Errors

1. Errors

2. Introduction Two types of error can be made by the book-keeper: Errors which do not affect the trial balance totals Errors which do affect the trial balance totals.

3. Examiner’s tip When correcting errors, ask three questions: What entries have been made? What entries should have been made? What entries must be made to correct the error?

4. Errors which do affect the trial balance totals • (1) Omission: • No double entry for the transaction was made in the ledger, e.g. a sale on credit to L Grant for £900 is not recorded in the ledger. • Correction: • Dr Cr • £ £ • L Grant 900 • Sales 900

5. Errors which do not affect the trial balance totals • (1) Commission: • An entry is made in the wrong personal account, e.g. a purchase on credit from L Smith for £1200 is recorded in the account of P Smith. • Correction: • Dr Cr • £ £ • P Smith 1200 • L Smith 1200

6. Errors which do not affect the trial balance totals • (2) Principle: • A fundamental error when an entry is made in the wrong account, e.g. the purchase of a motor van, £15,000, is recorded as a debit to motor expenses. • Correction: • Dr Cr • £ £ • Motor vans 15,000 • Motor expenses 15,000

7. Errors which do not affect the trial balance totals • (3) Compensating: • Errors are made in the ledger which will cancel each other out, e.g. a business has overcast both the purchases and sales accounts by the amount of £500. • Correction: • Dr Cr • £ £ • Sales account 500 • Purchases account 500

8. Errors which do not affect the trial balance totals • (4) Original entry: • A transaction is recorded as the incorrect amount in the journals and posted to the ledger for the incorrect amount, e.g. a sale on credit to L Patel for £600 is recorded in the sales journal as £60 and posted to the ledger. • Correction: • Dr Cr • £ £ • L Patel 540 • Sales account 540

9. Errors which do not affect the trial balance totals • (5) Complete reversal: • When both entries for a transaction are reversed, e.g. a payment to R Taylor by cheque for £1000 was entered • Debit – bank account – £1000 • Credit – R Taylor – £1000 • Correction: • Dr Cr • £ £ • R Taylor 2000 • Bank 2000

10. Errors which do affect the trial balance totals • Errors can be made which will result in one side of the trial balance being different from the other side. • The accounting equation does not hold true. • A suspense account will be required.

11. The suspense account • If the trial balance does not agree, then a suspense account should be opened for the difference. The trial balance will now be equal. • The errors must be found and corrected through the suspense account. • The balance on the suspense account must be cleared.

12. Example Debits: £50,000 Credits: £49,000 Motor expenses of £1000 have been debited to the motor expenses, but no credit entry has been made in the cash book. Suspense account Cash book 1000 Bal b/d 1000 1000 1000

13. Errors which do affect the trial balance totals • (2) Single entry: • Only one entry is made in the ledger, e.g. a payment by cheque for postage stamps for £60 is recorded in the cash book but no entry is made to postage expenses. • Correction: • Dr Cr • £ £ • Postage expenses 60 • Suspense account 60

14. Errors which do affect the trial balance totals (3) Overcasting and undercasting of accounts: John Bridge Bal b/d 500 Bank 2000 Sales 3000 Bal c/d 2500 35003500 Bal b/d 2500 cont’d

15. cont’d • The account of John Bridge is over cast by £1000 because the balance brought down should be £1500, not £2500. The debit side will be over cast by £1000 on the trial balance. • A journal entry must be made to correct the error • Correction: • Dr Cr • £ £ • Suspense account 1000 • John Bridge 1000

16. Errors which do affect the trial balance totals • (4) An income transaction could be recorded as an expense or an expense as an income transaction, e.g. discount allowed of £500 is posted to the credit of discount received. • Correction: • Dr Cr • £ £ • Discount allowed 500 • Discount received 500 • Suspense account 1000