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Errors. Errors. Errors not affecting trial balance agreement Errors affecting trial balance agreement. Errors not affecting trial balance agreement. E.g. Errors of commission Errors of principle Errors of original entry Errors of omission Compensating errors Complete reversal of entries.
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Errors • Errors not affecting trial balance agreement • Errors affecting trial balance agreement
Errors not affecting trial balance agreement E.g. • Errors of commission • Errors of principle • Errors of original entry • Errors of omission • Compensating errors • Complete reversal of entries
Errors affecting trial balance agreement • Suspense account
Errors of Commission • The correct amount is entered but in a wrong personal account
Example • A purchase of goods from C.Lee has been posted to the credit side of C.Lai’s account in error, amounting to $500. The correcting entries should be: Original entry: Dr Purchase $500 Cr C Lee $500 Dr Purchase $500 Cr C Lai $500 Wrong entry:
The journal $ $ C.Lai 500 C.Lee 500 Purchases entered in wrong personal account, now corrected.
C. Lai $ $ C.Lee 500 Purchases 500 C. Lee $ C.Lai 500
Errors of Principle • An item is entered in the wrong type of account due to misunderstanding of the nature of the item.
Example • Office equipment purchased for $1,000 in cash has been debited to an office expenses account. The correcting entries should be: Original entry: Dr Office Equipment $1000 Cr Cash $1000 Dr Office Expenses $1000 Cr Cash $1000 Wrong entry:
The journal $ $ Office Equipment 1,000 Office Expenses 1,000 Purchase of office equipment wrongly entered in the office expenses account, now corrected.
Office Expenses $ $ Cash 1,000 Office Equipment 1,000 Office Equipment $ Office Expenses 1,000
Errors of Original Entry • Wrong original figure is entered in the journals, and hence posted incorrectly to the accounts.
Example • A payment of $1,200 to a creditor, M.Wong, has been entered as both a debit and credit as $1,000. The correcting entries should be: Original entry: Dr Mr. Wong $1200 Cr Bank $1200 Dr Mr. Wong $1000 Cr Bank $1000 Wrong entry:
The journal $ $ M Wong(1200-1000) 200 Bank 200 Payment of $1,200 incorrectly entered as $1,000, now corrected.
M. Wong $ Bank 1,000 Bank 200 Bank $ M. Wong 1,000 M. Wong 200
Errors of Omission • A transaction has been completely omitted from the accounts.
Example • A sale of $400 to John Leung has been completely omitted from the accounts. The correcting entries should be: Original entry: Dr John Leung $400 Cr Sales $400 No entry Wrong entry:
The journal $ $ John Leung 400 Sales 400 A sale of $400 was omitted, now corrected.
Sales $ John Leung 400 John Leung $ Sales 400
Compensating Errors • Debit side errors are equal to credit side errors.
Example • The purchases account was undercast by $2,200, and the sales account was also undercast by $2,200. The correcting entries should be:
The journal $ $ Purchases 2,200 Sales 2,200 Purchases and sales accounts were undercast by $2,200, now corrected.
Purchases $ Sales 2,200 Sales $ Purchases 400
Complete Reversal of Entries • The correct amounts are entered in the wrong sides of the two appropriate accounts.
Example • The purchase of goods on credit from M. Lok for $60 was entered on the debit side of M. Lok’s account and the credit side of the purchases account. The correcting entries should be: Original entry: Dr Purchase $60 Cr M Lok $60 Dr M Lok $60 Cr Purchase $60 Wrong entry:
The journal $ $ Purchases ($60 x 2) 120 M. Lok ($60 x 2) 120 Purchases from M. Lok incorrectly debited to his account and credited to the purchases account, now corrected.
Purchases $ $ M. Lok 120 M. Lok 60 M. Lok $ $ Purchases 60 Purchases 120
Errors affecting trial balance agreement may occur when • (i) recording transactions in the accounts: • (1) omitting a debit or credit entry • (2) posting a wrong amount to one of the accounts • (3) recording an entry on the wrong side • E.g. a debit entry entered as a credit or a credit entry as a debit
(ii) Balancing of accounts: Incorrect calculation of a balance • E.g. overcast or undercast • (iii) Drawing up a trial balance: • (1) omitting a balance from the trial balance • (2) incorrectly posting an amount to the trial balance • (3) incorrectly posting a balance to the wrong side of the trial balance
Suspense Account • When the trial balance does not agree, the amount of the difference is entered in a suspense account.
Trial Balance as at 31 December 1996 $ $ Total balances extracted 90 100 Suspense account 10 100 100
Suspense Account 1996 $ Dec 31 Difference per trial balance 10
T form Balance Sheet $ Fixed Assets X Current Assets X Suspense Account X X
Vertical form Balance Sheet $ $ Fixed Assets X Current Assets X Less Current Liabilities X Working Capital X Suspense Account X X
T form Balance Sheet $ Capital X Long-term Liabilities X Current Liabilities X Suspense Account X X
Vertical form Balance Sheet $ $ Fixed Assets X Current Assets X Less Current Liabilities X Working Capital X Suspense Account (X) X
Correction of Errors • To correct the errors, students should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.
Example • A credit sale of $150 to Mr Chan has been omitted from his account. Original entry: Dr Mr Chan $150 Cr Sales $150 Dr - Cr Sales $150 Wrong entry: Correct entry: Dr Mr. Chan $150 Cr Suspense $150
Example • A sale to C. Lee for $230 was correctly entered in the sales book but entered in C. Lee’s account as $320. Original entry: Dr C Lee $230 Cr Sales $230 Dr C Lee $320 Cr Sales $230 Wrong entry: Correct entry: Dr Suspense $90 Cr C Lee $90
Example • A credit sale of $97 has been credited to H. Cheung’s account. Original entry: Dr H Cheung $97 Cr Sales $97 Cr H Cheung $97 Cr Sales $97 Wrong entry: Correct entry: Dr H Cheung (97*2) 194 Cr Suspense $194
Example • Sales day book was overcast by $200. Dr Sales $200 Cr Suspense $200 Correct entry:
Example • Sales day book was undercast by $40. Dr Suspense $40 Cr Sales $40 Correct entry:
