Errors and Correction of Errors in Financial Accounting

UNIVERSITY OF THE WEST INDIES MONA CAMPUS

ACCT 1005 – Financial Accounting

ERRORS & CORRECTION OF ERRORS

The trial balance is merely superficial evidence of the arithmetical accuracy of postings of transactions, as there are certain classes of mistakes which do not affect the balancing of the trial balance. It is essential to note that all errors are corrected by means of journal entries in the General Journal.

Errors Not Affecting the Balancing of the Trial Balance

1. Error of Omission
   This occurs when a transaction is completely omitted or left off the books.
   Example: A motor car was purchased on account from Used Wheels Ltd. for 450,000, but no record of the transaction was made.

2. Error of Commission
   This happens when the correct amount is entered but in the wrong account of the same class.
   Example: Services were provided on credit to B. Marks for 23,000, but the amount was debited to the account of D. Marcs instead.

3. Error of Principle
   This type of error is made when a transaction is entered in the wrong class of accounts.
   Example: A computer was bought for 54,000 for business use, but it was debited to purchases and credited to the bank account instead of an asset account.

4. Error of Original Entry
   This occurs when the figure taken from the source document is incorrect and this incorrect figure is entered into all accounts affected.
   Example: Services were provided on credit to S. Greaves for 5,640, but the amount was incorrectly entered as 4,640.

5. Compensating Errors
   These are errors that cancel or balance each other.

   • Where an account carrying a debit balance is over- or under-stated by an amount, and an account carrying a credit balance is also over- or under-stated by the same amount.
     Example: Purchases overstated by 2,000 and sales overstated by 2,000.
   • Where both accounts carry the same type of balance (i.e., Dr or Cr) but one is overstated and the other understated by the same amount.
     Example: Electricity Expense overstated by 500 and Rent Expense understated by 500.

6. Error of Complete Reversal of Entries
   This occurs when correct amounts are entered but on the wrong side of the accounts, meaning the account(s) to be debited is credited and vice versa.
   Example: A cash payment of 13,000 to A. Sherman was wrongly recorded as a debit to Cash and a credit to Sherman.

The Suspense Account

A suspense account is utilized when a difference arises after the trial balance is prepared, and this difference cannot be immediately identified. Every effort should be made to resolve this difference through correcting errors, especially if the amount is substantial. When a suspense account is needed, it is opened with a balance that represents the difference between the two columns of the trial balance.

• If the sum of the debit balances is greater than the sum of the credit balances, the suspense account will have a credit balance.
• Conversely, if the sum of the credit balances is greater than the sum of the debit balances, the suspense account will have a debit balance.

This balance in the suspense account will be eliminated upon locating the error(s). When errors are found, they should be corrected using the suspense account if applicable. The adjustments relating to the suspense account will require only a single entry: either a debit or credit in one account and the corresponding entry in the suspense account. If the accountant cannot resolve the suspense account and the remaining balance is immaterial, this amount will be reflected in the profit and loss account. A debit balance will be added to an expense, while a credit balance will be added to an income account.

Errors Affecting the Balancing of the Trial Balance

1. Posting Incorrectly

   • Single-Sided (One-Sided) Error/Incomplete Double Entry:
     This occurs when the double-entry is not completed, meaning one side of the entry is missing.
     Example: 42,000 cash invested into the current account of the business was only debited to the cash account.
   • Double-Sided Error:
     This refers to posting a transaction using only debits or credits without the corresponding entry.
     Example: Stationery supplies purchased for 12,000 cash were both debited to the Stationery Supplies and credited to Cash accounts, while one side is missing.

2. Mathematical Errors

   • Slide Error:
     One or more zeros are added to or omitted from a number.
     Example: Purchased office supplies for 1,000; but debited Office Supplies 100 and credited Cash 1,000.
   • Transposition Error:
     This occurs when the same digits are used but in the wrong order.
     Example: Paid utilities expense of 2,650 with Utility Expense debited as 2,650 and cash credited as 6,250.
     Note: Both transposition and slide errors are always divisible by 9.