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Correction OF Errors - Lecture notes 6

 (MARTIN MFINANGA) NIT
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CORRECTION OF ERRORS

When entries are made in the books of account, some wrong postings or calculations are possible
and these are known as errors. When discovered, the necessary correcting entries must be made
in the accounts. For the correction of these errors, the necessary journal entries are made. The
use of journal for the correction of errors is a common feature.
The errors may be divided in two types;-
A. ERRORS NOT AFFECTING THE TRIAL BALANCE
B. ERORS AFFECTING THE TRIAL BALANCE
A. Errors not affecting the Trial Balance
These errors are not disclosed by the trial balance.
These are:
1. Errors of Omission
If any invoice or other document is lost then that entry will be omitted and it will not affect
the agreement of the trial balance. The purchase of goods for sh. 1,000 from a supplier not
recorded in the purchases and the creditor’s account is an example of an error of omission.
2. Errors of Commission
This is an entry of a transaction in a wrong account of the same class. If the goods sold to A.
Smith on credit for sh. 5,000 are debited in the account of J. Smith then this will be an error
of principle.
3. Errors of Principle
This is an entry of a transaction in the wrong class of account. If the Purchase of machinery
(an asset) is debited to purchases account then this will be an error of principle.
4. Errors of Original Entry
This is a wrong entry made in a books of prime entry and the incorrect entry is posted to the
debit and credit sides of the ledger. For example, an invoice for sh. 950 entered in the
purchase day book as sh. 590.
5. Compensating errors
This is an incorrect entry on a credit side which is by coincidence equalized by an incorrect
entry on debit side. For example the purchases account was over added by sh. 50 and
similarly, the sales account had also been over added by sh. 50. The errors which did not
affect the agreement of the trial balance totals are corrected by passing journal entries. The
correction of these errors must still follow the double entry principle.
In this case
(a) DR: The account wrongly credited
(b) CR: The correct account
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OR
(c) DR: The correct account
CR: The account wrongly debited.

Example 1
The audit of the books of M. KAMAU’s books for the year ending 31 st December 19 – 8
revealed the following errors:-
(a) A machine purchased for sh. 1,200 had been debited to the purchases account.
(b) Goods purchased from A. BURTON for sh. 150 were credited to the account G. BURTON.
(c) An invoice from A. Smith for sh. 270 was omitted.
(d) Goods sold to A. White for sh. 175 were entered in the sale day book as sh. 157
(e) The salaries and wages account was over-added by sh. 35 and rent received account had also
been over-added by sh. 35.

SHOW BY MEANS OF JOURNAL ENTRIES HOW THE ABOVE ERRORS SHOULD

BE CORRECTED IN THE BOOKS OF M. MAKAU

ANSWER
DATE FOLIO DR CR
19___8 Sh. Sh.
DEC 31 MACHINERY ACCOUNT 1200
PURCHASES ACCOUNT 1200
Being the correction of error
as machinery debited to
PURCHASES ACCOUNT

DEC 31 G. BURTON 150

A. BURTON 150
Transfer of amount
In correctly credited
To G. BURTON

DEC 31 PURCHASES ACCOUNT 270

A. SMITH 270
The purchase of goods
Previously omitted

DEC 31 A. WHITE 18
SALES ACCOUNT 18
Being adjustment for
under charge of sales

DEC 31 RENT RECEIVABLE ACCOUNT 35

SALARIES & WAGES ACCOUNT 35
Being adjustment of overcharge
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B. Errors Affecting the Trial Balance (SUSPENSE ACCOUNT)

These errors relate to incorrect additions, subtraction or entries made on wrong side of the
books. These errors are disclosed by a trial balance because the totals of debit and credit
sides do not agree.
For the correction of these errors, a suspense account is opened and the difference in the trial
balance is posted in this account, if the debit side of a trial balance is smaller than this
amount is debited in the suspense account and vice versa. When the errors are discovered,
they are corrected by double entry through the suspense account. When all the errors have
been discovered and corrected, the balance on the suspense account is eliminated. In this
case:-
(a) DR: Respective account if omitted.
CR: Suspense a/c

(b) DR: Suspense a/c

CR: Respective a/c if omitted

(c) If any debit entry has been made on credit side then to correct it, double amount must be
debited and
vice versa.

