Correction of Errors

Introduction
A Trial Balance is drawn up at the end of the accounting period using the balances on each account in the ledgers. Eventhough the trial balance totals may agree there are instances where errors may be made in the recording of accounting entries. In this topic you will look at those errors that may occur that do not affect the trial balance and agreement and how these errors are corrected. We will also look at those errors that will affect the agreement of the trial balance totals and how to correct these errors.

Objectives
Upon completion of this lesson you will be able to:
1. understand that there are two types of errors;
2. appreciate that errors are identified after a period of time;
3. distinguish between the different types of errors; and
4. use the journals to correct errors.

Types of Errors
There are two types of errors.
1. Those that affect the trial balance totals agreement.
2. Those that don’t affect the trial balance agreement.

Whenever these errors are identified they are corrected by using the journal. You have learnt how the trial balance is used to check the arithmetic accuracy of the financial records. You will how learn that not all errors are revealed in the trial balance. We will now look at these errors in more detail

Errors that don’t affect the trial balance agreement

Your trial balance can still balance even though errors were made in your records. 

1. Errors of Commission – this occurs when the correct amount is entered in the records but in the wrong persons account.

Example

V. Peters paid us $150 by Cheque on 7th September 2011. This is correctly entered in the cash book, but was entered by error in A. Peters. The error was found on 30 September 2011. This will now have to be corrected and requires two entries Debit A Peters’ Account To cancel out the error on the credit side of that account Credit V Peters Account To enter the amount in the correct account

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2. Errors of Principle – occurs when an item is entered in the wrong type of account. Eg. A fixed asset entered in an expense account.

Example

You purchase motor car for $6,700 by cheque on 12 September 2011 has been debited in error to the motor expenses account. In the cash book it is shown correctly. This means that there has been both a debit of $6,700 and a credit of $6,700. 

The error is detected on 30 September 2011 and is corrected. To do so two entries are needed;
Debit Motor Car Account to put the amount in the correct account
Credit Motor Expenses to cancel the error previously made in the motor expenses account

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3. Error of Omission – occurs when a transactions has been completely omitted from the books

Example

You sold goods to P. Jackson for $250 on 7th September 2011 but did not enter the transaction in the accounts. There were no debit and credit entries made. The error was identified on 30 September. The entries to correct it will be thus:

4. Error of Original Entry – occurs when an item is entered, but both debit and credit entries are of the same incorrect amount.

5. Compensating Errors – where two or more unrelated errors cancel each other out.

Errors that affect the trial balance agreement

These errors will cause a difference in the trial balance totals. These errors are
1. Under-casting and over-casting – figures that are larger or smaller than they should be.
2. Transposition – that is figures turned around eg. 23 instead of 32
3. Entries made on the wrong side of accounts – that is a debit entry made instead of a credit entry.
4. Half the double entry omitted – only one part of the double entry completed

When there is difference in the trial balance, the amount is transferred to the suspense account on the same side as the difference in the trial balance. A suspense account is opened to record the difference in the trial balance totals. When the errors are located they are first recorded in the journal and the correction is recorded in the suspense account.

In order to correct these errors several entries are needed to make a correction, first entries to cancel the original entry which is wrong and second the entries that should have been made in the first place.

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Assignment



Topic Summary
You would have learnt that all errors cannot be identified from simply looking at your records. You would also learnt that all errors do not affect your Trial Balance total. Some errors are only identified after careful examination of your books.
You would also realize that an error has occurred once the trial balance totals doesn’t agree. When this happens the difference on the trial balance is transferred to a suspense account. Once the error is identified it is corrected through the Journal and then the suspense account.