FA1 - Chapter 4

• Types of error in accounting
• The correction of errors
Correction of Errors
Syllabus learning outcomes 1
 Identify the types of error which may occur in bookkeeping
systems.
 Identify errors which would be highlighted by the extraction of a
trial balance.
 Prepare journal entries to correct errors. o ns
o lu ti
 Calculate and understand the impact of errors
n g Son the statement of
a
profit or loss, statement of profit or loss rn i other comprehensive
and
x L e
income and statement of financial
e rte position.
V
 Understand the purpose of a suspense account.
 Identify errors leading to the creation of a suspense account.
 Record entries in a suspense account and make journal entries to
clear it.
https:vls_online.com
Overview
Types of error
o ns
Correction of errors luti
n g So
i
Le arn
rtex
Ve
Suspense account Adjustments to profit
Example
Paid electricity bill $ 100
Dr. Telephone Expense 100 Dr. Electricity Expense100

Cr. Cash 100 Cr. Telephone Expense 100
o n s
l u ti
Dr. Cash 100
n g So
Cr. Telephone Expense 100
r n i
Le a
tex
Ver
Dr. Electricity Expense 100
Cr. Cash 100
Types of error in accounting 1
The main types of error are as follows – Trial Balance remains same
1. Errors of omission, eg receive supplier's invoice for $500 and do not record
it in the books at all
2. Errors of commission, eg putting telephone expenses in the electricity
expense account on s
uti
3. S o
Errors of principle, eg treating capital expenditure as revenuel expenditure
in g
4. Errors of transposition, eg writing $381 as $318
ar n(the difference is divisible
by 9) x L e
t e
5. Compensating errors, eg both sales
coincidentally under cast by $500
Verday book and purchases day book
6. Error of Original Entry – account name and amounts are corrected,
however, debits and credits are wrong
Example – Error of Commission
Paid electricity bill $ 100
Dr. Telephone Expense 100 Dr. Electricity Expense100

Cr. Cash 100 Cr. Telephone Expense 100
o n s
l u ti
Dr. Cash 100
n g So
Cr. Telephone Expense 100
r n i
Le a
tex
Ver
Cr. Cash 100
Error of Principle
Asset – Balance Sheet
Purchased Computer $ 500 Opex – P&L

Explanation
If we take it to the asset account in balance sheet
Dr. Computer Repair a/c 500 the $100 (500*20%) will come to the income
Cr. Cash 500
o n s
statement as depreciation – Exp $ 100
Depreciation is 20% per year
o l u ti
n g S
We did not take as asset in balance sheet – so no
r n i depreciation exp in income statement, however, we
Profit is understated by $ 400 Le a took 500 exp in income statement straight away.
tex
Ver Which means that Instead of 100 expense we
Dr. Computer Equipment a/c 500 recorded 500 expense Increase in expense is 400
Cr. Computer Repair a/c 500 Decrease in profit is 400
Approach
Errors where the trial balance still balances

• When correcting these errors, a good approach is to consider:
1. What was the double entry? (‘did do’).

2. What should the double entry have been? (‘should do’). ons
l u ti
n g So
3. Therefore what correction is required? (‘to correct’).
r n i
Le a
r x
• Always assume that if one side tofethe double entry is not mentioned, it
Ve
has been recorded correctly.
Adjustment to Profits
Dr. Balance Sheet a/c Dr. Cash

No Change in Profit
Cr. Balance Sheet a/c Cr. Receivables
Dr. Income Statement a/c Dr. Rent Exp

o n s in Profit
Decrease
Cr. Balance Sheet a/c Cr. Cash a/c l u ti
n So
g
r n i
Dr. Balance Sheet a/c Dr. Cash/
L e a
Receivables
Cr. Income Statement a/c r
Cr. e x
tSales Increase in Profit
Ve
The correction of errors
• Example
Accountant omits to record invoice from supplier for $2,000. This
would be corrected by the following journal entry.
o n s
DEBIT Purchases $2,000
l u ti
CREDITPayables $2,000 n g So
r n i
A transaction previously omitted.x Le
a
e r te
V
The correction of errors
• Another example
Accountant posts car insurance of $800 to motor vehicles
account. Correct as follows.
o n s
DEBIT Motor expenses - Insurance $800
l u ti
CREDIT Motor vehicles $800ing So
ar n
Correction of error of principle. x Le
e r te
V
Errors where the trial balance does not balance
 Single sided entry – a debit entry has been made but no

