Correction of Errors

According to dual aspect concept every debit entry has a corresponding credit entry with the same
amount. Therefore, if all accounting entries are correctly recorded in journals and posted to ledgers,
trial balance should balance. A trial balance is prepared to check the arithmetical accuracy of the
double entries made in the ledger and as a basis to prepare financial statements. In case the trial
balance fails to agree, an investigation is made to detect errors in the ledger. There are two types of
errors:

1. Errors not affecting trial balance

2. Errors affecting trial balance

Errors in the ledger are corrected using the general journal with an explanatory note (Narration).

Errors not affecting trial

Error of principle

This arises when a transaction is recorded in the wrong class of account without due regards to the
fundamental accounting principle.

Example: A machine purchased for $10 000 cash has been debited to purchases account.

Correct entry Error

DR Machinery Account DR Purchases Account

CR CR

Cash 10 000 Machinery 10 000

Correct Wrong

DR Cash Account DR Cash Account

CR CR

Machinery 10 000 Machinery 10 000

Correct Correct

General Journal

Details DR $ $
CR

Machine Account (DR) 10 000

To Purchases Account 10 000

(Being entries for machine purchased for $10 000 cash debited
to purchases account)
Error of Commission

This arises when a transaction is recorded in the wrong personal account. It occurs when a
transaction is recorded in wrong account but to the correct type of account.

Example: $400 paid to P. Collins by cheque was recorded in the account of J. Collins.

Correct entry Error

DR P. Collins Account DR J. Collins Account

CR CR

Bank 400 Bank 400

Correct Wrong

DR Bank Account DR Bank Account

CR CR

P. Collins 400 P. Collins 10 000

Correct Correct

General Journal

Details DR $ $ CR

P. Collins (DR) 400

To J. Collins Account 400

(Being entries for an amount of $ 400 paid to P. Collins recorded

in J. Collins account)

Error of omission

This occurs where a transaction has been completely omitted from the books.

Example: A sale invoice to D. Riley $ 575 was completely omitted from the books.

Correct entry

DR D.Riley Account
CR

Sales 575

Correct

DR Sales Account
CR

D.Riley 575

Correct

General Journal

Details DR $ $
CR

D. Riley (DR) 400

To Sales Account 400

(Being entries for a sales invoice to D. Riley completely omitted from the
books.)

Complete Reversal of Entries

In this case the debit account is credited and the credit account is debited with correct amount. The
correction of this error requires the figure to be doubled. (One to correct error and one for original
entry)

Example: Rent paid $300 by cheque wrongly recorded as rent received.

Correct entry Error

DR Rent Account DR Rent Account

CR CR

Bank 300 Bank 300

Correct Wrong

DR Bank Account DR Bank Account

CR CR

Rent 300 Rent 300

Correct Wrong

General Journal

Details DR $ $
CR

Rent (DR) 600

To Bank Account 600

(Being entries for rent $ 300 paid by cheque wrongly

recorded as rent received)

Error of original entry

This occurs where the wrong amount is posted to both accounts although the accounts to which
entries were made are correct. It arises when there is an error in amount in the source document
before posting to the ledger.

Example: Goods returned from P. Wedge $639 was recorded in both accounts as $369.

Correct entry Error

DR P. Wedge Account DR P. Wedge Account

CR CR

Purchases Ret. 639 Purchases Ret. 369

Correct Wrong

DR Purchases return Account DR Purchases return Account

CR CR

P. Wedge 639 P. Wedge 369

Correct Wrong

General Journal

Details DR $ $
CR

Purchases Return (DR) 270

To P. Wedge Account 270

(Being entries for goods returned from P. Wedge $639

recorded in both accounts as $369)

Compensating Error

These are two or more errors which cancel themselves out. Errors on one side of the ledger are
compensated by errors of the same amount on the other side

Example: The sales and purchases account are both understated by $ 1 000.
Correct entry

DR Purchases Account
CR

Supplier’s account 1 000

Correct

DR Sales Account
CR

Customer’s account 1 000

Correct

General Journal

Details DR $ $
CR

Purchases (DR) 1 000

To Sales 1 000

(Being entries for sales and purchases account understated by $ 1

000)

Errors affecting trial balance

When a trial balance fails to agree, the difference between the two sides is recorded in a suspense
account. This is simply used to balance the trial balance. Errors affecting the trial balance are then
corrected through the suspense account. The main errors affecting the trial balance are:

1, Transaction recorded only once in the books

a) The transaction may be debited but not credited

b) The transaction may be credited but not debited.

2. Transaction recorded twice on same side

a) Transaction may be debited and again debited

b) Transaction may be credited and again credited.

3. Understatement or overstatement in one side

a) Transaction may be well debited but understated on the credit side

b) Transaction may be well debited but overstated on the credit side

c) Transaction may be well credited but understated on the debit side

d) Transaction may be well credited but overstated on the debit side

Effect of correcting errors on Gross profit and Profit for the year

Effect on

Gross Profit

Revenue / Sales DR – Decrease Decrease

CR – Increase Increase

Return inwards DR – Increase Decrease

CR – Decrease Increase

Opening inventory Increase Decrease

Decrease Increase

Closing inventory Increase Increase

Decrease Decrease

Purchases DR – Increase Decrease

CR – Decrease Increase

Return outwards DR – Decrease Decrease

CR – Increase Increase

Other income DR – Decrease No effect

CR – Increase No effect

Expenses DR – Increase No effect

CR – Decrease No effect

Worked Example

Catherine prepared a trial balance on 30 April 2019. The trial balance did not agree. She opened a
suspense account. On inspection of the books she found the following errors.

1. Motor vehicle expenses, $500, had been debited to the bank account and credited to the
motor vehicle expenses account.

2. Wages, $800, had been debited in the rent payable account.

3. A return of goods to a supplier, Ahmed, $595, had been incorrectly recorded in the
purchases returns journal as $295.
 4. The discount received total in the cash book, $68, had not been entered in the discount
received account.

5. A cash sale, $125, had been entered in the sales account as $215.

REQUIRED

a) Prepare journal entries to correct the errors 1 – 5. Narratives are not required.

b) Prepare the suspense account after the correction of errors 1 – 5. Show the original difference
recorded in the trial balance.