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Correction of errorsTOPIC

77 100 Shares

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Errors???

Reference: Chapter 2 of the textbook

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Learning ObjectivesLearning Objectives

Identify types of errors in a Trial Balance Explain ways to correct the errors Explain ways to correct errors that require

more than two entries

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Analyze each transaction and event form source documents

Recap:Analyzing and Recording Process

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

DISCOVER ERROR!!!

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ERRORSERRORS

• Are omissions and misstatements for one or more periods.

• Errors include:

1. result from mathematical mistakes2. mistakes in applying accounting principles and

policies3. oversights or misinterpretations of facts4. fraud.

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Types of ErrorsTypes of Errors

1. Errors of omission

2. Errors of commission

3. Errors of principles

4. Errors of original entry

5. Complete reversal of entries

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Types of Errors Types of Errors

A trial balance may be unequal because: Errors in account balances

• Incorrect addition of total balances in account, • debit entry mistakenly recorded in credit column, or vice

versa

Errors in posting from journal to ledger• Omit a debit or credit posting

Errors in trial balance preparation• Incorrect addition of the trial balance column• Omit a debit or credit item

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Error of OmissionError of Omission

Where a transaction completely omitted from the books (record). There is no effect on balance for the trial balance because none

debit and credit items are recorded. Example: Ahmad sold an item by cash to Mila at the price of RM

2000. If Ahmad did not enter the transaction either the sales or cash account, the trial balance will be remain the same.

Correction needed: Enter the sale transaction in the accounting record.

Dt Cash 2000Ct Sales

2000

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Error of CommissionError of Commission

- Correct amount is entered but in the wrong person’s account.- Example: A sale of RM1,500 to Ahmad is erroneously entered in

the account of Ahmed. Ahmad and Ahmed are your debtors.

Error: Suppose to be:

Dt Ahmed (a/r) 1,500 Dt Ahmad (a/r) 1,500 Ct Sales 1,500 Ct Sales 1,500

- Correction needed: Cancel out Ahmed’s account and entered to Ahmad’s account.

DtAhmad 1,500 (correct account)

Ct Ahmed 1,500 (cancellation)

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Error of PrincipleError of Principle Happens when an item is entered in the wrong class

of account• E.g. if a fixed asset such as vehicle is debited to an

expenses account such as vehicle repair expense account.

Example: Farid purchased a machine RM 10,000. His account’s clerk incorrectly debited to Purchases account instead of being debited to Machinery account.

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Error of Principle…contError of Principle…cont Calculation example: Farid purchased a machine

RM 10,000. His account’s clerk incorrectly debited the purchase to purchases account instead of being debited to Machinery account.

Error: Suppose to be:Dt Purchases 10K Dt Machinery 10K

Ct A/P / Cash 10K Ct A/P / Cash 10K -Purchases overstated- Machinery understated

Correction needed: Dt Machinery 10,000

Ct Purchases 10,000 (cancellation of purchases account)

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Errors of Original EntryErrors of Original Entry

Happens when the original figure is incorrect.

For instance, sales of RM2,020 were done but the calculation of sales invoice were wrong. If it were calculated as RM2,000 and RM2,000 were credited as sales and RM2,000 were debited to account receivables, the trial balance would still be ‘balance’ but wrong.

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Errors of Original Entry…contErrors of Original Entry…cont

Correction needed: Calculate the different:

RM2,020 – RM 2,000 = RM20 of sales understated. This also means that the account receivables value is also understated.

Journal entry to correct:

Dt Account receivables 20

Ct Sales 20

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Complete Reversal of EntriesComplete Reversal of Entries

Happens where the correct accounts are used but each items is shown on the wrong side of the account.

Example: A payment of cash RM 1000 to Mr.Asraf (account payable) was entered on the debit side of cash account and credited to Mr.Asraf account.

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Complete Reversal of Entries…Complete Reversal of Entries…

Error : Suppose to be: Dt Cash 1000 Dt A/Payable 1000

Ct A/Payable 1000 Ct Cash 1000

This means that the cash debit side is overstated to RM2,000 and account payable is overstated to RM2,000.

Correction:Dt A/Payable 2,000 Ct Cash 2,000

-to cancel both overstatements in order to reverse the effect of errors.

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Steps to detect errors Steps to detect errors

If the trial balance does not balance, the error(s) must be found and corrected.

Make sure the trial balance columns are correctly added.Make sure the trial balance columns are correctly added.

Make sure account balances are correctly entered into the ledger.

Make sure account balances are correctly entered into the ledger.

See if debit or credit accounts are mistakenly placed on the trial balance.

See if debit or credit accounts are mistakenly placed on the trial balance.

Recompute each account balance in the ledger.Recompute each account balance in the ledger.

Verify that each journal entry is posted correctly.Verify that each journal entry is posted correctly.

Verify that each original journal entry has equal debits and credits.

Verify that each original journal entry has equal debits and credits.

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Correcting the errorsCorrecting the errors

If an error was discovered during journalizing (before posting to ledger) replace with correct account or amount at previous

journal entry.

Eg. A purchase of RM1,000 supplies by cash was wrongly recorded as RM100 in journal entry. The error was discovered before posting.

Replace previous entry with correct amount:Dr. Supplies 100 1,000 Cr. Cash 100 1,000

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Correcting the errorsCorrecting the errors If an error was discovered after posting to ledger

write down correcting journal entry to remove the amount from the wrong account and records it in correct account.• E.g. A purchase of RM1,000 supplies by cash was wrongly

recorded as RM100 in journal entry. This error was discovered after posting to ledger.Incorrect journal entry:

Dr. Supplies 100 Cr. Cash 100

Incorrect posting to ledger: ___Supplies a/c ___ Cash a/c_____ Cash 100 Supplies 100

Effect: Understate Supplies and Overstate Cash a/c by RM900.

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Correcting the errors (cont…)Correcting the errors (cont…)

Correcting journal entry:Dr. Supplies 900 Cr. Cash 900

Correct posting to ledger respectively: ___Supplies a/c ___ Cash a/c_____ Cash 100 Supplies 100

Cash 900 Supplies 900 1,000

1,000

Now, correct balance of Supplies RM1,000 (Debit balance) and Cash RM1,000 (credit balance)

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Errors requiring more than two entriesErrors requiring more than two entries

Imbalanced trial balance sometimes can be caused by more than one error at one time.

E.g. Owner invested RM50,000 motor vehicle and RM100,000 cash into business.Incorrect journal entry:

Dr. Motor vehicle 50,000Dr. Capital 100,000 Cr. Cash 150,000

Error 1: Wrongly debited Capital a/c with wrong amount.Error 2: Wrongly credited Cash a/c.

Correct journal entry: Dr. Motor vehicle 50,000Dr. Cash 100,000 Cr. Capital 150,000

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Correction:

Dr. Cash 250,000

Cr. Capital 250,000

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End of Topic 7End of Topic 7