9.

CORRECTION OF ACCOUNTING ERRORS ACCOUNTING FOR IGCSE EXAMINATION

Accounting errors are mistakes made in the process of recording, classifying, summarizing, or interpreting
financial transactions. These errors can occur due to various reasons, such as oversight, misunderstanding of
accounting principles, computational mistakes, or even deliberate manipulation.

These errors can distort financial statements, leading to inaccurate financial reporting, which can mislead
stakeholders and affect decision-making. Detecting and correcting these errors promptly is crucial to maintain
the integrity and reliability of financial information.

TYPES OF ACCOUNTING ERRORS

▪ Errors that do not reflect from trial balance

▪ Errors that reflect from trial balance

ERRORS THAT DO NOT REFLECT FROM TRIAL BALANCE

Errors that do not impact trial balance accuracy are mistakes in the accounting records that do not affect the
overall equality of the debits and credits in the trial balance. These errors may exist in the accounts but do not
cause a discrepancy in the totals, making it difficult to detect them through a trial balance check.

1) Errors of Omission:
If a transaction is completely omitted but the corresponding entry (debit and credit) is missing, the trial
balance will still balance because both sides are equally affected.

Scenario
A company makes a $1,000 sale but forgets to record the transaction. Both the sales revenue and the
corresponding accounts receivable are missing, so the trial balance remains unchanged.

2) Errors of Commission:
Incorrectly recording an amount in the wrong account but, in the same class without changing the overall
total. The debits and credits still match.

Scenario
A company records a $500 vehicle service cost as a debit to office maintenance instead of vehicle repairs
expense. The total debits and credits are still equal, so the trial balance remains balanced.

3) Errors of Principle:
Misapplying an accounting principle (e.g., recording a capital expenditure as revenue expense) does not
affect the trial balance if both the debit and credit sides remain equal. This occurs when a transaction is
entered in the wrong class of accounts.

Scenario
A company purchases a piece of equipment for $10,000 but records it as an expense instead of an asset. Both
the equipment and cash accounts are affected equally, keeping the trial balance balanced.

4) Compensating Errors:
When one error offsets another (e.g., overstating one account and understating another by the same
amount), the trial balance remains balanced despite the inaccuracies.

Scenario
A company mistakenly overstates an expense account by $200 and understates a revenue account by the same
amount. The total debits and credits remain equal, so the trial balance does not show any discrepancies.
5) Transposition Errors:
If numbers are transposed in both the debit and credit entries (e.g., entering $123 instead of $132 in both
accounts), the trial balance will still be accurate.

Scenario
A company records a $1,200 transaction as $2,100 in both the debit and credit entries. The debits and credits
still match at $2,100, so the trial balance remains accurate.

6) Errors of Original Entries:

An error of original entry occurs when a financial transaction is recorded with incorrect amounts at the
initial point of entry in the accounting system. This error typically arises if the transaction is entered with
incorrect values in the day books. However, since both the debit and credit sides reflect the same incorrect
amount, the trial balance will still agree and remain unaffected.

Scenario
A business purchases office supplies for $1,000 but records the transaction as $100 in the books.

7) Errors of Complete Reversal:

An error of complete reversal occurs when the correct accounts are used in a transaction, but the debit and
credit entries are reversed. This type of error doesn't affect the trial balance because the total debits and
credits still match, but it causes inaccuracies in the accounts involved.

Scenario
A business's payment of $5,000 to a supplier was incorrectly debited to the Bank Account and credited to
Trade Payables.

ERRORS THAT REFLECT FROM TRIAL BALANCE

The following types of error will cause a difference in the trial balance, and therefore will be detected by the
trial balance. They can be investigated and corrected using a suspense account. Those errors encompass, but
are not limited to, the following:

1. Single Entry
A transaction is recorded on only one side (debit or credit) instead of both, resulting in an imbalance.
Example: If a business makes a cash sale of $1,000 but only debits the Cash account and does not credit the
Sales account, the trial balance will be unbalanced as the credit side is missing.

