Accounting errors refer to mistakes or inaccuracies made in the recording, classification,

summarization, or presentation of financial information in the accounting records. These errors

can occur due to various reasons, such as human error, misunderstanding of accounting
principles, misinterpretation of data, or system or software glitches. Accounting errors can have a
significant impact on the accuracy and reliability of financial statements, and it is important to
identify and correct them in a timely manner.

Errors not detected by the trial balance ;

(1) Error of omission

This is an error where a transaction is completely omitted from the books. No entries
were made at all for the transaction. It is as if the transaction has not existed.

Example:-
Goods sold on credit to John, $230, was not recorded in the books.

Type of Error Error of omission

Entries that should Dr John $230

Step 1
have been made Cr Sales $230

Step 2 Actual entries made none

Cancelling wrong
Step 3 none
entries

Completing missing Dr John $230

Step 4
entries Cr Sales $230

Step 5 Suspense account none

Combined correction Dr John $230

Step 6
required Cr Sales $230

(2) Error of commission

In this case, double entry was observed but the transaction was posted to a wrong account of the
same class. For example goods sold to John was correctly credited to Revenue (Sales) account
but debited to Jane’s account.

Example :-

Goods bought from Jane $500 was credited to Jenny’s account.

Type of Error Error of commission

Entries that should Dr Purchases $500

Step 1
have been made Cr Jane $500

Dr Purchases $500
Step 2 Actual entries made
Cr Jenny $500

Cancelling wrong
Step 3 Dr Jenny $500
entries

Completing missing
Step 4 Cr Jane $500
entries

Step 5 Suspense account none

Combined correction Dr Jenny $500

Step 6
required Cr Jane $500

(3) Error of principle

Double entry observed but an entry made in the wrong class of account. For example, payment
by cheque for vehicle repairs correctly credited to bank account but debited to vehicle account
instead. In this case, not only the account is wrong (vehicle instead of vehicle repairs) but also
the class of account is different. Vehicle account is a real account (asset) whereas vehicle repairs
account is a nominal account (expense).

Example:-

Repairs to motor vehicles paid by cheque $650 have been debited to motor vehicles account.

Type of Error Error of principle

 Entries that should Dr Repairs to motor vehicles $650
Step 1
have been made Cr Bank $650

Dr Motor vehicles $650

Step 2 Actual entries made
Cr Bank $650

Cancelling wrong
Step 3 Cr Motor vehicles $650
entries

Completing missing
Step 4 Dr Repairs to motor vehicles $650
entries

Step 5 Suspense account none

Combined correction Dr Repairs to motor vehicles $650

Step 6
required Cr Motor vehicles $650

(4) Error of original entry

The transaction was correctly according to the double entry system but with the wrong amount.
For example, payment of telephone expenses in cash of $560 was credited to cash account and
debited to telephone expenses account but by $600 in both accounts.

Example:-

The purchase of a van by cheque $2 000 was wrongly entered in the books as $2 200 due to an
error in the invoice received.

Type of Error Error of original entry

Entries that should Dr Van $2 000

Step 1
have been made Cr Bank $2 000

Dr Van $2 200
Step 2 Actual entries made
Cr Bank $2 200

Step 3 Cancelling wrong Dr Bank $2 200

 entries Cr Van $2 000

Completing missing Dr Van $2 000

Step 4
entries Cr Bank $2 000

Step 5 Suspense account none

Combined correction Dr Bank $200

Step 6
required Cr Van $200

(5) Complete reversal of entries

For a given transaction, the account to be debited was credited and the account to be credited was
debited. For example, goods sold to Nadia for $500 was debited to Revenue (Sales) account and
credited to Nadia’s account, both by $500.

Example:-

Goods returned by Sam $560 was debited to Sam’s account and credited to returns inwards
account.

