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Edexcel IGCSE Accounting: Your notes

Introduction to Bookkeeping &
Accounting
Correction of Errors
Contents
Errors & Journal Entries
Errors & The Suspense Account
Impact of Errors on Profit & Financial Position

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Errors & Journal Entries

Your notes
Errors Which Do Not Affect a Trial Balance
Which errors do not affect the trial balance?
There may be errors even though the totals in the trial balance are equal
These errors might be spotted by other means
Control accounts
Bank reconciliation statements
These errors cannot be ignored
They could affect the stated profit
They could affect the stated value of assets and liabilities
They could affect the balances related to other businesses
The six types of errors which do not affect a trial balance are:
Error of omission
Error of original entry
Error of complete reversal
Error of commission
Error of principle
Compensating errors

EXAM TIP
You need to learn the names and definitions of these six errors!

How do I correct errors using journal entries?

You can correct errors by making the appropriate entries into the ledger accounts
The journal will be used as a book of original entry
Enter the account that needs to be debited

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It is conventional for debit entries to appear first

Enter the account that needs to be credited
Your notes
It is conventional to indent the details for credit entries
Give a narrative for the journal entry
State “Correction of error”
Give a brief description of the error
Error of Omission
What is an error of omission?
An error of omission occurs when a transaction is not entered into any ledger accounts
The transaction is omitted
It is possible that the transaction was not entered into the books of original entry
The transaction is not included in the total for the debits and the total for the credits
The totals will therefore balance

How do I correct an error of omission?

Enter the transaction correctly into the ledger accounts
You essentially just need to make the entries as normal
Make the journal entries

WORKED EXAMPLE
Ashika is a sole trader. On 1 March 2024, Ashika identified an error where the sale of goods worth
$200 to Kiha was not entered into the ledger accounts.
Prepare journal entries to correct the error. A narrative is required.
Answer
Journal

Date Details Debit Credit

$ $

2024
Mar 1

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Kiha 200

Sales 200 Your notes

Correction of error of omission - credit sale to Kiha not recorded

Error of Original Entry

What is an error of original entry?
An error of original entry occurs when a transaction is entered into both of the ledger accounts using
an incorrect amount
The same incorrect amount is entered into both the debit account and the credit account
It is possible that the amount of the transaction was entered incorrectly into the books of original
entry
The incorrect amount is included in the total for the debits and the total for the credits
The totals will therefore balance

How do I correct an error of original entry?

Find the difference between the incorrect amount and the correct amount
Enter the difference into both accounts
To increase an amount
Put the difference on the same side as the original entry
To decrease an amount
Put the difference on the opposite side to the original entry

WORKED EXAMPLE
On 1 March 2024, Ashika identified an error where the sale of goods worth $200 to Kiha was entered
into the sales day book as $250. Kiha’s account was debited $250, and the sales account was
credited $250.
Prepare journal entries to correct the error. A narrative is required.
Answer
The amount entered was $50 more than the correct amount
Decrease both accounts by $50

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To decrease the accounts, enter $50 on the opposite sides compared to the original
entries
Journal Your notes

Date Details Debit Credit

$ $

2024
Mar 1 Sales 50

Kiha 50

Correction of error of original entry - credit sale recorded as $250

instead of $200

Error of Complete Reversal

What is an error of complete reversal?
An error of complete reversal occurs when a transaction is entered into the wrong sides of both of the
correct ledger accounts
The account that was debited should have been credited
The account that was credited should have been debited
The correct amount is included in the total for the debits and the total for the credits
The totals will therefore balance

How do I correct an error of complete reversal?

