correcting errors
DESCRIPTION
CORRECTING ERRORS. Learning Objectives Identify types of errors Detect the errors and do the correcting journal entry Function of Suspense Account Prepare Statement of Adjusted Net Profit and Adjusted Balance Sheet. Why A Balanced Trial Balance maybe not free from errors ?. - PowerPoint PPT PresentationTRANSCRIPT
CORRECTING ERRORSLearning Objectives1. Identify types of errors2. Detect the errors and do the
correcting journal entry3. Function of Suspense Account4. Prepare Statement of Adjusted
Net Profit and Adjusted Balance Sheet
Why A Balanced Trial Balance maybe not free from errors ?
Errors
Tangible Errors Intangible Errors
Intangible Errors
Errors of OmissionErrors of PostingErrors of Original EntryCompensating ErrorsErrors of Reversal
Errors of Omission – Transaction not yet recorded in any
recordEg: A payment of RM1,000 was made to
creditor Ar Ltd by cheque. This transaction was not recorded yet.Correcting Journal Entry :
Dr Creditor – Ar Ltd 1,000
CR Bank 1,000
Errors of Posting-
amount debited or credited is correct, but recorded in the wrong a/c
Eg : Credit sales of RM500 to Pollin was posted to PollyCorrecting Journal Entry :
Dr Pollin 500
CR Polly 500
Errors of Original Entry
Wrong amount was recorded, causing posting entry also incorrect
Eg : Credit purchase of RM353 from Bestari Ltd was recorded in purchase journal as RM335Correcting Journal Entry :
Dr Purchase 18
CR Creditor-Bestari 18
Compensating Errors
Errors in debit entry was balanced by errros in credit entry
Eg : Commission received RM650 was posted as RM560 and renatl for RM1,190 was debited as RM1,100Correcting Journal Entry :Dr Rental expenses 90
CR Commission received 90
Errors of Reversal
Correct accounts were used, but was recorded on the opposite side.
Eg : Cash purchase RM1,500 was debited to Cash A/c and credited to Purchase A/cCorrecting Journal Entry :
Dr Purchase 3,000
CR Cash 3,000
Tangible Errors* When does tangible errors happened ?* A suspense a/c will be createdtemporarily * Suspense A/c – debit side( Balance Sheet – Asset)* Suspense A/c – credit side( Balance Sheet – Liab.)
Types of Tangible Errors* Incomplete Double Entry*Wrong Posting*Different amount were debited and credited*
Transaction recorded by two debit entries or vice versa
Incomplete Double Entry
Only one entry recordedEg : Cash sales RM200 was only debited to
Cash A/c
Correcting Journal Entry :Dr Suspense 200
CR Sales 200
Wrong Posting
Eg : Sales journal of RM690 was wrongly calculated as RM960 and this wrong amount was posted to sales a/c. Debtors a/c was correctly recorded.
Correcting Journal Entry :Dr Sales 270
CR Suspense 270
Different amount were debited and credited
Eg : Wages of RM1,130 was correctly recorded in Cash Book but wrongly recorded in Wages a/c as RM1,100
Correcting Journal Entry :
Dr Wages 30
CR Suspense 30
Transaction recorded by two debit entries or vice versa
Eg : Purchase of RM1,380 was credited to Purchase a/c and Creditors a/c
Correcting Journal Entry :
Dr Purchase (1,380+1,380)
2,760
CR Suspense 2,760How this
happen?
Effect of Errors On Profit Or Loss
Errors
In Trading A/c
Effects to Gross
Profit/Net Profit
In P&L* Revenue* Expenses
Effects Net Profit
In Balance Sheet
No effects to Gross/Net
Profit
REFER TO EXAMPLE 9.12PAGE 248
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
Let’s recall…Background knowledge
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