Correction of Errors

Objectives:

 Types of error in accounting

 The correction of errors
 Material errors (IAS 8)
Introduction
This chapter continues the subject of errors in accounts. You have already learned about
errors which arise in the context of the cash book or the receivables and payables ledgers and
control accounts. Here we deal with errors that may be corrected by means of the journal or a
suspense account. Finally, we look at the correction of material errors from a prior period in
IAS 8.
By the end of this chapter you should be able to prepare a set of final accounts for a sole
trader from a trial balance after incorporating adjustments to profits for errors.
Types of error in accounting
There are five main types of error.
Some can be corrected by journal entry while some require the use of a suspense account.
It is not really possible to draw up a complete list of all the errors which might be made by
bookkeepers and accountants. Even if you tried, it is more than likely that as soon as you
finished, someone would commit a completely new error that you had never even dreamed
of! However, it is possible to describe five types of error which cover most of the errors
which might occur. They are as follows.
 Errors of transposition
 Errors of omission
 Errors of principle
 Errors of commission
 Compensating errors
Once an error has been detected, it needs to be put right.
o If the correction involves a double entry in the ledger accounts, then it is done by
using a journal entry in the journal.
o When the error breaks the rule of double entry, then it is corrected by the use of a
suspense account as well as a journal entry.
Topics covered in this chapter
The five common types of error:
o Review journal entries (which we briefly looked at earlier in this text)
o Define a suspense account, and describe how it is used
1.1 Errors of transposition
An error of transposition is when two digits in an amount are accidentally recorded the wrong
way round.
For example, suppose that a sale is recorded in the sales account as K6,843, but it has been
incorrectly recorded in the total receivables account as K6,483. The error is the transposition
of the 4 and the 8. The consequence is that total debits will not be equal to total credits. You
can often detect a transposition error by checking whether the difference between debits and
credits can be divided exactly by 9. For example, K6,843 – K6,483 = K360; K360 y 9 = 40.
1.2 Errors of omission
An error of omission means failing to record a transaction at all, or making a debit or credit
entry, but not the corresponding double entry.
Here is an example.
i. If a business receives an invoice from a supplier for K250, the transaction might be
omitted from the books entirely. As a result, both the total debits and the total credits
of the business will be out by K250.
ii. If a business receives an invoice from a supplier for K300, the payables control
account might be credited, but the debit entry in the purchases account might be
omitted. In this case, the total credits would not equal total debits (because total
debits are K300 less than they ought to be).

1.3 Errors of principle

An error of principle involves making a double entry in the belief that the transaction is being
entered in the correct accounts, but subsequently finding out that the accounting entry breaks
the 'rules' of an accounting principle or concept.
A typical example of such an error is to treat certain revenue expenditure incorrectly as
capital expenditure.
For example,
i. repairs to a machine costing K150 should be treated as revenue expenditure, and
debited to a repairs account. If, instead, the repair costs are added to the cost of the
non-current asset (capital expenditure) an error of principle would have occurred. As
a result, although total debits still equal total credits, the repairs account is K150 less
than it should be and the cost of the non-current asset is K150 greater than it should
be.
ii. Similarly, suppose that the proprietor of the business sometimes takes cash out of the
till for his personal use and during a certain year these withdrawals on account of
profit amount to K280. The book-keeper states that he has reduced cash sales by
 K280 so that the cash book could be made to balance. This would be an error of
principle, and the result of it would be that the withdrawal account is understated by
K280, and so is the total value of sales in the sales account.
1.4 Errors of commission
Errors of commission are where the bookkeeper makes a mistake in carrying out his or her
task of recording transactions in the accounts.
Here are two common types of errors of commission.
i. Putting a debit entry or a credit entry in the wrong account. For example, if telephone
expenses of K540 are debited to the electricity expenses account, an error of
commission would have occurred. The result is that although total debits and total
credits balance, telephone expenses are understated by K540 and electricity expenses
are overstated by the same amount.
ii. Errors of casting (adding up). The total daily credit sales in the sales day book should
be K28,425, but are incorrectly added up as K28,825. The total sales in the sales day
book are then used to credit total sales and debit total receivables in the ledger
accounts. Although total debits and total credits are still equal, they are incorrect by
K400.