Double the value of the transaction
This is because you need to apply the transaction twice
Once to undo the error
Once to make the correct entries
Make the entries on the correct side
This will be the opposite side to where it was entered

WORKED EXAMPLE

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On 1 March 2024, Ashika identified an error where goods sold to Kiha, for $200, were debited to the
sales account and credited to Kiha’s account.
Your notes
Prepare journal entries to correct the error. A narrative is required.
Answer
An amount of $400 is needed to fix the error
Journal

Date Details Debit Credit

$ $

2024
Mar 1 Kiha 400

Sales 400

Correction of error of complete reversal - credit sale of $200 entered on

the wrong side of the accounts

Error of Commission
What is an error of commission?
An error of commission occurs when one entry for a transaction is entered into an incorrect account
but the type of account is correct
A debit entry could have been entered into the wrong expense account
A transaction could have been entered into an account for the incorrect customer
A transaction could have been entered into an account for the incorrect supplier
The correct amount is included in the total for the debits and the total for the credits
The totals will therefore balance

How do I correct an error of commission?

Undo the entry in the incorrect account
This means making an equal entry on the opposite side of the account
Make an entry in the correct account

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WORKED EXAMPLE
Your notes
On 1 March 2024, Ashika identified an error where goods were sold to Kiha for $200, but the entry
was made in Dinah’s account in the receivables ledger. The transaction was entered correctly in the
sales account.
Prepare journal entries to correct the error. A narrative is required.
Answer
Dinah’s account has been debited by mistake
Undo the mistake by crediting Dinah’s account
Debit Kiha’s account
Journal

Date Details Debit Credit

$ $

2024
Mar 1 Kiha 200

Dinah 200

Correction of error of commission - credit sale was debited to Dinah’s

account instead of Kiha’s

Error of Principle
What is an error of principle?
An error of principle occurs when one entry for a transaction is entered into an incorrect account and
the type of account is also incorrect
A transaction for an expense could have been entered into an asset account
The correct amount is included in the total for the debits and the total for the credits
The totals will therefore balance

EXAM TIP

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It is very easy to confuse an error of principle with an error of commission. An error of commission
occurs when an account is confused with another account that has something in common. For
example, they are both expenses, or they are both trade receivables. Your notes

How do I correct an error of principle?

You correct an error of principle the same way as you would correct an error of commission
Undo the entry in the incorrect account
This means making an equal entry on the opposite side of the account
Make an entry in the correct account

WORKED EXAMPLE
On 1 March 2024, Ashika identified an error where $50 was paid for petrol, but the entry was made in
the vehicles account rather than the vehicle expenses account. The transaction was entered
correctly in the cash book.
Prepare journal entries to correct the error. A narrative is required.
Answer
The vehicles account has been debited by mistake, as this is an asset account not an expense
account
Undo the mistake by crediting the vehicles account
Debit the vehicle expenses account
Journal

Date Details Debit Credit

$ $

2024
Mar 1 Vehicle expenses 50

Vehicles 50

Correction of error of principle - vehicle expenses were debited to the

vehicles account

Compensating Errors
What are compensating errors?
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Compensating errors occur when the effects of unrelated errors balance out when totalling the
debits and credits
Your notes
Example
A business sells $100 worth of goods to Steve and $200 worth of goods to Tony
The transactions were entered correctly into the sales account
Both Steve and Tony’s accounts were debited $150
Overall the assets have still increased by $300

How do I correct compensating errors?

Correct each error separately
The total of the debits should equal the total of the credits

WORKED EXAMPLE
Ashika sold $100 worth of goods to Steve and $200 worth of goods to Tony. On 1 March 2024,
Ashika identified that both of these transactions were entered into the receivables ledger accounts
as $150. The transactions were entered correctly into the sales account.
Prepare journal entries to correct the error. A narrative is required.
Answer
Steve’s account was debited $150 instead of $100
Therefore, credit $50 to Steve’s account to reduce the balance
Tony’s account was debited $150 instead of $200
Therefore, debit $50 to Tony’s account to increase the balance
Journal

Date Details Debit Credit

$ $

2024
Mar 1 Tony 50

Steve 50

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Correction of compensating errors - Tony’s account was understated by