2. Casting Error
A mistake in the addition of figures in the accounting records, leading to incorrect totals.
Example: If the total of the Sales account should be $10,000 but is incorrectly added as $10,500, the trial
balance will reflect this discrepancy, showing an imbalance.

3. Extraction Error
Mistakes made when transferring balances from the ledger to the trial balance, such as miswriting or
misplacing figures.
Example: If the balance of an account is $5,000 but is extracted as $5,500 in the trial balance, it will cause an
imbalance between the total debits and credits.

4. Partial Omission
A partial omission occurs when only a part of a transaction is recorded, while the other part is missed or not
recorded correctly.
Example: Business buys goods worth ₹10,000 on credit from a supplier and the accountant forgets to debit the
Purchases Account.
HOW TO LOCATE THE ERRORS WHEN THE TRIAL BALANCE IS NOT IN AGREEMENT

1. Recheck the totaling of debit and credit columns

o Ensure that both debit and credit columns are added correctly.

2. Compare ledger balances with the trial balance

o Cross-check each account's balance from the ledger with the amount entered in the trial
balance.
o Look for missing accounts or incorrect extractions.

3. Verify the balancing of individual ledger accounts

o Go through each ledger account to confirm that debits and credits within the account are
correctly balanced.

4. Look for transposition and slide errors

o Transposition error: digits are reversed (e.g., $1,250 written as $2,150).
o Slide error: decimal points are misplaced (e.g., $500 recorded as $50).
o The difference between the debit and credit totals might indicate these errors.

5. Check for entries on the wrong side

o Make sure all debits and credits are entered on the correct side in the ledger and trial balance.

6. Look for partial or missing entries

o Ensure that for every debit entry, there is a corresponding credit entry.
o If a transaction is missing from one side, the trial balance will not balance.

7. Divide the difference by 2

o If the difference between the two columns is divisible by 2, an entry might have been posted to
the wrong side (e.g., a debit posted as a credit or vice versa).

8. Check for half-posted entries

o Confirm that all transactions have been fully recorded (both debit and credit sides).

9. Look for duplicated or omitted entries

o Ensure no entry has been recorded more than once or missed entirely.

10. Review journals and day books

o Go back to the original source documents (journals or day books) to see if the error originated
from there.

Summary
Both types of errors—those that affect the trial balance and those that don’t—can impact the accuracy of
financial reports. Errors that affect the trial balance, like casting or number-swapping mistakes, cause the debit
and credit sides to become unequal, making it easier to spot them. However, some errors, like missing a
transaction or recording something in the wrong account, won’t affect the trial balance but can still give a false
picture of the business’s financial health. This is why it’s important to find and fix these errors quickly to ensure
the financial information is correct, helping the business make good decisions and stay reliable for others.
STEPS TO FOLLOW WHEN THE TRIAL BALANCE DOES NOT AGREE

1. Identify and correct errors promptly:

o Begin by carefully reviewing the accounts to locate and fix any errors as soon as possible.

2. Use a suspense account if errors aren’t found immediately:

o If the errors cannot be identified right away, temporarily balance the trial balance by recording
the difference in a suspense account.

3. Record corrections with journal entries:

o Once the errors are identified, make the necessary corrections using journal entries in the
General Journal.

4. Post entries to the ledger accounts:

o Ensure that all journal entries are posted to the appropriate ledger accounts to update the
books accurately.

5. Clear the suspense account.

WHAT IS SUSPENSE ACCOUNT?

A suspense account is a temporary account used to record difference in the trial balance caused by errors like
missing information or unbalanced entries. It keeps the books balanced until the correct accounts are identified
and the errors are located and corrected. Once resolved, the suspense account is cleared, and the amounts are
transferred to the appropriate accounts.

A suspense account is typically needed to correct the following types of transactions.

