correction of errors 1purpose of a trial balance a trial balance is prepared to test the __________...

Correction of Errors

1 Purpose of a Trial Balance

A trial balance is prepared to test the __________ of the book keeping. As every transaction recorded follows the _____________ rule, it means ultimately, the total _______ must equal the total _________.

accuracy

double entrydebits credits

2 Types of Errors

There are 2 main types of errors:

a) _____________________________________

b) _____________________________________

Errors revealed by a trial balance( errors in which amount Dr not = amount Cr )

Errors not revealed by a trial balance( errors in which amount Dr = amount Cr )

3 Basic rules to correct errors inaccounts

Example 1:a) How to reduce the balance in Account A by

$40?b) How to increase the balance in Account A

by $50?Account A

Bal b/d 300

Answer: a) _________________________

b) _________________________

Credit Account A with $40

40 50

Debit Account A with $50

Example 2:a) How to reduce the balance in Account B by $80?b) How to increase the balance in Account B by $30?

Account BBal b/d 700

Answer: a) _________________________

b) _________________________

Debit Account B with $80

80

Credit Account B with $30

30

Simple Rule:

(a)To increase a balance, we enter on the _________ side;

(b)To reduce a balance, we enter on the ___________ side.

same

opposite

4 Correction of Errors revealed by a Trial Balance

A Error of recording in One account only

Example (text page 340)

Cash of $1,880 paid to Winston, a creditor, was recorded only in Winston’s account.

Step 1: Right entryCreditor-Winston Dr 1,880 Cash Cr 1,880

Step 2: Wrong entryCreditor-Winston Dr 1,880

Step 3:Compare

Step 4: Correcting entryCash Cr 1,880 Put in missing entry

B Arithmetic Errors in ledgers

Example (text page 340)Returns outwards account was overcast by $350

Step 1: Right balReturns Outwards eg. Cr 1,000

Step 2: Wrong balReturns Outwards eg. Cr 1,350

Step 3:Compare

Step 4: Correcting entryReturns Outwards Dr 350

Enter on opposite side to reduce amount

C Error in recording unequal amounts in the accounts

Example (text page 341)Cash purchase of equipment $1,000 was correctly credited in the Bank account but was incorrectly debited as $100 in the Equipment account.

Step 1: Right entryEquipment Dr 1,000 Bank Cr 1,000

Step 2: Wrong entryEquipment Dr 100 Bank Cr 1,000

Step 3:Compare

Step 4: Correcting entryEquipment Dr 900

Enter on same side to increase amount

D Error in recording on wrong side of a correct account

Example (text page 342)Discount received of $60 had been posted to the wrong side of the account as a debit instead of as a credit.

Step 1: Right entryCreditor Dr 60 Discount received Cr 60

Step 2: Wrong entryCreditor Dr 60Discount received Dr 60

Step 3:Compare

Step 4: Correcting entryDiscount received Cr 120

Enter on opposite side to reduce amount

E Entry made in an incorrect account with double entry effect

Example (text page 343)Payment of interest expense $100 had been credited to the Interest Revenue account.Step 1: Right entryInterest Expense Dr 100 Bank Cr 100

Step 2: Wrong entry Bank Cr 100 Interest Revenue Cr 100

Step 3:Compare

Step 4: Correcting entryInterest Expense Dr 100Interest Revenue Dr 100

Enter on opposite side to reduce amount

5 Correction of Errors not revealed by a Trial Balance

This type of errors have ________ equal to _______.

A Errors of OmissionExample (text book, pg 347) Cash payment of $400 for insurance expense was not recorded in the books.

debits credits

Step 1: Right entryInsurance expense Dr 400 Cash Cr 400

Step 2: Wrong entryNo entry was made

Step 4: Correcting entryInsurance expense Dr 400 Cash Cr 400

Step 3:Compare

Step 4:Put in missing entries

B Error of CommissionExample (text book pg 348)A purchase of goods of $500 from Karrim was posted to another supplier, Hassim’s account.

Step 1: Right entryPurchases Dr 500 Creditor-Karrim Cr 500

Step 2: Wrong entryPurchases Dr 500 Creditor-Hassim Cr 500

Step 3:Compare

Step 4: Correcting entryCreditor-Hassim Dr 500 Creditor-Karrim Cr 500

Enter on opposite side to reduce amount

C Error of PrincipleExample (text book pg 349)The purchase of equipment of $2,500 was posted incorrectly to the Repairs of Equipment account.

Step 1: Right entryEquipment Dr 2,500 Bank Cr 2,500

Step 2: Wrong entryRepairs of Equipt Dr 2,500 Bank Cr 2,500

Step 3:Compare

Step 4: Correcting entryEquipment Dr 2,500 Repairs of Equipt Cr 2,500

Enter on opposite side

to reduce amount

D Error of Original EntryExample (text book pg 349)A purchase of goods of $800 from Ali was entered in the Purchases journal as $880 and the amount was posted to the ledger accounts.

Step 1: Right entryPurchases Dr 800 Creditor-Ali Cr 800

Step 2: Wrong entryPurchases Dr 880 Creditor-Ali Cr 880

Step 3:Compare

Step 4: Correcting entryCreditor-Ali Dr 80 Purchases Cr 80

Enter on opposite side

to reduce amount

E Error of Complete ReversalExample (text book pg 350)A cheque of $400 received from Pipi was credited in the Bank account and debited in Pipi’s account.

Step 1: Right entryBank Dr 400 Debtor-Pipi Cr 400

Step 2: Wrong entryDebtor-Pipi Dr 400 Bank Cr 400

Step 3:Compare

Step 4: Correcting entryBank Dr 800 Debtor-Pipi Cr 800

Enter on opposite side

to reduce amount

F Compensating ErrorsExample (text book pg 351)The Purchases account and the Sales account are each overstated by $600.

Step 1: Right balPurchases eg. Dr 1,000Sales eg. Cr 4,000

Step 2: Wrong balPurchases Dr 1,600Sales Cr 4,600

Step 3:Compare

Step 4: Correcting entrySales Dr 600 Purchases Cr 600

Enter on opposite side

to reduce amount

6 Effects of correction of errors onnet profit

Where errors are detected / corrected before the Trading, Profit and Loss a/c and the Balance Sheet have been prepared, the corrections would involve the correcting journal entries in the _______________ and correction of the ________________.

general journalledger accounts

However, where the Trading, Profit and Loss a/c have been prepared before the errors have been detected / corrected, it would mean that the __________ and some items in the ______________ have been wrongly stated.

net profitBalance sheet

The correction of such errors would involve correcting journal entries, restatement of the __________ and restatement of some items in the ______________.

net profitBalance sheet

Analysis of corrections on Net Profit

Net profit = __________ - ___________Revenue Expenses

Rule 1:

Debiting any expense / revenue account would __________ net profit.reduce

Rule 2:

Crediting any expense / revenue account would __________ net profit.increase

Effects of Errors on Net Profit and Balance Sheet

Trading, Profit and Loss Account for the year ended 31 Dec 20X2

Opening stock 500 Sales 8,000Purchases 6,100

6,600less Closing stock 700COGS 5,900Gross profit c/d 2,100

8,000 8,000Rent 200 Gross profit b/d 2,100Insurance 120 Discount received 250Lighting and heating 180Depreciation 250Net Profit 1,600

2,350 2,350

Balance Sheet as at 31 Dec 20X2

Fixed Assets $ Owner’s Equity $Fixtures 2,200 Capital 1,800less Prov for depn 800 Add Net Profit 1,600

1,400 3,400Current Assets Less Drawings 900Stock 700 2,500Debtors 600 Current liabilitiesBank 340 Creditors 600

1,6403,040 3,100

Subsequently, the following errors were discovered:

i) Sales were overcast by $70ii) Rent was undercast by $40iii) Cash $50 received from a debtor was entered in the cash book onlyiv) A purchase of $59 from Abel is entered in the books, debit and credit entries, as $95

Required:

a) Correcting journal entries for the above errors;

b) A Statement of Corrected Net Profit for the year ended 31 Dec 20X2;

c) The Corrected Balance Sheet as at 31 Dec 20X2

a) Correcting Journal entries

i) Sales Dr 70

ii) Rent Dr 40

iii) Debtor Cr 50

iv) Creditor-Abel Dr 36 Purchases Cr 36

b) Statement of Corrected Net Profit for yr ended 31 Dec 20X2

$Net Profit as per accounts 1,600

Add(iv) Purchases under stated 36

1,636Less(i) Sales overcast 70(ii) Rent undercast 40Corrected Net Profit 1,526

Corrected Balance Sheet as at 31 Dec 20X2

Fixed Assets $ Owner’s Equity $Fixtures 2,200 Capital 1,800less Prov for depn 800 Add Net Profit 1,526

1,400 3,326Current Assets Less Drawings 900Stock 700 2,426Debtors(-50) 550 Current liabilitiesBank 340 Creditors(-36) 564

1,5902,990 2,990

d)