Type of Error Complete reversal of entries

Entries that should Dr Returns Inwards account $560

Step 1
have been made Cr Sam’s account $560

Dr Sam’s account $560

Step 2 Actual entries made Cr Returns Inwards account
$560

Cancelling wrong Dr Returns Inwards account $560

Step 3
entries Cr Sam’s account $560

Completing missing Dr Returns Inwards account $560

Step 4
entries Cr Sam’s account $560

Step 5 Suspense account None

 Combined correction Dr Returns Inwards account $1 120
Step 6
required Cr Sam’s account $1 120

(6) Compensating error

Errors on the debit side of the ledger have been set off by errors on the credit side of the ledger.
For example, vehicle account (debit balance) and commission received account (credit balance)
were both understated by $200.

Example:-

Purchases returns account and wages account are both overstated by $300.

Type of Error Compensating error

Entries that should

Step 1
have been made

Step 2 Actual entries made

Cancelling wrong
Step 3
entries

Completing missing
Step 4
entries

Step 5 Suspense account

Combined correction Dr Purchases account $300

Step 6
required Cr Wages account $300

(7) Error of transposition

For a given transactions, double entry was correctly observed but the figures in amount were not
written in the correct order. Examples are: writing $450 instead of $540, $71 instead of $17, $1
425 instead of $1 452, etc. For example, cash received from Sam $164 was debited to cash
account and credited to Sam’s account at $146.

Example:

Stationery bought in cash $76 was recorded in the books at $67.

Type of Error Error of transposition

Entries that should Dr Stationery account $76

Step 1
have been made Cr Cash account $76

Dr Stationery account $67

Step 2 Actual entries made
Cr Cash account $67

Cancelling wrong Dr Stationery account $76

Step 3
entries Cr Cash account $76

Completing missing Dr Stationery account $67

Step 4
entries Cr Cash account$67

Step 5 Suspense account None

Combined correction Dr Stationery account $9

Step 6
required Cr Cash account $9

(8) Error of duplication

A transaction was recorded twice in the ledger. Double entry was observed in each case.

Example:-

Cheque of $900 received from Jerry was posted twice in the books.

Type of Error Error of duplication

Entries that should Dr Bank account $900

Step 1
have been made Cr Jerry account $900

Step 2 Actual entries made Dr Bank account $1 800 (2x$900)

 Cr Jerry account $1 800
(2x$900)

Cancelling wrong Dr Jerry account 900

Step 3
entries Cr Bank account 900

Completing missing
Step 4 None
entries

Step 5 Suspense account None

Combined correction Dr Jerry account 900

Step 6
required Cr Bank account 900

Trial balance

A trial balance is a financial statement that lists the balances of all general ledger accounts at a
specific point in time. It serves as a preliminary step in the accounting cycle and is used to ensure
the accuracy of the recorded transactions.

The trial balance consists of two columns: the debit column and the credit column. Each
account's balance is listed in the appropriate column based on its normal balance (debit or credit).
The total of the debit column should equal the total of the credit column, indicating that the
accounting equation (assets = liabilities + equity) is in balance.

The purpose of preparing a trial balance is to detect errors in the general ledger accounts. If the
trial balance does not balance, it indicates that there may be errors in the recording of
transactions, such as incorrect postings, omissions, or mathematical mistakes. By identifying and
correcting these errors, the trial balance ensures the accuracy of the financial statements that will
be prepared later in the accounting cycle, such as the income statement and balance sheet.

It's important to note that while a balanced trial balance indicates that the total debits equal the
total credits, it does not guarantee that the individual accounts are free from errors. There can
still be errors that offset each other, resulting in a balanced trial balance but inaccurate financial
statements. Therefore, further analysis and review of the accounts are necessary to ensure the
reliability of the financial information.
In summary, a trial balance is a statement that lists the balances of all general ledger accounts,
serving as a tool to detect errors in the recording of transactions and ensure the accuracy of the
financial statements.

Correcting of accounting errors

Correcting accounting errors is an important step in maintaining accurate financial records.

When errors are identified, they should be promptly corrected to ensure the integrity of the
financial statements.

Methods for correcting accounting errors:

Journal Entry Reversal: If an incorrect journal entry was made, the most straightforward way
to correct the error is by reversing the original entry with an equal and opposite entry. This
ensures that the accounts are adjusted correctly. For example, if a $500 expense was erroneously
recorded as a debit to the wrong expense account, a reversing entry would be made to debit the
incorrect expense account and credit the correct expense account.