EXAMPLA 2
A trial balance was extracted from the books of A. BARKI and it was found that the debit side
exceeded the debit side exceeded the credit side by sh. 400. This amount was entered in the
suspense account. Subsequently, the following errors were discovered and corrected.
(a) The purchases were over-added by sh. 200.
(b) An amount paid to A. Smith was debited to his account as sh. 980 instead of sh.890.
(c) The sales were under-added sh. 110
Show the entries in the suspense account.

ANSWER

SUSPENSE ACCOUNT
PURCHASES Sh. BALANCE Sh.
ACCOUNT 200 AS PER TRIAL 400
A. SMITH 90 BALANCE
SALES 110
___ ___
400 400

The rule for correcting these errors is:-

The entry which was made correctly make that entry into Suspense account and the entry which
was not made previously, make that entry in the respective account.
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Example 3
While extracting the trial balance of Kimwaki Electrical Engineers Ltd as at 31 st December, 1989
it was observed that the total debits exceeded the total credits by Sh. 23,800. Investigations
revealed the following errors:-
(a) Sales had been overcast by Shs. 1,500
(b) Returns Outwards Account had not been credited with an amount of sh. 6,132.
(c) A payment by a debtor of Shs. 15,000 by a direct bank transfer had not been entered in the
debtor’s
account.

You are required to show:

(a) The necessary journal entries to correct the above errors
(b) Suspense account duly balanced as it would appear after the correction of the above errors.

ANSWER

(a) JOURNAL ENTRIES

1989 Shs Shs Shs
DEC 31 (i) SALES ACCOUNT 1500
SUSPENSE ACCOUNT 1500
Being the correction of
over-cost of sales
(ii) SUSPENSE ACCOUNT 6,132
DEC 31 RETURNS OUTWARDS 6,132
Being the correction of
credit entry omitted

DEC 31 (iii) SUSPENSE ACCOUNT 15,000

DEBTOR’S ACCOUNT 15,000
Being the correction of
credit entry omitted

DEC 31 (iv) PURCHASE ACCOUNT 232

SUSPENSE ACCOUNT 232
Being the correction of
Debit entry omitted

DEC 31 (v) SUSPENSE ACCOUNT 4,400

DEBTOR’S ACCOUNT 4,400
Being the correction of
credit entry made as
debit entry.
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(b) SUSPENSE ACCOUNT

_____________________________________________________________________

RETURNS OUTWARDS Sh BALANCE Shs.

A/C 6,132 AS PER

TRIAL BALANCE 23,800

DEBTOR’S 15,000 SALES ACCOUNT 1,500

ACCOUNT
DEBTOR’S A/C 4,400 PURCHASES A/C 232
__________ _____

25532 25532

Correcting Profit

Examination questions frequently require a net profit figure to be corrected. To arrive at the
correct net profit figure, the errors are corrected first and then the effect of these corrections on
net is determined. These adjustments are added or subtracted from the net profit figure given in
the question to find out the adjusted net profit. For this purpose, the following format may be
adopted.

Sh.

Net profit as per questions X

ADD
1. X
2. X
3. X X
X

DEDUCT
1. X
2. X
3. X X

Adjusted or
Correct net
Profit X
Example 4.
Set out below is the draft Balance Sheet of R.S as at 31st March
Capital account Sh Sh
Balance at 1.4.89 18,000
Add Net Profit for 1989/90 6,000 24,000
Less Drawings 4,000
_____
20,000

Represented by:
Fixed assets at cost in 1989 20,400

Less Depreciation to 31. 3. 90 15,300 5,100

Current Assets:

Stock 10,360
Debtors 4,050
Bank 5,820
20,230

Less Current Liabilities:

Creditors 5,200
Suspense account 130
5,330
Net Current Assets 14,900

Total net assets 20,000

______________________________________________________________________________
Following on your enquiry, the following errors and omissions were rectified in the relevant
accounts, the profit and loss statement and Balance sheet:

(i) A balance on a customer’s account who owed sh’ 10 had been listed as sh 100.

(ii) A sum of sh 20 which was part of the bad debts amount w/o in 1989 was recovered in
January 1990 and had been debited to Bad Debts account.

(iii) Plant which cost sh 200 in 1989 was scrapped in 1990 with nil proceeds. It was replaced by
new item at a cost of sh 400 and debited to Repairs account. Depreciation is charged for all plant
by the straight line method from the beginning of the year of purchase and based on an estimated
life of four years. Depreciation on plant is ignored in the year plant is either sold or scrapped.

(iv) Rates paid in advance at 1st April 1989 of sh 15, correctly dealt with in the previous year’s
accounts, had not been entered in the rates of account for the current year.

(v) Closing stock at cost sh. 150 had been wrongly entered on stock-sheets as sh 15.
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(vi) Goods returned by a customer valued at sh. 10 had been entered in the sales ledger only.
(vii) Discounts received correctly entered in the cash book at shs. 25 had not been transferred to
the discounts received account.

REQUIRED
(a) Preparation of the Suspense account to reflect the correcting entries.
(b) Preparation of revised Profit statement for the year ending 31st March 1990 and.
(c) The final Balance sheet of R.S as at 31st march 1990.

ANSWER

(a) SUSPENSE ACCOUNT

________________________________________________________________________
Sh. Sh.

DEBTOR’S A/C 90 BALANCE AS PER 130

BAD DEBTS A/C 20 TRIAL BALANCE
BAD DEBTS
RECOVERABLE A/C 20 RATES
ACCOUNT 15
DISCOUNT RECEIVED
A/C 25 RETURNS 10
INWARDS A/C
___ ___
155 155

NOTES:
Errors (iii) & (v) do not affect the suspense account as these are errors of omission, principle,
and original entry. It means that both types of errors might be given and the candidates are
required to be careful while correcting these errors.

REVISED PROFIT STATEMENT

For the Year ending 31st March 1990
Sh
Profit as per Question Sh 6,000
ADD
Bad debts recovered 20
Bad debts w/o incorrectly 20
Plant debited to repairs
Incorrectly 400
Closing stock under valued 135
Discount received omitted 25 600
6,600
DEDUCT
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Loss on Plant scrapped 100

Depreciation of plant
Purchased 100
Rates paid in advance in the
Previous year 15
Returns inwards 10 225
Adjusted or 6,375
correct profit

_____________THE FINAL BALANCE SHEET OF R.S AS AT 31ST MARCH 1990______

CAPITAL 18,000 sh FIXED ASSETS sh

ADD COST 20,600
NET PROFIT 6,375 LESS
LESS 24,375 Depreciation 15,300 5,300
DRAWINGS 4,000 20,375 Current Assets
Current Liabilities Stock 10,495
Creditors 5,200 Debtors 3,960
_____ Bank 5,820 20,275
25575 25575

Workings

_____________ (i) DEBTORS ACCOUNT______________________________

Sh Sh
BAL: 4050 Suspense 90
b/f A/C
______ Balance c/d 3,960
4050 4,050

_____________ (ii) FIXED ASSETS____________________________________

Sh Disposal Sh
Balance OF PLANT
b/f 20,400 A/C 200
BALANCE

_______ c/d 20,600

20,800 20,800

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______ (iii) DISPOSAL OF PLANT ACCOUNT________________________

Sh DEP: Sh
FIXED ASSETS A/C 200 PROV. A/C 100
______ PROFIT & LOSS A/C 100
200 200

_____________ (iv) DEPRECIATION PROV: ACCOUNT______________________

DISPOSAL BALANCE b/d 15,300
OF PLANT A/C 100 PROFIT & LOSS A/C 100
BALANCE C/D 15,300 ______
15,400 15,400

______ (v) STOCK ACCOUNT______________________________

Sh Sh
BALANCE b/f 10,360 BALANCE C/D 10,495
TRADING A/C 135
______ ______
10,495 10,495

Depreciation on new plant is charged at rate of 25% i.e. sh. 100

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