Week 10
CORRECTION OF
ERRORS AND
SUSPENSE
ACCOUNT
Learning Objectives
Errors not affecting trial balance agreement
After you have studied this chapter, you should be able to:
• correct all errors which do not affect trial balance totals being
equal
• distinguish between the different kinds of errors that may arise
Suspense accounts and errors
After you have studied this chapter, you should be able to:
• explain why a suspense account may be used
• create a suspense account in order to balance the trial balance
• correct errors using a suspense account
• recalculate profits after errors have been corrected
• explain why using a suspense account is generally
inappropriate
Recap:
Analyzing
and
Recording
Process
Analyze each transaction
and event form source
documents
Record relevant transactions
and events in a journal
Post journal information to
ledger accounts
Prepare and analyze the trial balance
DISCOVER
ERROR!!!
Errors
Most errors are found after preparing
the trial balance. Errors cannot be
crossed out or erased.
If there are errors, the trial balance
will not agree.
But there are some errors which will
not affect the agreement of the trial
balance totals.
Steps in Analyzing and
Correcting Errors
1st Step
1. Determine the correct journal entry
and the appropriate debits and
credits.
2nd Step
2.
Analyze the original errors journal
entry and determine all the debits
and credits that were recorded.
3rd Step
3. Preparing the correcting entries.
Errors Revealed by Trial Balance
1.
2.
3.
4.
Errors in calculation – Miscalculation of the trial
balance totals or the net account balances.
Errors of omission of one entry – Omission of
either the debit or credit entry of a transaction.
Posting to the wrong side of an account.
Errors in amount – debit entry of a transaction
differs in amount with the credit entry.
Note: Suspense account is opened to take care of
errors which have caused an imbalance in
the Trial Balance.
Errors NOT Revealed by Trial
Balance
1. Errors of omission – A transaction is
completely omitted from the books.
2. Errors of commission – An entry posted
at the correct amount but to the wrong
person’s account.
3. Errors of principle – An entry is made in
the wrong class of account.
4. Complete reversal of entries – An
account that should be debited is
credited and vice versa.
5. Compensating errors – where errors
cancel each other out.
6. Errors of original entry – The original
figure incorrectly entered although
the correct double-entry principle
has been observed.
CORRECTION OF ERRORS
- Errors of Omission
When a transaction has been completely omitted from the books, it can
be corrected by simply making a double-entry to record the
transaction.
EXAMPLE
A cash payment of RM 1,600 for rent has been omitted from the books.
1st Step
2nd Step
Correction:
Correct entry:
Error:
Dr
Dr
Cash
Cash
Dr
Dr
3rd Step
Rent Account
Account
Rent
RM 1,600
RM1,600
Cash Account
Account
Cash
Rent
Rent
Rent
Cr
Cr
Cr
Cr
RM 1,600
RM1,600
CORRECTION OF ERRORS
- Errors of Omission
The journal entry is as follows:
General Journal
Particulars
1st Step
Actual:
Rent
Dr
(RM)
1,600
Cash
2nd
Step
Error:
Rent
3rd Step
1,600
0
Cash
Correction: Rent
Cash
Being correction of error –
payment for rent omitted
from books
Cr
(RM)
0
1,600
1,600
CORRECTION OF ERRORS
- Errors of Commission
An entry has been posted to the wrong account of the same category.
EXAMPLE
A sale of RM150 to Folin Brothers has been posted to Lin Associates.
1st Step
2nd Step
3rd Step
Correction:
Dr
Correct
Error: entry: Debtor- Folin Brother
DebtorDr
Debtor-Folin
Dr
Debtor- LinBrother
Associates
Lin
Associates RM
RM
150
Sales
150
Sales
RM
150
Cr
Cr
Cr
X
Dr
Dr
Dr
DebtorLin Associates
Sales
Sales
Cr Cr Cr
DebtorDebtorDebtor
Folin
BrotherRM RM
Folin
150RM
- LinBrother
Associates
150150
√
CORRECTION OF ERRORS
- Errors of Commission
The journal entry is as follows:
General Journal
Particulars
1st Step
Actual:
Folin Brother
Dr
(RM)
150
Sales
2nd Step
Errors:
Lin Associates
Sales
Correction: Folin Brother
3rd Step
Lin Associates
Being correction of error –
Lin Associates wrongly
debited
Cr
(RM)
150
150 X
150 √
150
150
CORRECTION OF ERRORS
- Errors of Principle
An entry is posted to an account of a different category e.g. an
expense is recorded as an asset.
EXAMPLE
Repairs to vehicles amounting to RM 1,000 has been posted to Vehicles
Account.