$50 and Steve’s account was overstated by $50
Your notes

WORKED EXAMPLE
Ashika prepared a trial balance which balanced. However, she discovered the following errors.
1. Payment of cash, $600, to Fran, a credit supplier, had been debited to the account of Fred in
the payables ledger.
2. Rent paid by direct direct, $800, had not been recorded in the ledger accounts.
3. Office expenses, $150, had been debited to the office equipment account.
4. Wages paid, $500, had been debited to the bank account and credited to the wages account.
For each of the items, state the type of error that was made.
Answer

Error 1 Error of commission

Error 2 Error of omission

Error 3 Error of principle

Error 4 Error of complete reversal

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Errors & The Suspense Account

Your notes
Errors Which Affect The Trial Balance
Which errors affect the trial balance?
There are some errors that are identified by the trial balance
The most common reasons for these types of errors are:
Addition errors
Posting errors
Unequal posting errors
Partial omission errors

Which are addition errors?

Addition errors occur when:
A calculation error is made when balancing an account
A numerical error is made when totalling the debits or credits in the trial balance
Example
A business has two entries in the drawings account: $550 and $450
The business incorrectly totals this account as $910

Which are posting errors?

Posting errors occur when both entries of a transaction are made on the same side of the accounts
Both are entered as debits or both are entered as credits
Example
A business pays $500 for rent
The rent account is debited $500
The bank account is debited $500
This should be a credit entry

Which are unequal posting errors?

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Unequal posting errors occur when a transaction is entered into two accounts using different
amounts
Your notes
Transposition errors are common examples of unequal posting
This is where the digits are entered in the wrong order
Example
A business makes a credit sale of $52
$52 is entered into the sales account
$25 is entered into the trade receivables account
The digits have been switched around

Which are partial omission errors?

Partial omission errors occur when a transaction is only entered once into the ledger accounts
The debit or credit entry is missing
Example
A business takes $200 worth of goods for personal use
They debit the drawings account
But they forget to credit the purchases account

Suspense Account
What is a suspense account?
A suspense account is used to correct errors when the totals in the trial balance are not equal
It is a temporary account
It should be fully balanced once all the errors are corrected

How do I use a suspense account to correct errors?

STEP 1
Find the difference between the total debits and the total credits on the trial balance
STEP 2
Enter the difference into a suspense account on the side which has the lower total
Call the entry “Balance b/d (difference on trial balance)”

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STEP 3
Make entries into the ledger accounts to correct the errors
Your notes
Label the entries as “Suspense account”
STEP 4
Balance these entries by making corresponding entries into the suspense account
These entries will be on the opposite side to the entries that corrected the error
STEP 5
Close the suspense account once all the errors have been corrected
The suspense account should automatically be balanced
If not, there are still errors
How do I find the difference in the totals on the trial balance?
If you have the trial balance, simply subtract the smaller total from the larger total
Sometimes you will not be given the trial balance
You could be given a list of errors and asked to find the difference in the totals on the trial balance
Correct the errors using the suspense account
Balance the suspense account
Label the balancing entry as “Difference on trial balance”
The side that this entry appears on is the side which had the smaller total on the trial balance

EXAM TIP
You might still be asked to make journal entries alongside a suspense account. Remember that one
of the accounts for each journal entry should be the suspense account.

WORKED EXAMPLE
Jonas prepared a trial balance on 31 March 2024 and the totals were not equal. Credits were $590
higher than debits. The following errors were identified.
1. Credit purchases of $850 to Nicki had been correctly entered in the purchases account, but
credited as $580 in Nicki’s account.
2. The sales account had been overstated by $740.
3. Discount allowed, $400, had been credited to the discount received account.
4. Vehicle expenses, $50, had been debited to the vehicles account.

