or pressure of work the accountant may forget to
record transaction into the books thus both the debit and credit entries
are omitted from the books. The trail balance will agree in total
because the same amount has been omitted from both the debit and
the credit sides.
Hoe these errors are corrected
Effect the necessary double entry to rectify the error.
Illustration
Rent of GHC 3,000 paid by cash was completely omitted from the
accounts
Correction;
Journal
Dr rent account GHC 3,000
CR Cash account GHC 3,000
Being correction of rent expenses omitted
2. Error of Commission; this is where an entry has been posted
correctly but to the wrong personal account . This can occur when the
two accounts involved bear similar names or headings.

How to correct these errors

Effect an entry to cancel off the balance in the wrong account and
effect the entry in the correct account.
Illustration
Purchase of goods GHC 55,000 from A Mansah was entered in error in
A Mensah’s account
Journal
DR purchase account GH 55,000
CR A. Mensah account GH 55,000
Correction
DR A. Mensah account GH 55,000
CR A. Mansah account GH 55,000
the purchase of goods wrongly charged to A . Mensah instead of A
Mansah now corrected
3. Error of Original Entry; this is where an incorrect amount is posted
to both accounts in question. Though a wrong figure is being used, the
double entry rule is maintained
How to correct these errors
Add the difference if the amount was understated and deduct it if it
was overstated
Illustration
Sale of plant for GH 202 was incorrectly entered in both the cash and
plant disposed accounts as GH 220
Error
Journal
DR Cash account 220
CR Disposal of plant account 220
Correction
Journal
DR Disposal of plant account GHC 8
CR cash acount GHC 8
Being receipt from plant disposal of 228 wrongly entered as 220 now
corrected
4. Error of Duplication; an error of duplication is committed when the
same transaction has been recorded more than once. Again the trail
balance will not disagree in total because a debit and a corresponding
credit entry have been made
How to correct these errors
To correct these errors reverse the number of wrong entries from both
sides by debiting where there was a credit entry and crediting where
there was a debit entry.
Illustration
The purchase of a motor van at GH 5000 for cash was entered twice in
the correct books.
Correction;
Journal
DR Cash account GH 5,000
CR Motor van account GH 5,000
Correction of purchase of motor van recorded twice
5. Error of principle; this is where an item is incorrectly classified by the
bookkeeper and posted to the wrong type of account
How to correct these errors
Cancel out the error by making an entry in the opposite side of the
account that ha been wrongly opened and then effect the right entry.
Illustration
The purchase of a motor van for GH 6,500 had been correctly entered
in the cash book but posted wrongly to the purchases account
Correction
Journal
DR motor van account GH 6,500
CR Purchase account GH 6,500
Being correction of a wrong debit of the purchase of motor van to the
purchase account
6. Error of complete reversal of entry; this is where the accounts are
used but each item is shown on the wrong side of the account,i.e. the
credit entry is posted at the debit side and vice- versa
How these errors are corrected
Reverse the entries by doubling the sum and entering it at the correct
side
Illustration
Purchase of goods from P.B.Ltd GH200 has been debited to his personal
account and credited to the purchase account.
Error
Journal
DR P.B Ltd account GH 200
CR purchase account GH 200
Correction
Journal
DR purchase account GH 400
CR P.B. Ltd account GH 400
Being correction of a wrong debit to PB Ltd account and wrong credit to
purchase account in respect of purchases of goods on credit from P.B
Ltd.
7. Errors of compensation; this is where two or more errors cancel out
each other by the same amount. This may be due to overstatement or
understatement at either side of two or more accounts
How to correct these errors
Where an account has been overstated , reverse it by debiting the
account if is a credit account and vice versa.if the account has been
understated , make an entry to top it up by crediting the account if it is
a credit account and debit the account if it is a debit account with the
different.
Illustration
The sales account and motor expenses account were both overstated
by GH 50
Correction
journal\
DR sales account GH 50
CR Motor expenses account GH 50
Being correction of overstatement of sale and motor expenses accounts
respectively
Errors disclosed by the trial balance
When a trial balance fails to balance, it implies that there is an error.
Usually the trial balance is forced to balance in the meantime by
inserting the amount of the difference between the two sides in a
suspense account.
They inculde;
1. Incomplete double entry; this happens when only one account is
opened. There is no corresponding entry in the other account. Where
there has not been a complete double entry the trial balance is bound
not to balance.
Illustration
Cash sales GH 5000 entered only in the cash book
Journal
DR suspense account GH 5,000
CR Sales account GH 5,000
Being correction of an entry in respect of cash sales made only in the
cash book
2. Casting errors; these are errors that occurs as a result of casting mistakes.
Such an error may either overstate or understate the figure and it is known as
overcast or under-cast