❖ Errors of compensation
❖ Incorrect additions in accounts
❖ Partial omissions
❖ Partial reversal

Temporarily balancing the books is crucial for ensuring accurate financial reporting, identifying errors early,
maintaining compliance, and supporting effective decision-making, ultimately leading to better management
and financial health of the business.

EFFECT OF ERRORS ON PROFIT

Errors can lead to either an overstatement or understatement of profits and may also impact assets, liabilities,
and equity. To provide accurate financial information to stakeholders, it is crucial to understand how these
errors affect the financial statements. If an error occurs in a ledger account related to income or expenses, it
will directly impact the profit, as these accounts are used to calculate the company’s net earnings.

Hint on profit correction

If income or expense account is debit due to correction – Deduct from profit
If income or expense account is credit due to correction – Add it to profit
Concept Test 1
On March 5, 2024, Walmart Inc. purchased office furniture worth $3,500 on credit from IKEA. However, the
transaction was completely omitted from the books.

Required:
Prepare the correct journal entry to record this transaction.

Concept Test 2:
On April 10, 2024, Amazon received $2,000 from a customer, Best Buy, for a past due account. The payment
was recorded in the cash book but was not posted to the trade receivable ledger.

Required:
Prepare the correct journal entry to record this transaction.

Concept Test 3
On March 12, 2024, Target Corporation made a payment of $4,500 to its supplier, Nike, for previous purchases.
However, the payment was mistakenly recorded in the account of another supplier, Adidas.

Required:
Prepare the journal entries to correct this error.

Concept Test 4
On May 20, 2024, Starbucks sold goods worth $6,800 to Costco on credit. However, the accountant mistakenly
recorded this amount in the account of another customer, Walmart.

Required:
Prepare the journal entries to rectify this mistake.

Concept Test 5
On March 15, 2024, McDonald's spent $12,000 on major repairs for its kitchen equipment. Instead of recording
it as a repair expense, the accountant mistakenly recorded the amount under Machinery.

Required:
Prepare the journal entries to correct this error.

Concept Test 6
On June 5, 2024, Apple Inc. paid $25,000 as rent for office space, but the accountant mistakenly recorded the
amount as the purchase of a new asset under Land and Buildings.

Required:
Prepare the journal entries to rectify this mistake.

Concept Test 7
On April 10, 2024, the accountant at Walmart Inc. accidentally overstated Sales Revenue by $5,000. At the same
time, an error in recording Advertising Expense caused it to be overstated by $5,000 as well. Since both errors
offset each other, the trial balance remained balanced.

Required:
Prepare the journal entries to correct both errors.
Concept Test 8
On July 22, 2024, at Nike Inc., Salaries Expense was mistakenly recorded $3,000 higher than the actual amount.
At the same time, the Utilities Expense was understated by $3,000, causing no imbalance in the trial balance.

Required:
Prepare the journal entries to rectify both errors.

Concept Test 9
On March 18, 2024, Amazon purchased office supplies worth $4,750 on credit from Staples. However, the
accountant mistakenly recorded the amount as $7,450 in the books due to a transposition error.

Required:
Prepare the journal entry to correct this mistake.

Concept Test 10
On August 5, 2024, Tesla Inc. received a payment of $6,290 from General Motors for a past due invoice.
However, the amount was mistakenly recorded as $2,690 in the accounts due to a transposition of digits.

Required:
Prepare the journal entry to rectify this error.

Concept Test 11
On April 12, 2024, Coca-Cola sold goods worth $8,200 to Walmart on credit. However, due to an error, the sales
invoice was mistakenly recorded as $2,800 in the sales journal.

Required:
Prepare the journal entry to correct this mistake.

Concept Test 12
On September 3, 2024, Apple Inc. purchased machinery worth $15,600 from Siemens. However, due to a
mistake at the time of recording, the purchase was entered as $16,500 in the books.

