Home BOOK KEEPING B/KEEPING FORM 3 TOPIC 2: CORRECTION OF ERRORS | B/KEEPING FORM 3

TOPIC 2: CORRECTION OF ERRORS | B/KEEPING FORM 3

October 1, 2020

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TOPIC 2: CORRECTION OF ERRORS | B/KEEPING FORM 3

Wrong Entries

Identify wrong entries

An accounting error is a non-fraudulent discrepancy in financial documentation. The term is used in financial reporting.

Types of accounting errors include:

Error of omission — a transaction that is not recorded.
Error
of commission — a transaction that is calculated incorrectly. One
example of an error of commission is subtracting a figure that should
have been added.
Error of principle — a transaction that is not
in accordance with generally accepted accounting principles ( GAAP).
One example of an accounting error of principle is an expenditure that
is placed in an inappropriate category.

Accounting errors can occur in double entry bookkeeping for a number of reasons.

Accounting errors are not the same as fraud, errors happen
unintentionally, whereas fraud is a deliberate and intentional attempt to falsify the bookkeeping entries.

An accounting error can cause the trial balance not to balance, which is easier to spot, or the error can be such that the trial balance will still balance due to compensating bookkeeping entries, which is more difficult to identify.

The Effect of Errors

Accounting Errors that Affect the Trial Balance

Explain the effect of errors on the value of stock

Errors that affect the trial balance are usually a result of a one sided entry in the accounting records or an incorrect addition.

As a temporary measure, to balance the trial balance. the difference in the trial balance is allocated to a suspense account, and a suspense account reconciliation is carried out at a later stage.

For
example, suppose the trial balance showed total debits of 84,600 but
total credits of 83,400 leaving a difference of 1,200 as shown below.

Suspense Accounts – Trial Balance Difference
Account	Debit	Credit
Trial Balance Totals	84,600	83,400
Difference	1,200
Total	84,600	84,600

To make the trial balance a single entry is posted to the accounting ledgers in a suspense account.

Suspense Account Posting
Account	Debit	Credit
Suspense account	1,200

When the accounting error is identified a correcting entry is made. Suppose the difference was an addition error on the rent account, then the correcting entry would be as follows:

Suspense Account Reconciliation Posting
Account	Debit	Credit
Suspense account	1,200
Rent	1,200

Errors Which do not Affect the Trial Balance

Accounting errors that do not affect the trial balance fall into one of six categories as follows:

Error of Principle in Accounting
Errors of Omission in Accounting
Error of Commission
Compensating Error
Error of Original Entry
Complete Reversal of Entries

The types of accounting errors that do not affect the trial balance are summarized in the table below.

Summary of Accounting Error Types
Accounting Errors	Description
Error of Principle in Accounting	Correct amount, wrong type of account
Errors of Omission in Accounting	Entry missed from accounting records
Error of Commission	Correct amount and type of account but wrong account
Compensating Error	Two or more errors balance each other out
Error of Original Entry	Correct accounts, wrong amounts
Complete Reversal of Entries	Correct amount and account, entries reversed

Where possible all accounting errors should be identified and corrected, if the accounting errors are immaterial to the accounts then, as a last resort, the balance could be carried in the balance sheet on a suspense account or written off to the income statement as a sundry expense.

Preparation of Journal Entries Necessary to Correct Errors

Preparation of a Corrected Trial Balance

Prepare a corrected Trial Balance

An adjusted trial balance is a listing of all company accounts that will appear on thefinancial statementsafter year-end adjusting journal entries have been made.

Preparing an adjusted trial balance is the fifth step in theaccounting cycleand is the last step beforefinancial statementscan be produced.

There are two main ways to prepare an adjusted trial balance. Both ways are useful depending on the site of the company and chart of accounts being used.

You could post accounts to the adjusted trial balance using the same method used in creating the unadjusted trial balance. The account balances are taken from the T-accounts or ledger accounts and listed on the trial balance. Essentially, you are just repeating this process again except now the ledger accounts include the year-end adjusting entries.

You could also take the unadjusted trial balance and simply add the adjustments to the accounts that have been changed. In many ways this is faster for smaller companies because very few accounts will need to be altered.

Note that only active accounts that will appear on the financial statements must to be listed on the trial balance. If an account has a zero balance, there is no need to list it on the trial balance.

Example 1

Using Paul’sunadjusted trial balanceand hisadjusted journal entries, we can prepare the adjusted trial balance.

Once
all the accounts are posted, you have to check to see whether it is in
balance. Remember that all trial balances’ debit and credits must be
equal.

Now that the trial balance is made, it can be posted to theaccounting worksheetand thefinancial statementscan be prepared.

Uses of the Trail Balance

Outline uses of the Trail Balance

Keeping in mind the definition of the trial balance we can define the following characteristics and use of the trial balance:-

Trial
balance is prepared in tabular form only. It contains debit column for
debit balance of accounts and credit column for credit balances of
accounts.
Only the closing balances of the accounts are shown in trial balance.
The closing balance of stock is never shown in trial balance. It is always shown as foot note.
Other
adjustments against which no entries are passed in the books also not
shown in trial balance. They are also shown as footnotes.
The trial balance is prepared on a particular date as required by the management or at the end of thefinancial year.
Trial balance is not an account. It is a statement only.
The balance of all accounts is shown at one place. Thus it is the summary of all accounts.
It shows the arithmetical mistake of the entries.
Trading,profit and loss accountand thebalance sheetare prepared with the help of trial balance only.

TOPIC 2: CORRECTION OF ERRORS | B/KEEPING FORM 3

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