Week 10

1. Week 10 CORRECTION OF ERRORS AND SUSPENSE ACCOUNT

2. Learning Objectives Errors not affecting trial balance agreement After you have studied this chapter, you should be able to: • correct all errors which do not affect trial balance totals being equal • distinguish between the different kinds of errors that may arise Suspense accounts and errors After you have studied this chapter, you should be able to: • explain why a suspense account may be used • create a suspense account in order to balance the trial balance • correct errors using a suspense account • recalculate profits after errors have been corrected • explain why using a suspense account is generally inappropriate

3. DISCOVER ERROR!!! Analyze each transaction and event form source documents Recap:Analyzing and Recording Process Record relevant transactions and events in a journal Post journal information to ledger accounts Prepare and analyze the trial balance

4. Errors • Most errors are found after preparing the trial balance. Errors cannot be crossed out or erased. • If there are errors, the trial balance will not agree. • But there are some errors which will not affect the agreement of the trial balance totals.

5. 3rd Step 2nd Step 1st Step Steps in Analyzing and Correcting Errors • Determine the correct journal entry and the appropriate debits and credits. 2. Analyze the original errors journal entry and determine all the debits and credits that were recorded. 3. Preparing the correcting entries.

6. Errors Revealed by Trial Balance • Errors in calculation – Miscalculation of the trial balance totals or the net account balances. • Errors of omission of one entry – Omission of either the debit or credit entry of a transaction. • Posting to the wrong side of an account. • Errors in amount – debit entry of a transaction differs in amount with the credit entry. Note: Suspense account is opened to take care of errors which have caused an imbalance in the Trial Balance.

7. Errors NOT Revealed by Trial Balance • Errors of omission – A transaction is completely omitted from the books. • Errors of commission – An entry posted at the correct amount but to the wrong person’s account. • Errors of principle – An entry is made in the wrong class of account. • Complete reversal of entries – An account that should be debited is credited and vice versa.

8. Compensating errors – where errors cancel each other out. • Errors of original entry – The original figure incorrectly entered although the correct double-entry principle has been observed.

9. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Omission When a transaction has been completely omitted from the books, it can be corrected by simply making a double-entry to record the transaction. EXAMPLE A cash payment of RM 1,600 for rent has been omitted from the books.

10. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Omission The journal entry is as follows:

11. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Commission An entry has been posted to the wrong account of the same category. EXAMPLE A sale of RM150 to Folin Brothers has been posted to Lin Associates. X √

12. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Commission The journal entry is as follows: X √

13. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Principle An entry is posted to an account of a different category e.g. an expense is recorded as an asset. EXAMPLE Repairs to vehicles amounting to RM 1,000 has been posted to Vehicles Account. X √

14. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Principle The journal entry is as follows: √ X

15. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Original Entry A wrong amount is recorded in a book of original entry or a document such as an invoice and subsequently posted to the ledger accounts EXAMPLE A purchase of RM665 from Paper Manufacturers Ltd has been entered in the Purchases Journal and posted to the ledger as RM656.

16. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Original Entry The journal entry is as follows:

17. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Compensating Errors An error on the debit side is compensated by an error of equal amount on the credit side. EXAMPLE Rent revenue account is overcast by RM10, so as the Wages Account.. Wages RM10 Rent revenue RM10

18. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Principle The journal entry is as follows:

19. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS - Complete Reversal of Entries When recording a transaction, the debit entry and the credit entry are reversed. EXAMPLE A payment of RM 700 to a creditor, Martin, was debited to the Cash account and credited to Martin’s Account. X √

20. 1st Step 2nd Step 3rd Step CORRECTION OF ERRORS- Errors of Principle The journal entry is as follows: X X

21. Lecture Exercise 1 Record the entries needed in the journal to correct the following errors. Narratives are not required: (a) Motor expenses of RM56 entered incorrectly in the Motor Vehicles account. (b) Insurance RM98 paid by cash should have been entered as RM89. (c) Sale of goods for RM375 to S Lin entered into the account of S Lim. (d) Private withdrawal of RM150 cash had been debited to Sundry expenses account (e) Returns outwards of RM75 had been credited to Returns inwards by mistake. (f) Purchase of stock on credit from D Wing for RM115 had been completely omitted.

22. BREAK

23. CORRECTION OF ERRORS- Suspense Account • A Suspense Account is opened to take care of errors which have caused an imbalance in the Trial Balance. • When they are discovered, they have to be corrected by a double-entry, one in the Suspense Account and the other in the account concerned.

24. CORRECTION OF ERRORS- Suspense Account EXAMPLE • The credit side of a Trial Balance is short of RM100. • A Suspense Account is temporarily opened. • The difference between the two sides in the Trial Balance is entered in this account.

25. CORRECTION OF ERRORS- Suspense Account • The Suspense Account will have a credit balance when the credit total in the Trial Balance is short and a debit balance when the debit total is short.

26. Errors Affecting TB Agreement and their Correction • Errors which cause an imbalance in the Trial Balance affect only one side of an account. • This class of errors requires only one entry, either on the DR or CR side, to correct them. • The other entry has to be made in the Suspense Account, thus adhering to the double-entry principle.

27. Errors Affecting TB Agreement and their Correction EXAMPLE • A sale of RM80 to Linda has been credited to Sales Account but omitted from Linda’s account. • The debit side of the Trial Balance was later found to have a deficiency of RM80.

28. Errors Affecting TB Agreement and their Correction To correct the error... Suspense Account RM80 Linda RM80

29. Errors Affecting TB Agreement and their Correction The journal entry is as follows:

30. Correction of an Error Requiring More Than Two Entries EXAMPLE • Returns outwards RM100 to Samy has been correctly entered in Samy’s account but wrongly debited to Purchases Account. . Suspense Account RM100 Suspense Account RM100 Purchases RM100 Return outwards RM100

31. Correction of an Error Requiring More Than Two Entries The journal entry is as follows:

32. Lecture Exercise 2 The following errors were made: • $78 cash paid for stationery was entered in the Stationery Account and the Cash Account as $87. • $400 paid for repairs for machinery was debited to Machinery Account. • Sales Account and Purchases Account were overcast by $300 each. • Commission received $1,500 was wrongly debited to the Commission Revenue Account and credited to the Cash Account. What entries should be made to correct these errors?

33. Lecture Exercise 3 The debit total in the Trial Balance exceeded the credit total by RM32. On checking the books, the following errors were found: i. Rent received, RM400 had been recorded on the payment side of the Cash Book and debited to the Rent Expenses Account. ii. Goods amounting to RM70, returned to Alex, had been treated as sales. The amount was debited to the account of a debtor, B. Fowler and credited to the Sales Account. iii. A cheque of RM51 received from K. Jack had been debited in error to R. Jackson’s account. The entry in the Bank Account was correct. iv. A purchase of equipment, paid by a cheque of RM1,100, was entered as RM1,000 in the books. v. The remainder of the difference in the books was due to an error in over casting the Sales Journal. Show how these errors could be corrected.

34. Lecture Exercise 4 You have extracted a trial balance on 31 December 2006 which failed to agree by RM350, a shortage on the debit side of the trial balance. A suspense account was opened for the difference. The following errors were later found: • The purchases daybook had been undercast by RM200. • The insurance account had been undercast by RM50. • Sale of equipment of RM400 had been credited in error to the Sales account. • Sales account had been overcast by RM175 • Discounts received had been undercast by RM75 You are required to: (a) Show the journal entries necessary to correct the errors. (b) Draw up the suspense account after the errors have been corrected