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Correction of Errors – Errors not affecting the Trial Balance
We are already aware that book-keeping is based on the double entry system, every debit entry needs a corresponding credit entry; every credit entry needs a corresponding debit entry.
Accordingly when we extract a trial balance, the totals of the two columns would be the same. If the debit side is not equal to the credit side of the trial balance, then there must be an error in the double entry.
Sometimes however, even though the trial balance totals are in agreement, there might still be errors. These are the following:
Errors not revealed by the trial balance
1. Error of omission This is an error where a transaction is completely omitted from the books. No entries were made at all for the transaction. It is as if the transaction has not existed. 2. Error of commission In this case, double entry was observed but the transaction was posted to a wrong account of the same class. For example goods sold to John was correctly credited to Revenue (Sales) account but debited to Jane ’s account. 3. Error of principle Double entry observed but an entry made in the wrong class of account. For example, payment by cheque for vehicle repairs correctly credited to bank account but debited to vehicle account instead. In this case, not only the account is wrong (vehicle instead
of vehicle repairs) but also the class of account is different. Vehicle account is a real account (asset) whereas vehicle repairs account is a nominal account (expense).
4. Compensating errors Errors on the debit side of the ledger have been set off by errors on the credit side of the ledger. For example, vehicle account (debit balance) and commission received account (credit balance) were both understated by €200. 5. Error of original entry The transaction was entered correctly according to the double entry system but with the wrong amount. For example, payment of telephone expenses in cash of €560 was credited to cash account and debited to telephone expenses account but by €600 in both accounts. 6. Complete reversal of entries For a given transaction, the account to be debited was credited and the account to be credited was debited. For example, goods sold to Nadia for €500 was debited to the Sales account and credited to Nadia’s account, both by €500. 7. Error of transposition For a given transactions, double entry was correctly observed but the figures in amount were not written in the correct order. Examples are: writing €450 instead of €540, €71 instead of €17, € 1 ,425 instead of €1,452, etc. For example, cash received from Sam €164 was debited to cash account and credited to Sam’s account at €146. 8. Error of duplication A transaction was recorded twice in the ledger. Double entry was observed in each case.
Note that as can be seen in Go for accounting page 62 you could use the mnemonic R O C P O C to remember the first 6 types of errors. Another good mnemonic is POOR CC.
M. Saliba a/c 50
M Sant a/c
- Error of commission (where the correct amount is entered in the wrong personal account)
Example: Credit purchases from M. Sant €50 was entered in error in M. Saliba account.
Workings: Write down the error in the accounts and then think of necessary entries to correct it.
50
Purchases a/c M. Sant a/c 50 50
M. Saliba a/c
Use the workings above to write up
the journal to correct the error.
The Journal
Folio Dr Cr
M. Sant A/c €
M. Saliba A/c €
Purchase invoice no … entered in wrong
personal a/c, now corrected
Original error
Purchases 100
Equipment a/c
- Error of Principle (where an item is entered in the wrong class of account)
Example: Equipment bought in cash €100 entered in the purchases a/c.
Workings: Write down the error in the accounts and then think of necessary entries to correct it.
100 Equipment 100
Purchases a/c 100
Cash a/c
Use the workings above to write up the journal to correct the error.
The Journal
Folio Dr Cr
Equipment A/c €
Purchases A/c €
Correction of error of principle - purchase
of a non-current asset debited to purchases a/c
Use the workings above to write up the journal to correct the error.
The Journal
Folio Dr Cr
Rent A/c €
Cash A/c €
Correction of original error - rent of €
wrongly entered as €89 in the books
6. Complete Reversal of entries (the correct amount is entered on the wrong sides of the correct accounts)
Example: Cash received €30 from A. Muscat was debited to A. Muscat and credited to cash.
Workings: Write down the error in the accounts and then think of necessary entries to correct it.
The incorrect entry was as follows:
30
Cash a/c 30
A. Smith a/c
The correct entry should have been:
30
Cash a/c 30
A. Smith a/c
So as to correct this error:
A. Smith a/c 60
Cash a/c Cash a/c 60
A. Smith a/c
Note: To correct a complete reversal of entry we must cancel the error
and enter the correct transaction. So to correct such an error the
amount to be posted must be double the amount that should have been
posted if the entry was posted correctly in the first place.
Use the workings above to write up the journal to correct the error.
The Journal
Folio Dr Cr
Cash a/c €
A. Muscat A/c €
Correction of complete reversal of entries -
receipt from A. Muscat if €30 was wrongly
debited to A. Muscat and credited to cash a/c
- Error of transposition (where the figure for both entries was not entered in the correct order)
Example: A credit purchase from P. Meli costing €56 was entered in the books as €65.
Workings: Write down the error in the accounts and then think of necessary entries to correct it.
65 P. Meli a/c 9
Purchases a/c Purchases a/c 9 65
P. Meli a/c
Use the workings above to write up the journal to correct the error.
The Journal
Folio Dr Cr
P. Meli A/c €
Purchases A/c €
Correction of transposition error – Purchases
was overstated by €
As you can clearly see errors of transposition are very similar to errors
of original entry. Certain books consider errors of transposition as errors
of original entry.
Original entry with wrong amount
Exercises:
- Match the following:
a Omission When the correct entry was made but the
figures were not in the right order.
b Compensating Wrong number is entered on the correct sides
of the correct accounts.
c Principle Entry was made twice in the books.
d Complete
reversal of entries
When errors on the debit side cancel out errors on the credit side.
e Commission Entry was completely left out from the books.
f Original entry The correct amount was entered in the wrong
personal account.
g Transposition Item was entered in the wrong class of account
h Duplication Correct amount entered on the wrong sides of
the correct accounts.
- An agreed trial balance does not guarantee that all the transactions
have been correctly entered in the accounts.
Use the notes to define six different types of errors and give an example of each.
- Go for accounting – multiple choice questions, page 89, RQ 10/1, RQ
10/2, RQ 10/3.
- Show the journal entries necessary to correct the following errors.
Narrations are not required.
a) The purchase of a computer for €220 had been entered in error in the Office Expenses account. b) A sale of goods for €330 to F. Agius had been entered in E. Agius’s account. c) A sale of €245 to R. Magri had been entered in the books, both debit and credit, as €254. d) The purchase of a machine on credit from P. Saliba for €920 has been completed omitted from the books. e) Discounts allowed €58 had been entered in error on the debit side of the Discounts Received. f) A receipt of cash from R. Borg €78 had been entered on the credit side of the cash book and the debit side of R. Borg’s account. g) Commission received €370 had been entered in the Sales account. h) A purchase of goods for € 267 had been entered in error on the debit side of the Drawings account.
- After preparing its draft final accounts for the year ended 31st^ March 2015 and its draft financial statements as at 31st^ March 2015 a business discover that the inventory lists used to compare the value of inventory as at 31 March 2009 contained the following entry: Inventory item Number Cost per unit Total cost Y4003 100 €1.39 €1, Required: a) What is wrong with this particular entry? b) What would the effect of the error have been on: i. the value of inventory as at 31st^ March 2015? ii. the cost of goods sold for the year ended 31 March 2015? iii. the net profit for the year ended 31st^ March 2015? iv. the total for current assets as at 31st^ March 2015? v. The owner’s capital as at 31st^ March 2015