corresponding credit entry or vice versa.
 Debit and credit entries have been made but at different values.
 Two entries have been made on the same side.tions
o l u
S i.e. miscasting.
 An incorrect addition in any individualnaccount,
g
r n i
e a
 Opening balance has not beenLbrought down.
x
erte in the trial balance is different from
 Extraction error – theVbalance
the balance in the relevant account.
Single Sided Entry does not balance
Electricity Exp
Cr. Cash 185 Cash 185
o n s
l u ti
n g So
r n i
Le a
tex Cash a/c
Ver
Wrong Amounts does not balance
Electricity Exp
o n s
l u ti
n g So
r n i
Le a
tex Cash a/c
Ver Electricity Exp 158
Posted on same sides - does not balance
Electricity Exp
o n s
l u ti
n g So
r n i
Le a
tex Cash a/c
Ver Electricity Exp 158
Suspense Account
A suspense account is a temporary account that is used in the following
circumstances.
The bookkeeper knows in which account to make the debit entry for a
transaction but does not know where to make the corresponding credit
entry (or vice versa).
o n s
o l u ti
n g S
The credit is temporarily posted to the suspense account until the
r n i
correct credit entry is known.
Le a
te x
Example: Purchased computer V er disk
hard
Dr. Suspense Account 100

Cr. Cash 100
Dr. Computer Repair a/c 100

Cr. Suspense a/c 100
The correction of errors 5
Suspense account (cont'd)
• A difference occurs in the trial balance caused by the incomplete
recording of the double entry in respect of one or more
transactions.
— The difference is recorded in the suspense account o n sand
l u ti
n g So
included in the trial balance, so restoring equality.
r n i
Le a
tex
Any balance on a suspense account
r must be eliminated. It is
Ve
never included in the final accounts.
Approach
Errors where the trial balance still balances

• When correcting these errors, a good approach is to consider:
1. What was the double entry? (‘did do’).

2. What should the double entry have been? (‘should do’). ons
l u ti
n g So
3. Therefore what correction is required? (‘to correct’).
r n i
Le a
r x
• Always assume that if one side tofethe double entry is not mentioned, it
Ve
has been recorded correctly.
Lecture example 1
Dan, the bookkeeper of Tiffany's, has made his usual mess of things
and produced the following attempt at a trial balance for the year
ended 30 April 20X7.
$ $
Property, plant and equipment
o n s
At cost S o
60,000 luti
Provision for depreciation
ar n ing 31,000
ex Le
Capital at 1 May 20X6
Ve rt 53,000
Profit for the year 12,300
Inventory, at cost 14,000
Receivables ledger control account 9,600
Payables ledger control account 6,500
Balance at bank 1,640
85,240 102,800
Lecture example 1 (cont'd)
As chief accountant you discover the following:
(1) A rent payment of $350 in March 20X7 had been debited in the receivables ledger
control account.
(2) Discounts allowed of $500 during the year ended 30 April 20X7 had not been
recorded in the books.
(3) No entry had been made for the refund of $2,620 made by cheque to
March 20X7, in respect of defective goods returned to Tiffany. tiVo n s V Woolf in
Woolf, who had
already paid for the goods, returned them on 28 February S o lu
20X7.
n ingovercast by $1,900 in March
(4) The total column of the cash receipts book had
L e a rbeen
20X7.
rt ex
Ve
(5) The purchase of stationery for $1,460 cash in June 20X6 has not been posted to the
appropriate expense account.
(6) Capital of $35,000 was recorded incorrectly as $53,000.
Required
Prepare
(a) Journal entries to correct the above errors
(b) A suspense account showing how it is cleared
o n s
S o luti
ar n ing
ex Le
Ve rt
Answer to lecture example 1
(a) Journal entries
Dr Cr
$ $
(1) Rent and rates 350
Trade receivables 350
(2) Discounts allowed 500
o ns
Trade receivables
S o luti 500
(3) Sales Return
ni g
n 2,620
Cash at bank
Le a r 2,620
rtex
(4)
Cash at bank Ve
Suspense account 1,900
1,900
(5) Stationery and postage 1,460
(6) Capital 18,000
Answer to lecture example 1 (cont'd)
(b) Suspense account

