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Chapter 15 Correction of Errors

This document covers Chapter 15 of the Business, Accounting and Financial Studies curriculum, focusing on the correction of accounting errors. It explains types of errors affecting trial balance agreement, the use of suspense accounts, and the impact of these errors on net profit and working capital. Additionally, it includes examples of correcting entries and discusses other transactions such as contra entries and donations.

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gordoncheng1015
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26 views

Chapter 15 Correction of Errors

This document covers Chapter 15 of the Business, Accounting and Financial Studies curriculum, focusing on the correction of accounting errors. It explains types of errors affecting trial balance agreement, the use of suspense accounts, and the impact of these errors on net profit and working capital. Additionally, it includes examples of correcting entries and discusses other transactions such as contra entries and donations.

Uploaded by

gordoncheng1015
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Christian Alliance S C Chan Memorial College

F.5 Business, Accounting and Financial Studies (2023 – 2024)


Chapter 15: Correction of Errors (II)

Name: _____________________ Class: _______ ( ____ )

Expected Outcomes:
(i) Identify the types of accounting errors and their effects on accounting records.
(ii) Prepare correcting entries and, where appropriate, a suspense account.

1. Introduction
In this chapter, you will learn about:
 Errors affecting trial balance agreement and accounting treatments regarding these errors
 Adjustments on net profit and working capital (net current assets) for different errors

2. Suspense Account
 If the trial balance does not agree, we will open a suspense account to record the difference
 It is just a temporary account, and will be closed after all the errors have been corrected

Example

 Debit total is less than credit total by $500


 We have to open a suspense account to record the difference

Suspense
2015 $
Dec 31 Difference as per trial balance 500

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Now, the trial balance was made to agree as follows:

It will then be shown in the statement of financial position (temporarily):

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3. Errors Affecting Trial Balance Agreement
 Appears when a double entry is made with different amounts in the ledger accounts
 In this situation, debit balance is NOT equal to credit balance, which makes trial balance disagrees

(a) Two Debit / Credit Entries


Example 1
Interest income of $100 was received in cash. The following double entry was made:
Dr. Cash $100
Dr. Interest income $100

Correction of Error:

Dr. Suspense $200

Cr. Interest income $200

(b) Single Entry


Example 2
Rent of $10,000 was paid by cheque. The following double entry was made:
Dr. Rent $10,000
Cr. (no entry)

Correction of Error:

Dr. Suspense $10,000

Cr. Bank $10,000

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(c) Wrong Amount on One Side
Example 3
Goods were purchased on credit for $12,000. The following double entry was made:
Dr. Purchases $1,200
Cr. Trade payables $12,000

Correction of Error:

Dr. Purchases $10,800

Cr. Suspense $10,800

(d) Incorrect Casting of an Account


Example 4
The balance of drawings account was undercast by $1,000.

Correction of Error:

Dr. Drawings $1,000

Cr. Suspense $1,000

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(e) Listing Errors in Trial Balance
Example 5
The debit balance of $2,400 in the carriage outwards account was omitted in the trial balance.

Correction of Error:

Dr.

Cr. Suspense $2,400

Example 6
The debit balance of $2,400 in the carriage outwards account was listed as a credit balance in the trial
balance.

Correction of Error:

Dr.

Cr. Suspense $4,800

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4. Adjustments (usually shown in statement format)
(a) Net Profit
 If an error affects the accounts appeared in the income statement (expenses or revenues), net profit
will be affected
 If an error affects the accounts appeared in the statement of financial position (assets, liabilities or
capital), net profit will not be affected

Example

(b) Working Capital


 Working capital = Current assets – Current liabilities
 If an error affects the above categories, the working capital will be affected

Example

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5. Other Transactions
(a) Contra Entry
 When a trade debtor at the same time is also a trade creditor of the firm, the balances in the trade
receivables and trade payables can be set off by a contra entry.

Assume the firm sold goods at $1,000 on credit to Tom, and bought other goods on credit at $500 from
Tom. The following double entries were made in the books:

Dr. Tom (trade debtor) $1,000 Dr. Purchases


Cr. Sales Cr. Tom (trade creditor) $500

As a result, Tom is both a trade debtor and a trade creditor to the firm.
By calculations, Tom owe the firm $500. Therefore, a contra entry would be done as follows:

Dr. Tom (trade creditor) $500

Cr. Tom (trade debtor) $500

(b) Donations
 When the firm donates money / goods to a charity, the double entry would be done as follows:

Dr. Donation Expenses

Cr. Cash / Bank / Purchases

(c) Free Samples


(i) If we give free samples, the double entry would be done as follows:

Dr. Promotional Expenses / Selling Expenses

Cr. Purchases

(i) If we receive free samples


 NO ENTRY has to be made, since these samples are not for resale

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Effect on Net Profit:
Net Profit Expenses Revenues
Add Cr. (↓) Cr. (↑)
(↑) overstated / overcast understated / undercast / omitted
Less Dr. (↑) Dr. (↓)
(↓) understated / undercast / omitted overstated / overcast

Effect on Working Capital:


Working Capital Current Assets Current Liabilities
Add Dr. (↑) Dr. (↓)
(↑) understated / undercast / omitted overstated / overcast
Less Cr. (↓) Cr. (↑)
(↓) overstated / overcast understated / undercast / omitted

Effect of Accruals & Prepayments:


Net Profit Working Capital
Prepaid Expense ↑ ↑
預先付不屬於今年的支出 (Expenses ↓) (Current Assets ↑)
Accrued Revenue ↑ ↑
別人拖欠屬於今年的收入 (Revenues ↑) (Current Assets ↑)
Accrued Expense ↓ ↓
拖欠別人屬於今年的支出 (Expenses ↑) (Current Liabilities ↑)
Prepaid Revenue ↓ ↓
預先收不屬於今年的收入 (Revenues ↓) (Current Liabilities ↑)

List of Common Expenses and Revenues:


Expenses / accounts with debit balances Revenues / accounts with credit balances
 Purchases  Sales
 Returns inwards  Returns outwards
 Carriage inwards  Profit and loss – Closing inventory
 Discounts allowed  Discounts received
 Bad debts  Bad debts recovered
 Loss on disposal of non-current assets  Gain on disposal of non-current assets
 Depreciation of non-current assets
 Carriage outwards

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HKDSE Past Paper Questions
(Sample Paper Section B Q.6)

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10
(2015 Section B Q.6ab)

11
(2017 Section B Q.5a)

12
(2019 Section C Q.8)

13
14
(2020 Section C Q.9b)

15
16
(2022 Section C Q.7ab)

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