Lecture 2

Correction of
Errors

Learning Objectives
1. Distinguish between different kind of errors
2. Correct errors not revealed by trial balance
3. Correct errors revealed by trial balance
4. Explain why a suspense account may be used
5. Correct errors using a suspense account
6. Recalculate profits after errors have been corrected

BBFA1053 2023 Jan Lecture PPT 32

 Introduction
Duality principle
- For every debit entry, there will be an equal and opposite corresponding
credit entry
Trial balance
- Is a listing of all the debit and credit balances in the ledgers
- Total in the debit and credit columns in a trial balance are equal
- Facilitate preparation of financial statements

Limitations of Trial Balance

The prime function of trial balance is to test the accuracy of double entry
system
A trial balance will not balance when there is error such as:
Single entry
Debit amount and credit amount are not equal
A trail balance will not detect errors in the double entry if debit and credit
amounts of a transactions recorded are equal

BBFA1053 2023 Jan Lecture PPT 33

 Six Types of Errors Not Detected by a Trial Balance
Error Explanation Example
Error of commission C Correct amounts are entered in the
correct side of wrong account
Error of complete R Correct amounts are used but both
reversal entries are entered on the wrong side
of the account
Error of omission O The transaction is completely omitted
from the ledgers
Compensating error C Two or more errors cancel out each Purchases account was
other understated by RM200 and sales
returns was overstated by RM200
Error of principle P The transaction is posted to the wrong
class of account
Error of original entry O Incorrect figure is used when the
transaction was recorded

Error of Commission
Correct amounts are entered in the correct side of wrong account
Example Journal Entries
Payment of RM600 for repair of motor vehicle is
entered into the rental expenses account

Explanation

BBFA1053 2023 Jan Lecture PPT 34

 Error of Complete Reversal
Correct amounts are used but both entries are entered on the wrong side of
the account
Example Journal Entries

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The supplier account is credited with RM500 of
cash discount for prompt payment of an invoice.
The debit entry was posted to discount received.
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Explanation

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Error of Omission
The transaction is completely omitted from the ledgers
Example Journal Entries

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A purchase invoice RM5,000 for goods was not

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recorded in the books account

Explanation

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BBFA1053 2023 Jan Lecture PPT
f 35
 Compensating Error
Two or more errors cancel out each other
Example Journal Entries
Debit entry in purchases account was understated
by RM200, and sales returns was overstated by
RM200.

Explanation

Error of Principle
The transaction is posted to the wrong class of account

Example Journal Entries

RM1,000 for repair of motor vehicle is entered as
purchases of motor vehicle.

Explanation

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BBFA1053 2023 Jan Lecture PPT
8 36
 Error of Original Entry
Incorrect figure is used when the transaction was recorded
Example Journal Entries
Purchase of goods for RM1,000 was recorded as
RM10,000

Explanation

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1000 Supposed tradepayables1000
10000 9000
1000
Wh 100
now left Example 1 only so 10000 9000
quaggy Transaction Debit Credit Type of Error
Travelling expenses Salaries RM600 Bank RM600 Error of commission
RM600 Correction Correct amounts are
entered in the correct side
Bank RM600 Salaries RM600 of wrong account
Insurance of RM4,500 Bank RM4,500 Insurance RM4,500 Error of complete reversal
paid by cheque Correction Correct amounts are used
but both entries are
Insurance Bank RM9,000 entered on the wrong side
RM9,000 of the account
K No entry
Cash sales for RM321 was No entry Error of omission
omitted Correction The transaction is
completely omitted from
Cash RM321 Cash sales RM321 the ledgers

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BBFA1053 2023 Jan Lecture PPT

É 37
4
 I I
fit
Transaction
g Debit
Example 1
Credit Type of Error
Printing and stationery of Printing and Commission Compensating error
RM300 had been recorded stationery RM450 income RM650 Two or more errors cancel out each other
as RM450. Commission
from supplier RM650 was Correction
wrongly calculated
resulting in an excess of Commission Printing and
RM150 being recorded as income RM150 stationery RM150
income
Repair of office equipment Office equipment Bank RM300 Error of principle
RM300 RM300 The transaction is posted to the wrong class
Correction of account