Required:
Prepare the journal entry to correct this mistake.

Concept Test 13
On May 10, 2024, Nike Inc. purchased inventory worth $9,000 on credit from Adidas. However, the accountant
mistakenly recorded the transaction in reverse as:

Dr. Adidas A/c $9,000

Cr. Purchases A/c $9,000

Required:
Prepare the correct journal entry to rectify this error.

Concept Test 14
On August 20, 2024, Tesla Inc. received $7,500 from Ford Motors for a past due invoice. The accountant
correctly credited the Ford Motors account, but instead of debiting the Cash account, they mistakenly debited
the Sales account.

Required:
Prepare the journal entry to correct this mistake.
Concept Test 15
Following errors have been occurred in books of accounts of a retailer during January 2024.

a) Rent paid by cheque for $1 302 is recorded as $3 102 in both accounts.

b) Rent paid by cash for $2,000 is recorded as $200 in both accounts.
c) A motor car is purchased for $15,000 by cheque is debited to a motor expenses account.
d) A business records a sale of $5 000 as $500 while an expense of $5 000 is recorded as $500.
e) A payment of $5,000 for rent is mistakenly recorded in the building repairs account.
f) A business pays $2,000 to a supplier, but the accountant mistakenly debits the supplier's account and
credits the bank account.

Required:
1. Identify the type of error in each case (a) to (f)
2. Prepare the journal entries to correct the errors as at 31 January 2024.

Concept Test 16
The following errors were discovered in the business’s books, yet the trial balance remains balanced. Identify
the type of each error.

Example of Error Type of error

a. Electricity paid amounts to $675 is entered as $576 in the accounts.

b. An invoice received from a supplier of $1,250 has not been entered in the
books as it was lost.
c. Rent paid of $4,500 has been credited to the rent expense account and debited
to cash book.
d. A deficit of $450 in the debit side of trade receivable account is cancelled
against a deficit of $450 in the credit side of Revenue account.
e. A discount allowed to trade receivables amounts to $250 is recorded as $25 in
both accounts.
f. Purchase of office equipment worth $1,500 has been entered in the office
maintenance account.
g. A credit purchase of $7,500 from Ms. Rose is entered in Mr. Jack’s account.

Concept Test 17
Identify the error which requires entry in a suspense account.

Example of Error Suspense account

(Yes/No)
1. Office maintenance paid amounts to $345 is entered as $643 in the accounts.

2. Irrecoverable debts written off, $450 is recorded only in the personal

account.
3. Error of principle.

4. Debtor’s direct remittance to bank $825 debited twice in the bank account.

5. Electricity paid $145 credited correctly, but debited $745.

6. Salaries paid, $1,250 has been credited to salaries and debited to cash.
Chapter-9 Accounting for IGCSE Examination
Correction of Errors

PRACTICE QUESTIONS
Question 1
What are the two types of accounting errors?

1. ……………………………………………………………………………………………………………………………………………..

2. ……………………………………………………………………………………………………………………………………………..

Question 2
What are the errors that do not reflect from the trial balance?

1. ……………………………………………………………… 4. ………………………………………………………………

2. ……………………………………………………………… 5. ………………………………………………………………

3. ……………………………………………………………… 6. ………………………………………………………………

Question 3
On 15 January 2020, rent paid by cash for $256 is recorded as $652 in both accounts.

Required:
1. Record the above error as appeared in the ledger accounts.
2. Show the entries in the general journal to correct this error.
3. Post the correct entries in the ledger.

Question 4
On 15 January 2020, rent paid by cash for $2,000 is recorded as $200 in both accounts.

Required:
1. Illustrate the above error as appeared in the ledger accounts.
2. Show the entries in the general journal to correct this error.
3. Post the correct entries in the ledger.

Question 5
A motor car is purchased for $15,000 by cheque on 28 June 2020. It is debited in error to a motor expenses
account. In the cash book it is shown correctly.

