Post on 23-Dec-2015
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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
Correcting entry
1. Asset
2. Purchases
3. Expenses
4. Returns Inwards
5. Drawings
Increase – Debit
Decrease - Credit
Examples of account
Correcting entry
1. Liabilities/Capital
2. Sales
3. Income
4. Returns Outwards
Increase – Credit
Decrease – Debit
Examples of 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:
Wrong entry:
Dr Purchase $500Cr C Lee $500
Dr Purchase $500Cr 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:
Wrong entry:
Dr Office Equipment $1000Cr Cash $1000
Dr Office Expenses $1000Cr Cash $1000
$ $
Office Equipment 1,000
Office Expenses 1,000
Purchase of office equipment wrongly entered in the office expenses account, now corrected.
The journal
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:
Wrong entry:
Dr Mr. Wong $1200Cr Bank $1200
Dr Mr. Wong $1000Cr Bank $1000
$ $
M Wong(1200-1000) 200
Bank 200
Payment of $1,200 incorrectly entered as $1,000, now corrected.
The journal
Example
A sale of $400 to John Leung has been completely omitted from the accounts. The correcting entries should be:
Original entry:
Wrong entry:
Dr John Leung $400Cr Sales $400
No entry
Example
The purchases account was undercast by $2,200, and the sales account was also undercast by $2,200. The correcting entries should be:
$ $
Purchases 2,200
Sales 2,200
Purchases and sales accounts were undercast by $2,200, now corrected.
The journal
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:
Wrong entry:
Dr Purchase $60Cr M Lok $60
Dr M Lok $60Cr Purchase $60
$ $
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.
The journal
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.
$ $
Total balances extracted 90 100
Suspense account 10
100 100
Trial Balance as at 31 December 1996
$ $
Fixed Assets X
Current Assets X
Less Current Liabilities X
Working Capital 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
Vertical form
Balance Sheet
Correction of Errors
To correct the errors, students should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.
Example
Original entry:
Wrong entry:
Dr Mr Chan $150Cr Sales $150
Dr -Cr Sales $150
A credit sale of $150 to Mr Chan has been omitted from his account.
Correct entry: Dr Mr. Chan $150Cr Suspense $150
Example
Original entry:
Wrong entry:
Dr C Lee $230Cr Sales $230
Dr C Lee $320Cr Sales $230
Correct entry: Dr Suspense $90Cr C Lee $90
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:
Wrong entry:
Dr H Cheung $97Cr Sales $97
Cr H Cheung $97Cr Sales $97
Correct entry: Dr H Cheung (97*2) 194 Cr Suspense $194
Example
A credit sale of $97 has been credited to H. Cheung’s account.
Correction of Errors
A single entry in the suspense account.
This occurs when errors are made in extracting balances, rather than in the recording phase.
Correct entry: Dr Suspense $1500
Example The total of the sales account of $1,500
has been omitted from the trial balance.
Correct entry: Dr Suspense $200
Example The total of the sales account of $1,500
has been extracted as $1300 in the trial balance.
Correct entry: Dr Suspense (1500*2) $3000
Example The total of the sales account of $1,500
has been extracted to the debit column of the trial balance.
Correction of Errors and Effects on the Profit and Balance Sheet
For errors affecting the final accounts (I.e. profit calculation and balances carried down)
Corrections are also required for the profit/loss and balances in the balance sheet.
Trading account:
Sales - Cost of good sold = Gross Profit
Sales - (Opening stock + Purchases – Closing stock) = Gross Profit
Sales - Opening stock - Purchases + Closing stock = Gross Profit
1st order
Sale increase Cr. Sales Increase in Net Profit
Opening stock increase
Dr. Stock Decrease in Net Profit
Purchases increase
Dr. Purchases Increase in Net Profit
Closing stock increase
Dr. Stock Increase in Net Profit
2nd order 3rd order
Profit and loss account:
Gross Profit + Income (e.g. Rent received) – Expenses (e.g. Motor expenses) = Net Profit
1st order
Income increase
Cr. Income Increase in Net Profit
Expenses Increase
Dr. Expenses Decrease in Net Profit
2nd order 3rd order
Example of errors Action required on
the profit
Action required on the balance
sheet
Purchases undercast Subtract -
Purchases overcast Add -
Sales undercast Add -
Sales overcast Subtract -
Income undercast Add -
Income overcast Subtract -
Expenses undercast Subtract -
Expenses overcast Add -
Example of errors Action required on
the profit
Action required on the balance
sheet
Opening stock undervalued
Subtract -
Opening stock overvalued
Add -
Closing stock undervalued
Add Increase closing stock
Closing stock overvalued
Subtract Decrease closing stock
Example of errors Action required on
the profit
Action required on the balance
sheet
Prepayments of expenses omitted
Add Increase prepayments
(current assets)
Accruals of expenses omitted
Subtract Increase accruals (current
liabilities)
Fixed/current assets undervalued
- Increase fixed/ current asset
Liabilities understated - Increase liabilities