2nd Step
Correction:
Correct entry:
Error:
Dr Dr
Repair
expense
Repair
expense
Dr
Vehicle
Account
Cash/
Vehicle
RM 1,000
Cash/
Acct.
payable
RM 1,000
acct
payable
RM 1,000
3rd Step
Dr
Dr
Dr
1st Step
Cr CrCr
X
Vehicle
Cr
Cash / Account payable
Cr
Cash/ account payable
Cr
Repair
RM 1,000
Repair
1,000
Vehicle
RMRM
1,000
√
CORRECTION OF ERRORS
- Errors of Principle
The journal entry is as follows:
General Journal
Particulars
1st Step
Actual:
Repair
Dr
(RM)
1,000
Cash/Accounts payable
2nd Step
Errors:
Vehicle
Cash/Accounts payable
Correction: Repair
3rd Step
Vehicle
Being correction of error –
repairs to vehicles posted
to Vehicles Account
Cr
(RM)
1,000
1,000
√
X 1,000
1,000
1,000
CORRECTION OF ERRORS
- Errors of Original Entry
A wrong amount is recorded in a book of original entry or a
document such as an invoice and subsequently posted to the ledger
accounts
EXAMPLE
A purchase of RM665 from Paper Manufacturers Ltd has been
entered in the Purchases Journal and posted to the ledger as RM656.
1st Step
Correct entry:
Correction:
Error:
Purchases
Dr
Purchases
Dr Dr
Purchases
Paper
Paper
MfgMfg
LtdLtd RMRM
656
Paper
Mfg
Ltd
9 665
2nd Step
3rd Step
Dr
Dr
Dr
Paper Manufacturers Ltd
Paper Manufacturers Ltd
Purchases
Paper Manufacturers
Ltd
Repair
Purchases
Cr
Cr
Cr
Cr
Cr
RM Cr
665
RM 9
RM 656
CORRECTION OF ERRORS
- Errors of Original Entry
The journal entry is as follows:
General Journal
Particulars
1st Step
Actual:
Purchases
Dr
(RM)
665
Paper Manufacturers Ltd
2nd Step
Errors:
Purchases
3rd Step
665
656
Paper Manufacturers Ltd
Correction: Purchases
Paper Manufacturers Ltd
Being correction of error –
purchases understated by
RM 9
Cr
(RM)
656
9
9
CORRECTION OF ERRORS
- Compensating Errors
An error on the debit side is compensated by an error of equal
amount on the credit side.
EXAMPLE
Rent revenue account is overcast by RM10, so as the Wages Account..
1st Step
2nd Step
Correction
Dr
Wages
Dr
3rd Step
Cash
Rent Revenue Account
RM10
Cash
Wages Account
RM 600
Rent revenue
Cr
RM350
Cr
RM10
CORRECTION OF ERRORS
- Errors of Principle
The journal entry is as follows:
General Journal
Particulars
1st Step
2nd Step
Cr
(RM)
Actual:
Errors:
Correction: Rent revenue
3rd Step
Dr
(RM)
Wages
Being correction of error –
rent received and wages
paid overstated by $10
each
10
10
CORRECTION OF ERRORS
- Complete Reversal of Entries
When recording a transaction, the debit entry and the credit entry
are reversed.
EXAMPLE
A payment of RM 700 to a creditor, Martin, was debited to the
Cash account and credited to Martin’s Account.
1st Step
Correction:
Correct entry:
Error:
Dr
Dr Dr
Cash
Cash
Martin
2nd Step
3rd Step
Dr
Dr
Dr
Martin
Martin
Cash
RM700
700
RM1,400
RM
X
Cash
Cash
Martin Martin
Martin
Cash
Cr Cr
Cr
Cr
Cr
RMCr
700
RM
RM 1,400
700
√
CORRECTION OF ERRORS
- Errors of Principle
The journal entry is as follows:
General Journal
Particulars
1st Step
Actual:
Martin
Dr
(RM)
700
Cash
2nd Step
Errors:
Cash
3rd Step
700
700 X
Martin
Correction: Martin
Cash
Being correction of error –
payment to Martin debited
to Cash Account and
credited to Martin’s
account
Cr
(RM)
700 X
1400
1400
Lecture Exercise 1
Record the entries needed in the journal to correct the
following errors. Narratives are not required:
(a) Motor expenses of RM56 entered incorrectly in the
Motor Vehicles account.
(b) Insurance RM98 paid by cash should have been
entered as RM89.
(c) Sale of goods for RM375 to S Lin entered into the
account of S Lim.
(d) Private withdrawal of RM150 cash had been debited
to Sundry expenses account
(e) Returns outwards of RM75 had been credited to
Returns inwards by mistake.
