INTERNATIONAL ADVANCED LEVEL

ACCOUNTING

LECTURE NOTES
- CORRECTION OF ERRORS -

ERRORS NOT AFFECTING TRIAL BALANCE AGREEMENT

may affect final

meaning
accounts?
 Account is entered into correct class
but wrong account
Errors of commission no effects
 e.g., Sales on credit to J Lo are debited
to J Law’s account
 The transaction has not been entered
Errors of omission either/both
into the ledger at all
 Transaction is entered into incorrect
class of account
Errors of principle both
 e.g., an assets is entered as an
expenses
 A debit is entered as credit (and vice
Errors of reversal versa)
both
entries  e.g., revenue a/c is debited and trade
receivable a/c is credited with a sale
 Wrong amount is posted in both
Errors of original entries
both
entry  e.g., £689 is entered as £698 is both
DR and CR
 Two errors cancel each other out
 e.g., Sales account was £10 overcast
Compensating errors and the purchases was also added up either/ both
to be £10 too much, these two errors
will cancel out in the trial balance

Most errors are found at a date later than the one on which they are first made. We
make corrections to double entry accounts by preparing journal entries:

1. Show the corrections by means of journal entries; then

2. Show the corrections in the double entry set of accounts, by posting these journal
entries to the ledger account affected.

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Error of commission
A purchase of goods, £44 from J Lo, was entered in error in J Law’s account.

To correct this:

J Law
2021 £ 2021 £
May 30 J Lo: Error corrected 44 May 30 Purchases 44

J Lo
£ 2021 £
May 30 Purchases: Entered
originally in J Law’s a/c 44

The journal entry would be:

The journal
DR CR
£ £
J Law 44
J Lo 44
Correction of error of commission

Error of omission
The sale of goods, £10, to Jay Fung, has been completely omitted from the books.

The journal
DR CR
£ £
J Fung 10
Sales account 10
Correction of error of omission on credit sales

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Error of principle
The purchase of a machine, £200, is debited into the purchase account instead of being
debited to a machinery account.

The journal
DR CR
£ £
Machinery 200
Purchase account 200
Correction of error of principle: purchase of non-current assets
debited purchase account

Error of reversal entry

A payment of cash of £16 to T Holland was entered on the receipt side of the Cash Book
in error and credited to T Holland’s account.

This is somewhat more difficult to adjust. First must come the amount needed to cancel
the error, then comes the actual entry itself. Hence, the correcting entry is double the
actual amount first recorded.

The entries were initially entered wrongly as:

Cash
2022 £ 2022 £
T Holland 16

T Holland
2022 £ 2022 £
Cash 16

To correct this:

Cash
2022 £ 2022 £
T Holland 16 T Holland (error 32
corrected)

T Holland
2022 £ 2022 £
Cash (error corrected) 32 Cash 16

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Hence, the journal entry appears:

The journal
DR CR
£ £
T Holland 32
Cash 32
Correction of error of reversal of entries on payment of cash

Error of original entry

A sale of £38 to A Winehouse was entered in the books as £28.

The journal
DR CR
£ £
A Winehouse 10
Sales account 10
Correction of error of original entry: sales were understated
by £10 (£38 – £28)

Compensating error
The sales were overcast by £200, as also in the wages account.

The journal
DR CR
£ £
Sales account 200
Wages 200
Correction of overcast of £200 each in the sales account and the
wages account which compensated each other

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ERRORS AFFECTING TRIAL BALANCE

Errors that affect a trial balance include:

meaning
 This may be on the trial balance itself or perhaps in the
Addition error
general ledger account
Errors of  Two figures are transposed.
transposition  e.g., £78 is incorrectly transposed and posted as £87
 This occur when one side of the transaction is posted to
Posting error
the wrong side of the account

 This occur when one side of the transaction has not

Partial omission error
been posted

 This occur when the debit side of the posting does not
Unequal posting error
equal to the credit side

Should the trial balance does not balance, the difference is placed is a temporary
account called suspense account.

The balance of suspense account may be shown in the statement of financial position
until it is sorted – however, naturally, this must be solved by finalising the financial
statements for the period (especially, in the exam).