Required:
1. Illustrate the above entry as appeared in the accounts.
2. Show the entries in the general journal to correct this error.
3. Post the correct entries in the ledger.
Question 6
Total of the purchases day book for July 2020 was $27,500. Total of the sales day book was $48,500.

It was noted that both the day books have been totaled by extra $500 and posted to nominal ledger
subsequently.

Required:
1. Illustrate the above entry as appeared in the accounts.
2. Show the entries in the general journal to correct this error.
3. Post the correct entries in the ledger.

Question 7
Purchase invoice of $12,500 from Sabri received on 15 August 2020 has been completely omitted from the
books.

Required:
1. Show the entries in the general journal to correct this error.
2. Post the correct entries in the ledger.

Question 8
Shang yung paid us $250 by cheque on 7th September 2020. The transaction was entered correctly in the
cash book, but it was posted in the account for Shang yong by mistake.

Required:
1. Illustrate the above entry as appeared in the accounts.
2. Show the entries in the general journal to correct this error.
3. Post the correct entries in the ledger.

Question 9
On 31 December 2020, a cheque for $675 is paid to Keshav who is a trade payable. However, this has been
debited cash book and credited to Keshav’s account.

Required:
1. Illustrate the above entry as appeared in the accounts.
2. Show the entries in the general journal to correct this error.
3. Post the correct entries in the ledger.
Question 10

Trial balance as at 31 December 2021

Debit ($) Credit ($)
Cash at bank 250
Trade receivables 1,375
Trade payable 1,225
Motor vehicles 12,000
Bank loan 4,500
Capital 8,000

Required:
1. Get the totals of both sides (Use a pencil)
2. Is it balanced? If not, calculate the difference.
3. Record the highest total within the double lines in both the sides.
4. Record the difference in the trial balance labeled as “Suspense”.
(Keep in mind to record the difference in the column which has lower total)
5. Open “suspense account” in the general ledger & record the difference

In the above case, consider that the error occurs due to overcast in the credit side of trade payables
account by $100.

Required:
6. Write the journal entry in the journal for correction.
7. Post the required entries in the suspense account.
8. Prepare the trial balance after correction.

Question 11

A retailer prepared his draft profit and loss statement and reported a profit of $4,275 for the year
ended 31 July 2020. However, following errors were revealed during an observation made by auditors.

1. Electricity paid $625 is posted to the electricity account as $526.

2. Sales invoice of $1,250 has been omitted from the day book.
3. Rent income received for $650 has been posted to debit side of rent.
4. Motor vehicle repairs of $725 has been posted to motor vehicles.

Required:
1. Identify the effect of each of the above errors on the profit.
2. Prepare a statement to show the corrected profit for the year.
Question 12
Following trial balance has been extracted from Dinuki Traders.
Trial balance as at 31 March 2021
Debit ($) Credit ($)
Cash at bank 250
Trade receivables 1,375
Trade payable 1,225
Motor vehicles 12,000
Bank loan 4,500
Capital 8,000
Sales revenue 8,750
Electricity 1,275
Wages paid 585
Purchases 6,900

Required:
1. Record the difference in the suspense account.

Following errors were noted during investigation.

a) Wages paid for $385 has been posted to wages as $585.
b) Sales invoice of $525 has been omitted from the day book.
c) Purchase invoice of $145 has been posted to the credit side of purchase account.

2. Write-up the journal to correct above errors.

3. Post the above journal entries to suspense account.
4. Prepare the new trial balance after all corrections made.

Assume the draft profit calculated for the above business is $4,750 before correcting above errors.

5. Prepare a statement to show the corrected profit for the period.

Chapter-9 Accounting for IGCSE Examination
Correction of Errors

Theory and Past paper Questions

Q1.
Complete the following table for each scenario.
(6)

(Total for question = 6 marks)

Q2.
Arianna is considering investing in a computerised accounting system to help with her business.
Explain two advantages and two disadvantages for Arianna of this proposal.
(8)
Advantages

1 ..........................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................