Journal Entry Adjustment: In some cases, a direct adjustment entry may be necessary to
correct an error. This involves creating a journal entry to fix the mistake without completely
reversing the original entry. For example, if an asset was understated by $1,000, a journal entry
would be made to increase the asset account by $1,000.

Restating Financial Statements: If an error is material and has impacted prior financial
statements, it may be necessary to restate those statements. Restating financial statements
involves correcting the errors and presenting the corrected financial information for the affected
periods. This ensures that the financial statements accurately reflect the financial position and
performance of the business.

Prior Period Adjustment: If an error is identified in a prior accounting period, but it does not
meet the criteria for restating financial statements, a prior period adjustment should be made.
This adjustment is recorded in the current period's financial statements to correct the error for the
historical period in which it occurred. The prior period adjustment is disclosed in the financial
statements to provide transparency.

Documentation and Disclosure: It is crucial to document and disclose any accounting errors
and their corrections in the financial statements. This helps provide clarity and transparency to
users of the financial statements. Proper documentation ensures that the errors and corrections
are properly recorded and can be referenced in the future if needed.
A SUSPENSE ACCOUNT

A suspense account is a temporary account used to hold the balance of an unidentified or

unresolved discrepancy or error in the accounting records. It acts as a placeholder until the error
is identified, investigated, and corrected. The suspense account allows for the continued
balancing of the books while the discrepancy is being resolved. Here are seven common uses of
a suspense account:

Recording Bank Reconciliation Differences:

If there are discrepancies between the cash balance in the company's books and the bank
statement, a suspense account can be used to temporarily hold the difference until the
discrepancy is resolved.

Correcting Errors in Trial Balance:

If a trial balance does not balance due to an error, the imbalance can be placed in a suspense
account until the error is identified and rectified.

Unallocated Receipts or Payments:

If a payment or receipt cannot be initially assigned to a specific account, it may be temporarily

recorded in a suspense account until it can be properly allocated to the correct account.

Unidentified Invoices or Expenses:

If an invoice or expense is received but cannot be identified or allocated to the appropriate

account, it may be recorded in a suspense account until the necessary information is obtained.

Discrepancies in Inventory:

If there are discrepancies or unresolved issues with inventory counts, a suspense account can be
used to temporarily hold the adjustment until the discrepancies are resolved.

Discrepancies in Sales or Revenue:

If there are discrepancies or unresolved issues with sales or revenue, a suspense account can be
used to temporarily hold the adjustment until the discrepancies are resolved.
Unresolved Reconciliation Differences:

If there are discrepancies during the reconciliation process, such as differences in accounts
payable or accounts receivable balances, a suspense account can be used to hold the adjustment
until the discrepancies are resolved.

Examples of Suspense Account and Correction of Errors:

Suppose a company's trial balance does not balance due to a $1,000 overstatement of sales
revenue. The error could be temporarily recorded in a suspense account until the adjustment is
made to correct the revenue account.

If a company receives an unidentified payment of $500, the funds can be recorded in a suspense
account until the payment can be properly allocated to the correct customer or account.

In the process of conducting a physical inventory count, discrepancies are found, resulting in an
inventory adjustment of $2,000. The adjustment can be initially recorded in a suspense account
until the discrepancies are resolved and the inventory accounts are updated.
References

Horngren, C. T., Sundem, G. L., & Stratton, W. O. (2020). Introduction to financial accounting
(12th ed.). Pearson.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting: Tools for business
decision-making (9th Canadian ed.). Wiley.

Warren, C. S., Reeve, J. M., & Duchac, J. E. (2020). Financial and managerial accounting (15th
ed.). Cengage Learning.

Nobes, C., & Parker, R. (2019). Comparative international accounting (14th ed.). Pearson.

Spiceland, J. D., Thomas, W. A., & Herrmann, D. (2020). Financial accounting (5th ed.).
McGraw-Hill Education.