CORRECTION OF ERRORS
Each error must first have an entry in the journal describing it, and then be posted to
the account concerned:

One error only

Assume that the error of £40 is found in the following year of 2016 (as the credit
column has £40 less than debit column). The error was that the sales account was
undercast by £40.

Trial Balance as at 31 December 2015

DR CR
£ £
Totals after all the accounts have been listed 100 000 99 690
Suspense 40
----------- -----------
100 000 100 000

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The procedures will be:

CR suspense account (i)

The action taken to correct this is:

DR suspense account (to close the suspense account) (ii)

CR sales account (to show where it should have been)

The account now will appear as:

Suspense
£ 2015 £
16 Dec 31 Trial balance (i) 40
==

2016 £ 2016 £
Mar 31 Sales (ii) 40

Sales
£ 2016 £
16 Mar 31 Suspense (ii) 40

Meanwhile, this can be shown in journal form as:

The journal
DR CR
2016 £ £
Mar 31 Suspense 40
Sales 40
Correction of undercasting of sales by £40 last yrar

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More than one error

The trial balance at 31 December 2017 showed a difference of £77, being a shortage on
the debit side.

A suspense account in opened, and the difference of £77 is entered on the debit side of
the account.

On 28 February 2018 all the errors from the previous year were found:

(A) A cheque of £150 paid to M Williams had been correctly entered into the Cash
Book but had not been entered into Williams’s account.

(B) The purchase account had been undercast by £20.

(C) A cheque of £93 received from K Rowland had been correctly entered in the
Cash Book, but had not been entered in Rowland’s account.

These three errors resulted in a net error of £77, shown by debit of £77 on the debit
side of the suspense account.

(33.4)

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STATEMENT OF REVISED PROFIT

Some of the errors will have meant that original profits calculated will be wrong. Other
error will have no effect upon profits.

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The causes of depreciation are as follows:

physical
economic factors time depletion
deterioration
wear and tear (e.g. obsolescence (i.e. For example: Wasting
machinery and out of date)  legal life fixed character, likely
building) in terms of due to extraction
years of raw materials
erosion, rust and rot inadequacy (i.e. an
 patent (e.g. mine,
(e.g. land or wood) asset is no longer
quarries and oil
used because of the
well)
growth and changed
in the size of the
business

The characteristics of depreciation of non-current assets are:

(1) Non-cash accounting transaction

(2) Method of calculating the cost of using the assets (not a method of valuing the
assets)
(3) Not a fund for replacement

METHODS OF CALCULATING DEPRECIATION CHARGES

depreciation charge
Cost −residual value
straight line fixed amount for every year =
useful economic life

reducing balance carrying value (or net book value) × depreciation rate (%)
decrease in value
revaluation
(there is no fixed %, while the carrying value = valuation)

The considerations of choose the methods of depreciation and effects on profits are:

Most appropriate when… Effects on Profit… Usually used on:

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 the asset is expected to

earn revenue for the  reduced by the
business evenly over its same amount in
straight line motor vehicles
useful life every accounting
 the asset has clearly period
defined fixed life

 the earning power of

the asset is expected to  lower in early
reducing diminish with age years as the plant and
balance  maintenance costs are depreciation will machinery
taken into be greater
consideration

small but
 unreasonable to keep important item,
revaluation detailed record (due to –– e.g. tools in office,
the nature of the asset) home officer
printer

DOUBLE-ENTRY RECORDS FOR DEPRECIATION AND PROVISION FOR

DEPRECIATION

To record the purchase of the van and the depreciation of the first three years:

Step 1: Record the purchase in the non-current asset account

DR Non-current asset account (cost)

CR Bank or cash

Step 2: Calculate the annual depreciation charge

Step 3: Open a provision for depreciation account

Step 4: Record the entries for depreciation in the provision for

depreciation account

DR Statement of P/L
CR Provision for depreciation

RECORD THE SALE OF A NON-CURRENT ASSET

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When a non-current asset is sold, it is necessary to:

Step 1: Open a disposal of non-current assets account

Step 2: Transfer the cost of asset sold from the debit of the asset cost
account to the credit of the asset disposal account

DR Disposal
CR Non-current asset (cost)

Step 3: Transfer the accumulated depreciation on the asset sold from the
credit of the provision for depreciation account to the debit of the
asset disposal account

DR Disposal
CR Provision for depreciation

Step 4: Record the amount received for the asset in the credit of the asset
disposal account

DR Bank or cash
CR Disposal

Step 5: The result balance on the disposal account (either profit or loss) is
then transferred to the statement of P/L at the end of the financial
period.