2 ..........................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................

Disadvantages

1 ..........................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................

2 ..........................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................
(Total for question = 8 marks)
Q3.
Ben records motor vehicle expenses in the motor vehicle account in error.
What type of error is this?
A Commission
B Complete reversal
C Original entry
D Principle
(Total for question = 1 mark)

Q4.
Identify the type of error in each scenario.

(Total for question = 3 marks)

Q5.
Identify the type of error when a sales invoice for $500 is entered in the sales day book as $450.
A Commission
B Compensating
C Original entry
D Principle
(Total for question = 1 mark)

Q6.
Identify the type of error in each case.
(3)

(Total for question = 3 marks)

Q7
Arianna maintains a full set of accounting records and extracts a trial balance at the end of each month.
Identify three types of error that are not identified by a trial balance.
(3)
1 ..........................................................................................................................................
2 ...........................................................................................................................................
3 ..........................................................................................................................................
(Total for question = 3 marks)

Q8.
Identify in which book of original entry a credit note received would be recorded in a customer's books.
(1)
A Purchases
B Purchases returns
C Sales
D Sales returns
(Total for question = 1 mark)

Q9.
A payment for rent, $20, had been posted to the credit of the rent received account.
Which entry would correct the error?

(Total for question = 1 mark)

Q10.
Which one of the following errors would require a correcting entry in a suspense account?
A Credit note entered twice in the books of account
B Incorrect addition of the total column of the sales day book
C Payment for stationery posted to office equipment
D Sales invoice not entered in the books of account
(Total for question = 1 mark)
Q11.
A trader provided the following balances at 31 March 2022.

After preparing the trial balance, three errors were discovered.

• The sales account had been undercast by $200

• A payment of $218 to Johann, a credit supplier, had been entered in the bank account correctly but had
been posted to Johann's account as $128
• A cheque received of $130 from C Green, a credit customer, had been credited to the bank account and
debited to the account of V Green.

Prepare journal entries to correct the errors. Narratives are not required.
(7)
 (Total for question = 7 marks)

Q12.
Arianna maintains a full set of accounting records and extracts a trial balance at the end of each month.
State two errors that could cause a trial balance not to balance.
(2)
1 ..........................................................................................................................................
.............................................................................................................................................
2 ..........................................................................................................................................
.............................................................................................................................................
(Total for question = 2 marks)

Q13.
At the end of his financial year, 31 March 2021, Jacques prepared a trial balance and opened a suspense
account with a debit balance of $210
Jacques has found the following errors.
1. Motor insurance, $400, had been posted to the debit side of the motor vehicles account.
2. A cheque received from a credit customer, $650, had been entered correctly in the cash book but had
been entered as
$560 on the credit side of the customer's account.
3. A direct debit, $120, for general expenses had not been entered.
4. Returns inwards, $150, had been posted to the credit side of the returns outwards account.

State the type of error made in error 1.

(1)
.............................................................................................................................................
(Total for question = 1 mark)
Q14.
At the end of his financial year, 31 March 2021, Jacques prepared a trial balance and opened a suspense
account with a debit balance of $210
Jacques has found the following errors.
1. Motor insurance, $400, had been posted to the debit side of the motor vehicles account.
2. A cheque received from a credit customer, $650, had been entered correctly in the cash book but had
been entered as
$560 on the credit side of the customer's account.
3. A direct debit, $120, for general expenses had not been entered.
4. Returns inwards, $150, had been posted to the credit side of the returns outwards account.

Prepare journal entries to correct each of the errors.

Narratives are not required.
(9)

(Total for question = 9 marks)

Q15.
State two purposes of a suspense account.
(2)
1 ...........................................................................................................................................
2 ...........................................................................................................................................
(Total for question = 2 marks)