ERRORS
• According to the double entry system, every transaction affects at least two
accounts, one debit and the other credit with the same amount.
• At the end of each trading year, a trial balance is extracted to verify the
arithmetical accuracy of the double entry system.
• In other words an agreed trial balance indicates that for every debit entry
there has been a corresponding credit entry or entries.
• However, it does not prove that all the entries are for the correct amount or
are made to the correct accounts.
• Many mistakes may remain even if a trial balance agrees.
• These mistakes nay relate to the original documents, such as invoices, credit
or debit notes etc. and they may also arise through wrong calculations,
incorrect quantities, wrong posting and wrong transfer of entries.
• Whenever figures are copied, there exists the risk of error. If the original
documents (invoices, credit or debit notes etc.) from which entries are
made are correct the next possible source of mistakes is in the book of
original (prime) entry itself.
• Then the errors may be made in posting from the books of original entry
into the ledger, or in taking out the balances of the ledger accounts.
• Whenever errors are discovered, they cannot be crossed out or erased.
Corrections must be done through journal entries. The necessary
corrections will then be posted to the accounts involved in the ledgers.
Types of Errors
The errors in the books of accounts may be of two types
1. Errors not affecting agreement of trial balance
2. Errors affecting agreement of trial balance
Errors Not Affecting Agreement of Trial Balance
Error of Omission:
This occurs when a transaction is completely omitted from the
accounting books
• Example: A sale invoice to K Henry was not recorded anywhere in the
books.
Error of Principle:
This arises when recording of a transaction is not in full compliance of
the fundamental accounting principles. This occurs when an item of a
capital nature is recorded as a revenue item and vice versa.
• Example: A vehicle purchased for $8500 has been debited to
purchases account.
Error of Commission:
This is similar to the error of principle and arises where one half of a
transaction has been entered in wrong account but to the correct type
of account. For instance a capital item is recorded as another capital
item.
• Example: $400 paid to P. Collins was debited to the account of J.
Collins.
Complete Reversal of Entries:
This arises when an entry is completely reversed i.e. credit aspect of
the accounting entry is recorded as debit item and debit item is
recorded on the credit side.
• Example: Rend paid $300 wrongly recorded as rent received.
Error of Original Entry:
This occurs where the both debit and credit aspects are recorded on
their correct sides but the same wrong amount is entered on both sides
of the entry.
• Example: Return inwards from P. Wedge $639 was recorded in the
accounts as $369.
Compensating/Compensatory Error:
This is not a single error. Rather these are two or more than two errors
which cancel themselves out. So an error in one account is exactly
matched by an equal but opposite error in another account.
• These errors are not apparent when the trial balance is extracted but
often come to light as the result of the external evidence.
• For example, a bank statement may reveal errors in the cash book;
• customers’ statements of accounts may reveal errors in the sales
ledger and so forth.
QUESTION
Allan Mull started a new business on 1 July 20X6. On 30 June 20X7, after preparing
the trial balance it was found that the totals of debit and credit balances did not
agree. The following errors were discovered upon investigation.
• Machine repairs amounting to $190 had been debited to the machinery account.
• Purchases on credit from L Kim for $130 had been wrongly credited to M Kim’s
account.
• Bank service charges for June 20X7 of $210 had been omitted from the cash
book.
• Goods purchased from Jones for $425 recorded as $245.
• Purchases of $456 from Philips a supplier had been entered in the sales journal
as $654.
• REQUIRED
• Prepare journal entries to correct each of the above.
• List down the name of error illustrated in each of the above errors.
Solution
NOTES
1. A revenue expense wrongly treated as a capital Error of
expense (non-current asset). Its correction will involve principle
increase in (debiting to) Income statement expense
and reduction in (crediting to) non-current asset
account.
2. Though correct credit entry had been made in
purchases account however account to M Kim was Error of
wrongly credited as a trade payable. In order to correct commission
the mistake M Kim’s account is debited and L Kim
account (original trade payable) is credited to show
amount payable to him.
3. Recording of bank service charges involves
Error of
increase in bank charges expense (debit) and as
Omission
payment is made to bank so will result in credit
entry to bank account.
4. Purchases from Jones were recorded as $245 Error of Original
instead of $425 so another entry of $180 should Entry
be passed to correct the mistake.
5. Purchases were omitted so now should be Complete
debited whereas wrong credit to sales should also reversal of
be corrected by debiting the sales account. On the entries and
other hand Philips account should be credited by Error of original
using total of these values. entry
Errors Affecting Agreement of Trial Balance
• There are many errors which do affect the agreement of trial balance.
• They often occur where one side of a transaction is correctly dealt
with but the other is not.
• The result is that one column of the trial balance will be smaller than
the other.
Example
• Calculating a total incorrectly in a book of original entry
• Calculating the balance incorrectly on a ledger account
• Making a debit entry and a credit entry which are not equal in
amounts
• Making a debit entry without a corresponding credit entry or vice versa
• Entirely omitting a ledger account balance from the trial balance
• Listing a debit balance as a credit balance (or vice versa)
Suspense Account
• If the trial balance disagrees, it is necessary to locate the errors
concerned and to correct them through journals.
• However, if draft accounts are required as quickly as possible, the
difference between the trial balance totals may be entered into a
suspense account and held there temporarily, pending resolution of the
problems at some more convenient time.
Important
• The discussion of errors assumes the existence of manual accounting
system. If the system is computer based error type (1) above can still
occur but errors of type (2) almost certainly cannot.
Question
R Andrews has drawn up a trial balance at 31 March 20X2 and
determined that total of the debit side was $121900 whereas the total
of the credit side was only $121312. As a result, suspense account was
created.
• Subsequently the following errors were discovered and when the
necessary amendments had been made in the accounts, the Suspense
Account balance was eliminated.
• The sales journal overcast by $270.
• The returns inward amounting to $300 has been entered as $500 in a
trade receivable’s account.
• A standing order for $180 for insurance was entered on the wrong
side of the Bank Account.
• The purchase of goods from M. Fish $250 had been posted to the
wrong side of Fish account.
• The Trade receivables total of $7123 had been wrongly entered in the
trial balance as $7321.
REQUIRED:
• Make the necessary entries in the journal below to correct the
following errors. Narrations are requires.
• Draw up the Suspense account after all the corrections have been
made.
Practice Question
SOLUTION
PRACTICE QUESTIONS