1. Errors

2. Errors • Errors not affecting trial balance agreement • Errors affecting trial balance agreement

3. 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

4. Errors affecting trial balance agreement • Suspense account

5. Examples of account

6. Examples of account

7. Errors Not Affecting Trial Balance Agreement

8. Errors of Commission • The correct amount is entered but in a wrong personal account

9. 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:

10. The journal $ $ C.Lai 500 C.Lee 500 Purchases entered in wrong personal account, now corrected.

11. C. Lai $ $ C.Lee 500 Purchases 500 C. Lee $ C.Lai 500

12. Errors of Principle • An item is entered in the wrong type of account due to misunderstanding of the nature of the item.

13. 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:

14. The journal $ $ Office Equipment 1,000 Office Expenses 1,000 Purchase of office equipment wrongly entered in the office expenses account, now corrected.

15. Office Expenses $ $ Cash 1,000 Office Equipment 1,000 Office Equipment $ Office Expenses 1,000

16. Errors of Original Entry • Wrong original figure is entered in the journals, and hence posted incorrectly to the accounts.

17. 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:

18. The journal $ $ M Wong(1200-1000) 200 Bank 200 Payment of $1,200 incorrectly entered as $1,000, now corrected.

19. M. Wong $ Bank 1,000 Bank 200 Bank $ M. Wong 1,000 M. Wong 200

20. Errors of Omission • A transaction has been completely omitted from the accounts.

21. 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:

22. The journal $ $ John Leung 400 Sales 400 A sale of $400 was omitted, now corrected.

23. Sales $ John Leung 400 John Leung $ Sales 400

24. Compensating Errors • Debit side errors are equal to credit side errors.

25. Example • The purchases account was undercast by $2,200, and the sales account was also undercast by $2,200. The correcting entries should be:

26. The journal $ $ Purchases 2,200 Sales 2,200 Purchases and sales accounts were undercast by $2,200, now corrected.

27. Purchases $ Sales 2,200 Sales $ Purchases 400

28. Complete Reversal of Entries • The correct amounts are entered in the wrong sides of the two appropriate accounts.

29. 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:

30. 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.

31. Purchases $ $ M. Lok 120 M. Lok 60 M. Lok $ $ Purchases 60 Purchases 120

32. Errors Affecting Trial Balance Agreement

33. 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

34. (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

35. Suspense Account • When the trial balance does not agree, the amount of the difference is entered in a suspense account.

36. Trial Balance as at 31 December 1996 $ $ Total balances extracted 90 100 Suspense account 10 100 100

37. Suspense Account 1996 $ Dec 31 Difference per trial balance 10

38. How To Show a Suspense Account on the Balance Sheet

39. Debit Balance of the Suspense Account

40. T form Balance Sheet $ Fixed Assets X Current Assets X Suspense Account X X

41. Vertical form Balance Sheet $ $ Fixed Assets X Current Assets X Less Current Liabilities X Working Capital X Suspense Account X X

42. Credit Balance of the Suspense Account

43. T form Balance Sheet $ Capital X Long-term Liabilities X Current Liabilities X Suspense Account X X

44. Vertical form Balance Sheet $ $ Fixed Assets X Current Assets X Less Current Liabilities X Working Capital X Suspense Account (X) X

45. Correction of Errors • To correct the errors, students should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.

46. 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

47. 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

48. 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

49. Example • Sales day book was overcast by $200. Dr Sales $200 Cr Suspense $200 Correct entry:

50. Example • Sales day book was undercast by $40. Dr Suspense $40 Cr Sales $40 Correct entry: