accounting errors topic

What are the two categories of errors

Errors not revealed by trial balance

Errors revealed by trial balance

Why are errors not revealed by the trial balance hard to detect

the trial balance will still agree and so the debits and credits are equal. In reality, these errors would be difficult to detect.

 

Acronym for errors not revealed by trial balance

COPROC

What does this stand for

Commission

Omission

Principle

Reversal

Original entry

Compensating

What is error of commission

Where the correct amount is entered in the correct type of account. However, it has been posted into the wrong personal account such as mixing up two customer accounts in the sales ledger or two supplier accounts in the purchases ledger where they have similar names.

Example of error of commission

Sold goods on a credit basis to Mrs Smith for £5 750 has been entered in the account of Mrs Smyth.

 

Correct entry should have been:

Dr ​Mrs Smith (trade receivable / asset increase)​£5 750

Cr ​Sales (income increase)​£5 750

 

‘Incorrect’ entry was:

Dr ​Mrs Smyth (trade receivable / asset increase)​£5 750

Cr ​Sales (income increase)​£5 750

 

General journal entry to correct the error:

Dr ​Mrs Smith (trade receivable / asset increase)​£5 750

Cr​Mrs Smyth (trade receivable / asset decrease)​£5 750

What is error of omission

Where a transaction has been completely omitted (not included) from the books of prime entry.

Example of error or omission

Eg. A cash sale of £2 650 by cheque to Mrs Brown has not been entered in the books of account.

 

General journal entry to correct the error:

Dr Bank (asset increase)​​£2 650

Cr Sales (income increase)​​£2 650

 

What is error of principle

where a transaction is entered in the wrong class of account.

Example of error of principle

Eg. A machine which had been purchased for £13 500 from Mrs Bloggs, a supplier, on a credit basis was posted to the purchases account.

 

Correct entry:

Dr Machinery (asset increase)​​£13 500

Cr Mrs Bloggs (liability increase)​​£13 500

 

‘Incorrect’ entry:

Dr Purchases (expense increase)​​£13 500

Cr Mrs Bloggs (liability increase)​​£13 500

 

General journal entry to correct the error:

Dr Machinery (asset increase)​​£13 500

Cr Purchases (expense decrease)​​£13 500

What is an error of reversal

where the correct accounts are used but each entry is shown on the wrong side of the account. This requires double the amount in the opposite direction to correct.

Example of error of reversal

A cheque of £2 400 for rent was posted to the correct accounts but in the wrong direction.

 

Correct posting:

Dr Rent (expense increase)​​£2 400

Cr Bank (asset decrease)​​£2 400

 

‘Incorrect’ posting:

Dr Bank (asset increase)​​£2 400

Cr Rent (expense decrease)​​£2 400

 

General journal entry to correct the error:

Dr Rent (expense increase)​​£4 800

Cr Bank (asset decrease)​​£4 800

 

what is error of original entry

Where the original figure is incorrect but double entry has nevertheless been done correctly. Typically, this is known as a transposition error where the correct digits have been used but in the wrong order eg. entering £142 instead of £124. This is quite a common error, but very difficult to identify.

Example of error of original entry

A cheque for insurance for £350 was posted as £530.

 

Correct entry:

Dr Insurance (expenses increase)​£350

Cr Bank (asset decrease)​£350

 

Incorrect entry:

Dr Insurance (expense increase)​£530

Cr Bank (asset decrease)​£530

 

General journal entry to correct the error:

Dr Bank (asset increase)​£180

Cr Insurance (expenses decrease)​£180

 

What is a compensating error

When two or more errors cancel eachother out.

Example of compensating error

Cash sales of £2 750 received in cash were over posted by £250 in the sales account onlyand cash purchases of £1 600 paid in cash were also over posted by the same £250 in the purchases account only on a different transaction.

 

Correct entry:

Dr Cash (asset increase)​​£2 750

Cr Sales (income increase)​£2 750

 

‘Incorrect’ entry:

Dr Cash (asset increase)​£2 750

Cr Sales (income increase)​£3 000

 

Note:

• The cash account had been posted correctly and so isn’t adjusted.

 

Correct entry:

Dr Purchases (expense increase)​£1 600

Cr Cash (asset decrease)​£1 600

 

Incorrect entry:

Dr Purchases (expense increase)​£1 850

Cr Cash (asset decrease)​£1 600

 

General journal entry to correct the error:

Dr Sales (income decrease)​​£250

Cr Purchases (expense decrease)​​£250

 

Types of correction and impact on general journal

Debit	Expense increase	Decrease profit
Debit	Income decrease	Decrease profit
Credit	Expense decrease	Increase profit
Credit	Income increase	Increase profit

What happens if general journal correction relates to capital assets or liabilities

If a general journal entry involves the correction of an asset, liability or capital account then there is no impact on profit and so the draft profit doesn’t need to be adjusted.

What to do when errors are revealed by the trial balance

the errors would need to be found and resolved before the financial statements were completed in draft form. The trial balance can be balanced temporarily by setting up a suspenseaccount with the required balancing figure. This is also created as a ledger T account. Once the general journal error correction entries have been identified and posted, the suspense account will automatically agree. If it doesn’t, then there are still unresolved errors.

Is it the debit balance or credit balance that’s wrong

either the debit balance, credit balance or both could be wrong in the trial balance. To create a suspense account, an amount equalling the difference is added to the lower value side (in this case added to £11 620 in CR) and NOT deducted from the larger value side (in this case not deduced from £12 750 in Dr).

Errors revealed by the trial balance

Partial omission

Unequal posting

Posting two debits or two credits

Additional

What is an error of partial omission

Posting the debit or the credit entry but not both sides of the transaction.

Example of partial omission

A cash payment for wages of £4 250 was posted to wages but not to the cash account.

 

Correct entry:

Dr Wages (expense increase)​£4 250

Cr Cash (asset decrease)​ ​£4 250

 

‘Incorrect’ entry:

Dr Wages (expense increase)​£4 250

Cr No account posted​        £0

 

General journal entry to correct the error:

Dr Suspense account​​£4 250

Cr Cash (asset decrease)​​£4 250

What is the error of unequal posting

Posting a different amount in the debit and credit side. At least one of the amounts posted must be incorrect but, in somesituations, they could both be incorrect.

Example of error of unequal posting

A cheque payment for telephone of £3 820 was posted incorrectly as £3 520 to the telephone account.

 

Correct entry:

Dr Telephone (expense increase)​£3 820

Cr Bank (asset decrease)​ ​£3 820

 

‘Incorrect’ entry:

Dr Telephone (expense increase)​£3 520

Cr Bank (asset decrease)​£3 820

 

General journal entry to correct the error:

Dr Telephone (expense increase)​£300

Cr Suspense account​​£300

What is the error of posting two debits or two credits

When posted as two debit entries or two credit entries

Example of posting two debits or two credits error

Rent received by cheque of £2 975 has been posted to the debit of both bank and rent received accounts.

 

Correct entry:

Dr Bank (asset increase)​£2 975

Cr Rent received (income increase)​£2 975

 

‘Incorrect’ entry:

Dr Bank (asset increase)​£2 975

Dr Rent received (income decrease)​£2 975

 

General journal entry to correct the error:

Dr Suspense account​​£5 950

Cr Rent received (Income increase)​£5950

What is error of addition

Addition errors in either the book of prime entry, the ledger account or the trial balance. This can be either overcast (added to be higher) or undercast (added to be lower) in nature.

Example of addition error

A sales daybook has been prepared as follows:

 

Customer	£
Mr Wrong	12 500
Mrs Wright	16 750
Total	35 100

 

Here, the total should be 29 250 (12 500 + 16 750). Therefore, it has been overcast by £5 850 (35 100 - 29 250).

 

Correct entry:

Dr Mr Wrong (trade receivable / asset increase)​12 500

Dr Mrs Wright (trade receivable / asset increase)​16 750

Cr Sales (income increase)​​29 250

 

‘Incorrect’ entry:

Dr Mr Wrong (trade receivable / asset increase)​12 500

Dr Mrs Wright trade receivable / asset increase)​16 750

Cr Sales (income increase)​​35 100

 

General journal entry to correct the error:

Dr Sales (income decrease)​5 850

Cr Suspense account​​5 850

When is weeks of addition identified

This type of error would be identified when the sales ledger control account is used to reconcile with the individual accounts in the sales ledger.