It is, then, necessary to assess whether a profit or a loss has been made on the sale of the
asset. If the sale proceeds are more than the net book value of the asset, then a profit
has been made, and loss if vice versa.

If the balance on the asset disposal account is a debit, then a loss has been made; if the
balance on the asset disposal account is a credit, then a profit has been made.

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PURCHASE OF NON-CURRENT ASSETS ON PART-EXCHANGE BASIS

Occasionally, a business may purchase new non-current asset and part exchange a
non-current asset that it wishes to dispose of, as part of the purchase price.

Record the transaction as:

Step 1: Open the old asset account with an opening balance

Step 2: Open the provision for depreciation account with an opening

balance for the old asset

Step 3: Transfer the cost of the old asset that is being part exchanged to
the disposal account

CR Non-current asset (cost) (original cost)

DR Disposal

Step 4: Transfer the part-exchange value of the old asset that is being of
the exchanged to the disposal account

DR Non-current asset (cost) (part-exchange value*)

CR Disposal

*part-exchange value = cost of new asset – amount settled with cheque/cash

Step 5: Transfer the accumulated depreciation on the old asset to the

disposal account

DR Provision for depreciation

CR Disposal

Step 6: Record the amount of the cheque/cash paid in the assets at cost
account and in the bank/cash account

DR Non-current asset (cost)

CR Bank or cash

Step 7: Transfer the balance on the disposal account (DR) to the P/L.

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DISPOSAL OF NON-CURRENT ASSETS

On the sale of a fixed asset, the following entries are needed:

Step 1: Transfer the cost price of the asset sold to an assets disposal
account

DR Disposal
CR Non-current asset (cost)

Step 2: Transfer the depreciation already charged to the assets disposal

account

DR Provision for depreciation

CR Non-current asset (cost)

Step 3: For the amount received on disposal

DR Bank or cash
CR Non-current asset (cost)

Step 4: Transfer the difference (i.e. the amount needed to balance the non-
current asset account) to the statement of profit and loss.

(i) if the disposal account shows a credit balance (i.e. if more

has been credited to the account than has been debited to
it), there is a profit on sale

DR Disposal
CR Statement of P/L

(ii) If the disposal account shows a debit balance, there is a

loss
on sale

DR Statement of P/L
CR Disposal

In many cases, the disposal of an asset will mean that we have sold it. This will not
always be the case. For example, a vehicle may be given up exchanged against the
purchases of a new vehicle, and hence, the disposal value is the exchange value. Say, if a
new vehicle costing £10 000 was to be paid for by £6 000 in cash and an allowance of £4
000 for the old vehicle, then the disposal value of the old vehicle if £4 000.

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Straight line method

VAN (COST)
2020 £ 2020 £
Jan 1 Bank X
Dec 31 Bal c/d X
X X
2021 2021
Jan 1 Bal b/d X
Dec 31 Bal c/d X
X X
2022 2022
Jan 1 Bal b/d X

PROVISION FOR DEPRECIATION - VAN

2020 £ 2020 £
Dec 31 Bal c/d X Dec 31 P/L X

VAN (COST)
2020 £ 2020 £
Jan 1 Bank X
Dec 31 Bal c/d X
X X
2021 2021
Jan 1 Bal b/d X
Dec 31 Bal c/d X
X X
2022 2022
Jan 1 Bal b/d X

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Depreciation
DR Depreciation (Statement of P/L)
CR Provision for depreciation

ASSET (COST)
2018 £ 2018 £
Jan 1 Bank X
Dec 31 Bal c/d X

The journal
DR CR
£ £

The journal
DR CR
£ £
J Law 44
J Lo 44

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