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5. A payment of $260 from a credit customer, Timmy, had been entered correctly into the cash
book but had been debited to Timmy’s account.
6. Returns outwards, $160, had been entered correctly in the payables ledger but had been Your notes
omitted from the returns outwards account.
Prepare the suspense account to correct the errors. Start with the difference on the trial balance.
Answer
The debit total was smaller on the trial balance, so put the difference on the debit side of the
suspense account.
Deal with the errors one at a time.
1. Credit $270 to Nicki’s account ($850 - $580), then debit the suspense account.
2. Debit $740 to the sales account to reduce it, then credit the suspense account.
3. Discount allowed should have been debited to the discount allowed account. Debit $400 to
the discount received account and debit $400 to the discount allowed account. Then credit
the suspense account.
4. This is an error of principle that does not affect the balancing of the trial balance. Therefore, no
entries are made into the suspense account to correct the error.
5. Timmy’s account should have been credited. Credit $260 to Timmy’s account twice, once to
undo the incorrect posting and once to enter the correct posting. Then debit the suspense
account.
6. Credit $160 to the returns outwards account. Then debit the suspense account.
Suspense Account

Date Details $ Date Details $

2024 2024
Mar 31 590 Mar 31 Sales 740
Balance b/d (difference on trial balance)

Nicki 270 Discount allowed 400

Timmy 520 Discount received 400

Returns outwards 160

1 540 1 540

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Impact of Errors on Profit & Financial Position

Your notes
Impact of Errors on Profit
Which accounts affect gross profit?
It is important to learn whether the balance of an account affects the gross profit
An account could cause the gross profit to increase
An account could cause the gross profit to decrease
An account could have no effect on the gross profit
Remember the formulae
Gross profit = net revenue - cost of sales
Net revenue = sales - returns inwards
Cost of sales = opening inventory + net purchases - closing inventory
Net purchases = purchases + carriage inwards - returns outwards - goods for own use
Anything which increases net revenue will increase gross profit
Anything which increases the cost of sales will decrease gross profit
This can be summarised in the following table

Accounts which increase Accounts which decrease Accounts which do not affect
gross profit gross profit gross profit

Sales Returns inwards Other incomes

Returns outwards Purchases Other expenses
Closing inventory Opening inventory Other assets
Carriage inwards Liabilities
Equity
Drawings

EXAM TIP

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Goods taken for the owner’s use are normally recorded in the purchases account. Read the
question carefully to see whether this has already been accounted for.
Your notes
Remember carriage outwards does not affect the gross profit as this is an expense whereas carriage
inwards is classed as part of purchases.

How do errors affect the gross profit?

Some errors cause the gross profit to be overstated or understated
The gross profit will be overstated if:
Either the balance of an account which increases gross profit has been overstated
Or the balance of an account which decreases gross profit has been understated
The gross profit will be understated if:
Either the balance of an account which increases gross profit has been understated
Or the balance of an account which decreases gross profit has been overstated
Check the overall effect on the gross profit of all the errors
The effects of some errors might cancel each other out

How do corrections of errors affect the gross profit?

You might be asked to correct errors and find the adjusted gross profit
Consider which debit and credit entries are needed to correct the errors
If the account affects gross profit then:
Debit entries decrease gross profit
Credit entries increase gross profit
Remember some accounts do not affect the gross profit

EXAM TIP
Read these questions carefully. Check whether the question is asking you to determine the effect
that errors have on the gross profit or whether it is asking you to determine the effect of correcting
the errors!

Which accounts affect profit for the year?

It is important to learn whether the balance of an account affects the profit for the year

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You can determine the effects using the same methods as for gross profit
Remember the formula
Your notes
Profit for the year = gross profit + other incomes - other expenses
Anything which increases gross profit or other incomes will increase the profit for the year
This can be summarised in the following table
Balances which increase profit Balances which decrease profit Balances which do not affect
for the year for the year profit for the year

Sales Returns inwards Other assets

Returns outwards Purchases Liabilities
Closing inventory Opening inventory Equity
Other incomes Other expenses Drawings

If the account affects profit for the year then:

Debit entries decrease the profit
Credit entries increase the profit

WORKED EXAMPLE
Felipe is a sole trader. At the end of the accounting period he stated the gross profit as $12 340 and
the profit for the year as $5 435. After calculating these values, Felipe identified some errors.
1. A credit sale, $360, to Emily, had been debited to the sales account and credited to Emily’s
account.
2. Felipe had taken goods for his own use, $300, but he had not entered this into the ledger
accounts.
3. The returns inwards account and the discount received account had both been undercast by
$250.
4. Rent received, $1 200, had been debited to the rent payable account. It was entered correctly
into the cash book.
5. A credit purchase, $900, from Reema, has been credited to Rachel’s account. It was entered
correctly into the purchases account.
Calculate the adjusted gross profit and profit for the year after the correction of the errors.
Answer
Find the corrections that are needed.

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If the account affects a type of profit, then debit entries decrease the profit and credit entries
increase the profit.
Your notes
Error Correction needed Effect on gross Effect on profit for the
profit year

1 Debit $720 to Emily’s account (asset) No effect No effect

Credit $720 to the sales account Increase by $720 Increase by $720

2 Debit $300 to the drawings account No effect No effect

Credit $300 to the purchases account Increase by $300 Increase by $300

3 Debit $250 to the returns inwards account Decrease by $250 Decrease $250

Credit $250 to the discount received No effect Increase $250

account
(income)

4 Credit $1 200 to the rent payable account No effect Increase by $1 200

(expense)

Credit $1 200 to the rent receivable No effect Increase by $1 200

account
(income)

5 Debit $900 to Rachel’s account No effect No effect

(liability)

Credit $900 to Reema’s account No effect No effect

(liability)

Gross profit: $12 340 + $720 + $300 - $250 = $13 110

Profit for the year: $5 435 + $720 + $300 - $250 + $250 + $1 200 + $1 200 = $8 855

Impact of Errors on a Statement of Financial Position

How do errors affect the statement of financial position?
Some errors can affect the stated values for:
Assets

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Liabilities
Equity Your notes
The equity account will be overstated if:
The profit for the year is overstated
The drawings account is understated
The equity account will be understated if:
The profit for the year is understated
The drawings account is overstated
The effects of some errors can cancel each other out and therefore do not affect the statement of
financial position
Suppose that a payment from a trade receivable of $100 has been omitted from the ledger
accounts
Trade receivables would be $100 overcast
The bank would be $100 undercast
The total value of the assets is unaffected by this error
How does the correction of errors affect capital?
Equity will increase if:
The profit for the year increases
The balance of the drawings account decreases
Finding the corrected balance for the equity is very similar to finding the corrected profit for the year
Just remember to look out for transactions involving drawings

EXAM TIP
Always read the question carefully. You might be required to determine whether the capital is
understated or overstated due to errors. Or you might be required to calculate the adjusted equity
after correcting the errors.

WORKED EXAMPLE
Gina is a sole trader. Gina has prepared a draft statement of financial position but later discovers
some errors. For each error put a tick (✓) in the correct column to indicate the effect that each error
has on Gina’s capital.
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Error Equity is Equity is No effect

overstated understated on equity
Your notes
The purchase of a vehicle for business use,
$2 000, had been debited to the purchases
account.

Goods taken for Gina’s own use, $500, had been

omitted from the ledger accounts.

Gina had taken $1 000 from the business bank

account for personal use. This had been entered in
the cash book but no other entries had been
made.

Answer
For the first error, the transaction was entered into the purchases account instead of an asset
account
The purchases account is overstated which means the profit is understated
Therefore the capital is understated
For the second error, the purchases account is understated which means the profit is
overstated
However, the drawings account is understated which cancels out the effect of the
overstated profit when calculating the capital
For the third error, the drawings account is understated
This means the capital is overstated
Error Equity is Equity is No effect
overstated understated on equity

The purchase of a vehicle for business use, ✓

$2 000, had been debited to the purchases
account.

Goods taken for Gina’s own use, $500, had been ✓

omitted from the ledger accounts.

Gina had taken $1 000 from the business bank ✓

account for personal use. This had been entered in
the cash book but no other entries had been
made.

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