1.5 Compensating errors

Compensating errors are errors which are, coincidentally, equal and opposite to one another.
For example,
Two transposition errors of K540 might occur in extracting ledger balances, one on each side
of the double entry. In the administration expenses account, K2,282 might be written instead
of K2,822, while in the sundry income account, K8,391 might be written instead of K8,931.
Both the debits and the credits would be K540 too low, and the mistake would not be
apparent when the trial balance is cast. Consequently, compensating errors hide the fact that
there are errors in the trial balance.
1.6 Summary: errors that can be detected by a trial balance
 Errors of transposition
 Errors of omission (if the omission is one-sided)
 Errors of commission (if one-sided, or two debit entries are made, for example)
Other errors will not be detected by extracting a trial balance, but may be spotted by other
controls (such as bank or control account reconciliations).

2. The correction of errors

Errors which leave total debits and credits in the ledger accounts in balance can be corrected
by using journal entries. Otherwise a suspense account has to be opened first, and later
cleared by a journal entry.
2.1 Journal entries
Some errors can be corrected by journal entries. To remind you, the format of a journal entry
is:
Date Debit Credit
K K
Account to be debited X
Account to be credited X
(Narrative to explain the transaction)
The journal requires a debit and an equal credit entry for each 'transaction', i.e. for each
correction. This means that if total debits equal total credits before a journal entry is made
then they will still be equal after the journal entry is made. This would be the case if, for
example, the original error was a debit wrongly posted as a credit and vice versa. Similarly, if
total debits and total credits are unequal before a journal entry is made, then they will still be
unequal (by the same amount) after it is made. For example, a bookkeeper accidentally posts
a bill for K40 to the local taxes account instead of to the electricity account. A trial balance is
drawn up, and total debits are K40,000 and total credits are K40,000. A journal entry is made
to correct the misposting error as follows.
Example
1.7.20X7
DEBIT Electricity account K40
CREDIT Local taxes account K40
To correct a misposting of K40 from the local taxes account to electricity account
After the journal has been posted, total debits will still be K40,000 and total credits will be
K40,000. Total debits and totals credits are still equal. Now suppose that, because of some
error which has not yet been detected, total debits were originally K40,000 but total credits
were K39,900. If the same journal correcting the K40 is put through, total debits will remain
K40,000 and total credits will remain K39,900. Total debits were different by K100 before
the journal, and they are still different by K100 after the journal. This means that journals can
only be used to correct errors which require both a credit and (an equal) debit adjustment.
2.2 Example:
Journal entries Listed below are five errors which were used as examples earlier in this
chapter.
Write out the journal entries which would correct these errors.
i. A business receives an invoice for K250 from a supplier which was omitted from the
books entirely.
ii. Repairs worth K150 were incorrectly debited to the non-current asset (machinery)
account instead of the repairs account.
iii. The bookkeeper of a business reduces cash sales by K280 because he was not sure
what the K280 represented. In fact, it was a withdrawal on account of profit.
 iv. Telephone expenses of K540 are incorrectly debited to the electricity account.
v. A page in the sales day book has been added up to K28,425 instead of K28,825.
2.3 Use of journal entries in examinations
Occasionally an examination question might ask you to 'journalise' a transaction (i.e. select
one of two, three or four journal entries), even though the transaction is perfectly normal and
nothing to do with an error. This is just the examiner's way of finding out whether you know
your debits and credits. For example:

Question
A business sells K500 of goods on credit. What is the correct journal to reflect this
transaction?
A Debit sales K500, credit trade accounts receivable K500
B Debit trade accounts receivable K500, credit sales K500
Answer B
DEBIT Trade accounts receivable K500
CREDIT Sales K500
Narration: No error has occurred here, just a normal credit sale of K500. By asking you to
select a journal, the examiner can see that you understand the double-entry bookkeeping.
2.4 Suspense accounts
Suspense accounts, as well as being used to correct some errors, are also opened when it is
not known immediately where to post an amount. When the mystery is solved, the suspense
account is closed and the amount correctly posted using a journal entry.
A suspense account is an account showing a balance equal to the difference in a trial
balance.
A suspense account is a temporary account which can be opened for a number of reasons.
The most common reasons are as follows.
o A trial balance is drawn up which does not balance (i.e. total debits do not equal total
credits).
o The bookkeeper of a business knows where to post the credit side of a transaction, but
does not know where to post the debit (or vice versa). For example, a cash payment
might be made and must obviously be credited to cash. But the bookkeeper may not
know what the payment is for, and so will not know which account to debit.
In both these cases, a temporary suspense account is opened up until the problem is sorted
out. The next few paragraphs explain exactly how this works.
2.5 Use of suspense account: when the trial balance does not balance
 When an error has occurred which results in an imbalance between total debits and total
credits in the ledger accounts, the first step is to open a suspense account.
For example, an accountant draws up a trial balance and finds that total debits exceed total
credits by K162. He knows that there is an error somewhere, but for the time being he opens
a suspense account and enters a credit of K162 in it. This serves two purposes.
i. As the suspense account now exists, the accountant will not forget that there is an
error (of K162) to be sorted out.
ii. Now that there is a credit of K162 in the suspense account, the trial balance balances.

When the cause of the K162 discrepancy is tracked down, it is corrected by means of a
journal entry. For example, the credit of K162 should be to purchases. The journal entry
would be:

DEBIT Suspense a/c K162

CREDIT Purchases K162
To close off suspense a/c and correct error
Note: Whenever an error occurs which results in total debits not being equal to total credits,
the first step an accountant makes is to open up a suspense account. Three more examples are
given below.
2.9 Use of suspense account: not knowing where to post a transaction
Another use of suspense accounts occurs when a bookkeeper does not know where to post
one side of a transaction. Until the mystery is sorted out, the entry can be recorded in a
suspense account.
A typical example is when the business receives cash through the post from a source which
cannot be determined. The double entry in the accounts would be a debit in the cash book,
and a credit to a suspense account.
2.11 Suspense accounts might contain several items
If more than one error or unidentifiable posting to a ledger account arises during an
accounting period, they will all be merged together in the same suspense account. Indeed,
until the causes of the errors are discovered, the bookkeepers are unlikely to know exactly
how many errors there are. An examination question might give you a balance on a suspense
account, together with enough information to make the necessary corrections, leaving a nil
balance on the suspense account and correct balances on various other accounts. In practice,
of course, finding these errors is far from easy!
2.12 Suspense accounts are temporary
Suspense accounts are only temporary. None should exist when it comes to drawing up the
financial statements at the end of the accounting period.
It must be stressed that a suspense account can only be temporary. Postings to a suspense
account are only made when the bookkeeper doesn't know yet what to do, or when an error
has occurred. Mysteries must be solved, and errors must be corrected. Under no
circumstances should there still be a suspense account when it comes to preparing the
statement of financial position of a business. The suspense account must be cleared and all
the correcting entries made before the final accounts are drawn up.

Class Exercise

Required.
Write out the journal entries which would correct these errors.
i. A business receives an invoice for K250 from a supplier which was omitted from the
books entirely.
ii. Repairs worth K150 were incorrectly debited to the non-current asset (machinery)
account instead of the repairs account.
iii. The bookkeeper of a business reduces cash sales by K280 because he was not sure
what the K280 represented. In fact, it was a withdrawal on account of profit.
iv. Telephone expenses of K540 are incorrectly debited to the electricity account.
v. A page in the sales day book has been added up to K28,425 instead of K28,825.