$ $
Brought forward
o ns
(102,800 – 85,240) luti (5)
17,560 Stationery and postage
o 1,460
Cash at bank (4) 1,900 Capital (6) g S 18,000
19,460 r nin
Le a 19,460
rte x
Ve
Lecture example 2
Required
Prepare a statement of adjustments to profit for Lecture example 1.
o n s
S o luti
ar n ing
ex Le
Ve rt
Adjustment of profits statement for the year ended 30 April 20X7
Increases Decreases
$ $ $
Draft profit 12,300
o ns
Adjustments
S o luti
g
Rent (1)
Le a rnin 350
rt ex
Ve(2)
Discounts allowed 500
Stationery (5) 1,460
Total adjustments 2,310 ( 2,310)

9,990
Revised profit
Lecture example 3
Z Co's statement of profit or loss showed a profit of $112,400 for the year ended 30
September 20X7. The following errors were later discovered:
(1)Sales returns of $2,700 had been recorded as a new sale.
(2) A machine which had been held for two years and had originally cost $15,000
was depreciated this year using a 331/3% reducing balance basis. Z Co's policy is to
depreciate machines over four years. o n s
o lu ti
ng S
Le arni
rtex
Ve
Required
What would be the net profit after adjusting for these errors?
A $103,250
B $105,750
C $105,950 o n s
o lu ti
D $108,450
n igS
n
Lear
rtex
Ve
B
Increases Decreases
$ $ $
Draft profit 112,400
Adjustments
o ns
(1) sales returns (2 × $2,700)
S o 1,250luti
5,400
g
rnin
(2) depreciation (W)
Le a_ 6,650
rtex
Adjusted profit Ve (6,650)
105,750
(W) Depreciation charge was

331/3% × ($15,000 × 2/4) = $2,500
Depreciation charge should have been
$15,000 ÷ 4 years = $3,750
Incremental depreciation to be charged $1,250
Specimen paper question
o n s
S o l uti
ing
e a rn
ex L
t
Ver
Source: ACCA Paper FFA/F3 Financial Accounting Specimen Exam
Specimen paper answer
o ns
S o luti
rnin g
L ea
Ver tex
Specimen paper question
o n s
S o l uti
ing
e a rn
ex L
t
Ver
Specimen paper answer
o ns
S o luti
rnin g
L ea
Ver tex
Working:
P&L $83,600
Mis-posting $18,000 Should Dr. Asset
Depreciation ($4,500) Did Dr. Expense
($18,000 x 25%) $97,100

Chapter summary 1
1 Introduction
 If the trial balance doesn't balance an error has been made
and must be corrected.
ns
ti o
lu
g So
nin
ea r
x L
r te
Ve
Chapter summary 2
2 Types of error
 There are four types of errors: errors of omission, commission,
principle and compensating errors which will still allow the
trial balance to balance.
n s
 If an error is made however where debits ti o≠ credits then the
o lu
trial balance will not balance. S
g
nin
ea r
x L
r te
Ve
Chapter summary 3
3 Suspense accounts
 Where the trial balance does not balance a suspense account
will be inserted and the errors, once identified, will be
corrected via a journal entry.
ns
 A suspense account should never appear ti oin the final financial
o lu
statements. S g
nin
ea r
x L
r te
Ve
Chapter summary 4
4 Adjustments to profit
 Where the process of correcting errors requires changes to
income and expense accounts the business' profit will be
affected. In this case a statement of adjustments to profit can
nsfigure.
tio
be prepared to determine the revised profit
lu
S o
ing
a rn
L e
tex
Ve r

FA1 - Chapter 4

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FA1 - Chapter 4

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• Types of error in accounting

• The correction of errors

Suspense account Adjustments to profit

Paid electricity bill $ 100

Dr. Telephone Expense 100 Dr. Electricity Expense100

Paid electricity bill $ 100

Dr. Telephone Expense 100 Dr. Electricity Expense100

Asset – Balance Sheet

Purchased Computer $ 500 Opex – P&L

Errors where the trial balance still balances

1. What was the double entry? (‘did do’).

Dr. Balance Sheet a/c Dr. Cash

Dr. Income Statement a/c Dr. Rent Exp

 Single sided entry – a debit entry has been made but no

Dr. Suspense Account 100

Dr. Computer Repair a/c 100

Errors where the trial balance still balances

1. What was the double entry? (‘did do’).

(b) Suspense account

Stationery (5) 1,460

Total adjustments 2,310 ( 2,310)

(W) Depreciation charge was

Source: ACCA Paper FFA/F3 Financial Accounting Specimen Exam

Source: ACCA Paper FFA/F3 Financial Accounting Specimen Exam

Source: ACCA Paper FFA/F3 Financial Accounting Specimen Exam

Source: ACCA Paper FFA/F3 Financial Accounting Specimen Exam

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