Illustration
Purchase was undercast by GH 40 and sales overcast by GH 60
Journal
DR Purchase account GH 40
CR Suspense account GH 40
Being correction of an undercast of purchases by GH 40
Journal
DR sales account GH 60
CR Suspense account GH 60
Being correction of an overcast
3. Error of transposition; this occurs when figures are transposed in
only one of the two accounts pertaining to a transaction. Such an error
may either overstate or understate the figure.
How to correct these errors
Where the error has caused the figure to be overstated, deduct the
difference from the account involved. On the other hand if it
understates the figure then add the difference.
Illustration
Insurance of GH 32 was wrongly entered in the insurance account as
GH 23
Journal
DR insurance account GH 9
CR suspense account GH 9
Being correction of a wrong entry of insurance expense of GH 32 as GH
23
4. Omission of an opening balance; the balance on an account as at
the end of the previous year (which is the opening balance for the
current year) could be omitted. When this happens the trial balance
will not balance
How to correct these errors
Enter the opening balance at the appropriate side of the ledger.
Illustration
The opening balance of creditors GH300 was omitted from the sundry
creditors account
Journal
DR Suspense account GH 300
CR sundry creditors account GH 300
Being omission of an opening balance rectified
5. Posting errors; correct balance posted wrongly; errors of this nature
occur where a balance is correctly extracted but posted wrongly.
How to correct these errors
correction could be effected by any of the two cases shown hereunder
(a) If a figure has been understated add the amount by which it has
been understated .
Illustration
An amount of GH 120 in the sales day book was posted in error to the
sales ledger as GH 100
Journal
DR debtors account GH 20
CR Suspense account GH 20
Being correction of an error in posting a sum of GH 120 to the sales
ledger as GH 100
(b) If the figure has been overstated ,then deduct the amount by which it
has been overstated.
Illuatration
An amount of GH 230 in the purchase day book was posted in error to the
purchase ledger as GH 320
Journal
DR creditors account GH 90
CR Suspense account GH 90
Being correction of an error in posting a sum of GH 230 to the purchases
ledger as as GH 320
6. Correct balance posted to wrong side; where balance of a particular
item may be correctly extracted but posted to wrong side of the
account concerned. In this way the principle of double entry is
completely violated.
How to correct these errors
To rectify such an error double the sum and effect the entry on the
correct side. If account should have been credited but debited credit it
with twice the sum and vice versa
Illuatration
Sales return figure of GH 22 was credited in error to the sales returns
account.
Journal
DR Sales returns account GH 44
CR suspense account GH 44
Being correct balance extracted but posted to the wrong side corrected
7. Failure to extract one or more balances; failure to extract one or
more balances will also lead to a distortion in the equilibrium of the
trial balance.
How to correct these errors
This may be done by extracting the balances involved
Illustration
A balance of GH 156 in the lighting & heating account were not
extracted by the bookkeeper.
Journal
DR lighting & heating account GH 156
CR suspense account GH 156
Being correction of the failure to extract lighting & heating account
balance of GH 156 to the trial balance.
8. Posting accounts at the wrong side of the trial balance; where a
debit balances are placed at the credit side of the trial balance and
credit balances placed at the debit side of the trial balance.
How to correct these error
By simply correcting the trial balance so that accounts are correctly
placed
The effect of errors on profit
Sometimes, pending the discovery of some errors, the profit and loss
account may be prepared. It is thus possible that some errors that may
be subsequently discovered may affect the profit figure
Errors that affect profit
All errors that affect the value of revenue and expenses and indeed all
elements that form part of the profit and loss account will ultimately
affect profit.
Errors that affect only the assets and liabilities will however not affect
profit.
Computation of Adjusted profit
Format
addition deduction balance
Unadjusted profit XXX
Opening stock undercast XX
Opening stock overcast XX
Closing stock undercast XX
Closing stock overcast XX
Expenses undercast XX
Revenue overcast XX
Revenue undercast XX
XX XX
Net effect of errors XXX
Adjusted profit XXX
NOTE
If the addition column is greater than the deduction column, then add
to the opening balance of profit, but if the deduction is greater than
the addition , then deduct the net from the unadjusted profit to obtain
the adjusted profit
illustrations
CONTROL ACCOUNTS
Trial balance are drawn up as a test of the arithmetical accuracy of the
accounts. When a trial balance totals disagreed , there is a check to find
out the errors.
Is an account which contains the debit and credit totals of other
accounts and is used to prepare financial statement
What is required is a type of trial balance for each ledger, and this
requirement is met by the control account. Thus , it is only the ledgers
whose control accounts do not balance that need detailed checking to
find errors
Principle of control accounts
The principle on which the control account is based is that, if the
opening balance of an account is known, together with information of
the additions and deductions entered in the account, the closing
balance can be calculated.
Form of control accounts
Control accounts are often presented in the same form as an account,
with the totals of the debit entries in the ledger on the left hand side of
the control account,and the totals of the various credit entries in the
ledger on the right hand side of the control account
Advantages of control accounts
• They are used to identify errors
• Normally control account are under the charge of a responsible
official and fraud is made difficult because transfer in an effort to
disguise frauds will have to pass the security of this person
• Control account can be used to ascertain missing balances.
Bank Reconciliation Statement