Repair of office Office equipment

equipment RM300 RM300
Electricity expenses for the Electricity Accrual RM3,310 Error of original entry
month was recorded as RM3,310 Incorrect figure is used when the transaction
RM3,010 instead of Correction was recorded
RM3,000 as shown in the
bill Accrual RM300 Electricity RM300

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Suspense Account
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Because they paid
more
RM300 then put into account
accrual electricity
Suspense account is a temporary account opened to make the trial balance
totals equal
It is a holding account until the errors causing the imbalance in trial balance
are cleared
The amount recorded in suspense account is the difference between the total
debit and credit in the trial balance
General journal is used to clear the suspense account

BBFA1053 2023 Jan Lecture PPT 38

 Example 1 Opening a Suspense Account
TB Before SA Debit Credit TB After SA Debit Credit
RM RM
RM RM
Total for the
Total for the
column 10,200 15,000
column 10,200 15,000
Suspense
Difference 6,900

the
account 6,900

15,000 15,000 17,100 17,100

Suspense Account
RM RM
Difference in
trial balance 6,900

Example 2 Clearing Errors Recorded in Suspense Account

The trial balance of Shan showed credit is greater than debit by RM630.
It was discovered that:
1. Repairing expenses of RM1,500 for motor vehicle was posted to motor
vehicles account.
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2. Payment of RM3,200 to a supplier was recorded correctly in the bank book
but it had been recorded as RM2,300 in trade payable account.
3. Total for sales journal RM76,300 had been posted to the sales account as
RM76,030.

Prepare a suspense account and correct the errors.

BBFA1053 2023 Jan Lecture PPT 39

 Example 2 Steps
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The trial balance of Shan failed to balance by RM630.(A debit balance of RM630 is
inserted in the suspense account)
It was discovered that:

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1. Repairing expenses of RM1,500 for motor vehicle was posted to motor vehicles
account. (This is an error of principles. It does not affect the trial balance The correction will
not appear in the suspense account.)
2. Payment of RM3,200 to a supplier was recorded correctly in the bank book but it

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had been recorded as RM2,300 in trade payable account. (Amount credited RM3,200
<> the amount of debit RM2,300 Trial balance failed to balance Corrected in suspense
account)
3. Total for sales journal RM76,300 had been posted to the sales account as
RM76,030. (Amount credited RM76,030 <> the amount of debit RM76,300 Trial balance
failed to balance. Corrected in suspense account)

Prepare a suspense account and correct the errors.

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sat Example 2: Solution
I suspensenghdoo Suspense Account
RM RM
Difference in trial balance 630 Trade payable 900
(3,200-2,300)
Sales(76,300-76,030) 270
900 900

BBFA1053 2023 Jan Lecture PPT 40

 Example 3: Correction of Errors and Effect on Profit
Caleb drew up the income statement of KR Sdn Bhd and it showed a profit of
RM35,000. On detail examination, he discovered the following errors.

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a) The sales journal were overcast by RM1,000.
b) Returns inwards were posted to returns outwards as RM150.
c) Discount of RM264 received from MCKK was omitted.
d) Payment of RM450 by YXY was credited to CWX.
e) Repair of office equipment for RM1,000 was debited to office equipment.

Required
(1) Prepare journals to corrected the errors. Narration is not required.
(2) Indicate for each of the error whether it overstate the profit, understate the profit or
no effect. Show the adjusted profit after corrections.

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Example 3: Solution (1)
gigging
Dr Cr
Error Accounts (RM) (RM)
Sales 1,000
a)
Trade receivables control account 1,000
Returns inwards 300
b)
Returns outward 300
Trade payables control account 264
c)
Discount received 264
CWX 450
d)
YXY 450
Repair of office equipment 1,000
e)
Office equipment 1,000

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 Example 3: Solution (2)
Effect on Profit Amount (RM)
a) Overstate (1,000)
b) Overstate (300)
c) Understate 264
d) No effect 0
e) Overstate (1,000)
Net effect (2,036)
Profit before adjustment 35,000
Adjusted profit after corrections 32,964

Accounting Equation

Assets Expenses Capital Liabilities Income

Dr Dr Cr Cr Cr

Increase Dr Dr Cr Cr Cr

Decrease Cr Cr Dr Dr Dr

BBFA1053 2023 Jan Lecture PPT 42