(f) Purchase of stock on credit from D Wing for RM115
had been completely omitted.
BREAK
CORRECTION OF ERRORS
- Suspense Account
• A Suspense Account is opened to take
care of errors which have caused an
imbalance in the Trial Balance.
• When they are discovered, they have to
be corrected by a double-entry, one in
the Suspense Account and the other in
the account concerned.
CORRECTION OF ERRORS
- Suspense Account
EXAMPLE
• The credit side of a Trial Balance is short of RM100.
• A Suspense Account is temporarily opened.
• The difference between the two sides in the Trial
Balance is entered in this account.
Trial Balance as at 31 December 2002
Totals
Suspense Account
Dr (RM)
Cr (RM)
95,600
95,500
100
95,600
95,600
CORRECTION OF ERRORS
- Suspense Account
• The Suspense Account will have a credit
balance when the credit total in the Trial
Balance is short and a debit balance when
the debit total is short.
Dr
Suspense Account
Cr
Dec 31 Difference in books RM100
Errors Affecting TB Agreement and
their Correction
• Errors which cause an imbalance in the Trial
Balance affect only one side of an account.
• This class of errors requires only one entry,
either on the DR or CR side, to correct
them.
• The other entry has to be made in the
Suspense Account, thus adhering to the
double-entry principle.
Errors Affecting TB Agreement
and their Correction
EXAMPLE
• A sale of RM80 to Linda has been credited to Sales
Account but omitted from Linda’s account.
• The debit side of the Trial Balance was later found to
have a deficiency of RM80.
Dr
Sales Account
Linda
Dr
Suspense Account
Difference in books
RM80
Cr
RM80
Cr
Errors Affecting TB
Agreement and their
Correction
To correct the error...
Dr
Cr
Linda
Suspense Account
Dr
Cr
Difference in books
RM80
RM80
Suspense Account
Linda
RM80
Errors Affecting TB
Agreement and their
Correction
The journal entry is as follows:
General Journal
Date
Particulars
Linda
Suspense Account
Being correction of error – amount
not posted to Linda’s account
Dr ($)
Cr ($)
80
80
Correction of an Error Requiring
More Than Two Entries
. EXAMPLE
• Returns outwards RM100 to Samy has been correctly
entered in Samy’s account but wrongly debited to
Purchases Account.
Dr
Samy
Dr
Dr
Purchases
Return outwards
Purchases Account
RM100
Suspense Account
Returns Outwards Account
Suspense Account
Suspense Account
RM100 Difference in books
RM100 RM200
Cr
RM100
Cr
RM100
Cr
Correction of an Error Requiring
More Than Two Entries
The journal entry is as follows:
General Journal
Date
Particulars
Suspense Account
Dr ($)
Cr ($)
200
Purchases
100
Returns Outwards
100
Being correction of error –
returns outwards wrongly posted
to Purchases Account
Lecture Exercise 2
The following errors were made:
i. $78 cash paid for stationery was entered in the
Stationery Account and the Cash Account as
$87.
ii. $400 paid for repairs for machinery was
debited to Machinery Account.
iii. Sales Account and Purchases Account were
overcast by $300 each.
iv. Commission received $1,500 was wrongly
debited to the Commission Revenue Account
and credited to the Cash Account.
What entries should be made to correct these errors?
Lecture Exercise 3
The debit total in the Trial Balance exceeded the credit total by
RM32. On checking the books, the following errors were
found:
i. Rent received, RM400 had been recorded on the payment side
of the Cash Book and debited to the Rent Expenses Account.
ii. Goods amounting to RM70, returned to Alex, had been treated
as sales. The amount was debited to the account of a debtor,
B. Fowler and credited to the Sales Account.
iii.A cheque of RM51 received from K. Jack had been debited in
error to R. Jackson’s account. The entry in the Bank Account
was correct.
iv. A purchase of equipment, paid by a cheque of RM1,100, was
entered as RM1,000 in the books.
v. The remainder of the difference in the books was due to an
error in over casting the Sales Journal.
Show how these errors could be corrected.
Lecture Exercise 4
You have extracted a trial balance on 31 December 2006
which failed to agree by RM350, a shortage on the debit
side of the trial balance. A suspense account was opened
for the difference. The following errors were later
found:
–
The purchases daybook had been undercast by RM200.
–
The insurance account had been undercast by RM50.
–
Sale of equipment of RM400 had been credited in
error to the Sales account.
–
Sales account had been overcast by RM175
–
Discounts received had been undercast by RM75
You are required to:
(a) Show the journal entries necessary to correct the errors.
(b) Draw up the suspense account after the errors have been
corrected