TOPIC 2 CORRECTION OF ACCOUNTING ERRORS – ACCOUNTANCY
Error – Mistake
An error (from the Latin error, meaning “wandering”) is an action that is inaccurate or incorrect. In some usages, an error is synonymous with a mistake.
In statistics, “error” refers to the difference between the value which has been computed and the correct value. An error could result in failure or in a deviation from the intended performance or behavior
An ‘error’ is a deviation from accuracy or correctness. A ‘mistake’ is an error caused by a fault: the fault being misjudgment, carelessness, or forgetfulness. Now, say that I run a stop sign because I was in a hurry, and wasn’t concentrating, and the police stop me, that is a mistake.
If, however, I try to park in an area with conflicting signs, and I get a ticket because I was incorrect in my interpretation of what the signs meant, that would be an error. The first time it would be an error. The second time it would be a mistake since I should have known better
Errors may occur
1.While the transactions are initially recorded.
2.While the ledge account are being recorded.
3.While the trial balance is bean prepared.
CLASSIFICATION OF ERRORS
1. Arithmetical error
Error occur due to
2. Clerical error
These are errors which arises due to falling to complete double entry system.
The Accounting errors are classified into two types which are;
- Errors which do not affect the agreement of the Trial balance.
- Errors which affect the agreement of the Trial balance.
1.ERRORS WHICH DO NOT AFFECT THE AGREEMENT OF A TRIAL BALANCE RESULT DUE TO:-
1. Omission of figure(s); It is among the errors in which it occurs when a transaction is completely omitted from the books.
Example: If we sold Tshs. 10,000/= goods to Usama but did not enter it in either sales or Usama’s personal account, the trial balance will still balance.
2. Commission; This is where the correct amount is entered but in the wrong personal account.
Example: where a sale of 100/= to K. Asaad is entered in the account of B. Asaad . It will be noted that the correct class of account was used; both the account concerned being personal accounts.
3. Original entry:
This error occurs when the original figure is incorrect, yet double entry is still observed using this incorrect figure.
An instance of this could be where there were sales of 4500/= goods but an error is made in calculating the sales Invoice.
If sales was calculated as 4300/= and credited as Sales and debited to the personal account of the customer, the customer, the trial balance will still balance.
4. Reversal of entries;
Where the correct accounts are used but each item is shown on the wrong side of account.
Example: Supposed we had purchased goods at 1200/= the double entry of which is Cr. Cash 1200/= and Dr. purchases 1200/=. In error it is entered as Cr. Purchase1200/= and Dr. Cash 1200. The Trial balance will still agree.
5. Application of principle;
Where an item is entered in which wrong class of account.
6. Compensating of figures;
Where errors cancel out each other. If the Sales account was added up to be 600/= too high and the purchases a/c also added up to be 600/= too high, then these two errors would cancels out in the trial balance.
2. ERRORS WHICH AFFECT THE AGREEMENT OF A TRIAL BALANCE RESULT:
(i) Incorrect additions either total too great or too small in any account.
(ii) Entering an item on only one side of the book.
For instance, if the debit entry is made but not the credit entry (once recording only).
(iii) Posting an entry twice in the books of accounts on the same side.
E.g. Dr. Sales 500 and Dr. Cash A/C 500 or vice – versa.
(iv) Failing to post an entry to the trial balance.
E.g. Balance of 100/= From Discount a/c is totally forgotten, not posted to trial balance through an account has been prepared.
(v) Entering one figure on the debit side of the books but another figure on the credit side.
E.g. If 800/= for cash received from K. Usama is entered in the cash book but 8,000/= is entered in respect of it in Usama’s A/c
Is an A/C opened and used in corrections errors which can cause disagreement of the trial balance.
Since errors are discovered in trial balance, so as to prepare final accounts at the end of accounting period to enable work on the trial balance is often transferred to a temporary ledger account called suspense account. Either by debiting or crediting.
EFFECTS OF BOOK-KEEPING ERROR ON PROFIT
Sometime final account are prepared before detection and correction of errors which have been committed in the course of book-keeping for the period.
The trading, profit and loss account drawn up on the basis of erroneous trial balance will them show a wrong gross profit and net profit for the period ending.
Even the balance sheet will reveal a wrong financial position as at the end of the period under review
COMPUTATION OF CORRECT GROSS PROFIT AND NET PROFIT
The following hints should be followed when calculating the correct gross profit and net profit.
1. Errors which direct affecting gross profit.
Are those errors which involve items normally posted to determine net income realized from sales or turnover. Involves items appear in the trading account.
2. Errors direct affecting net profit
Are those errors which are normally posted to the profit and loss account to determine net profit for the period or items appeared in the profit and loss account.
3. Errors involving personal account
Eg real account
HOW TO COMPLETE/CORRECT NET PROFIT FOR THE YEAR
Profit for the year ****
Add: any income undercast *
Any payment overcast * ** ******
Less: any payment undercast *
any income overcast ** ***
corrected profit ***
Show journal entries necessary to correct the following errors:-
(a) A selling of goods 70,000/= to Halima, had been posted to Halimu’s a/c.
(b) The purchase of machine from Lamu for 1,600,000/= had been omitted from the books.
(c) The purchase of office furniture 800,000/= had been posted to office furniture expenses.
(d) A receipt of cash from Halima 88,000/= had been entered in the wrong side of the accounts.
(e) A cheque of 115,000/= paid to Ram had been correctly entered in the cash book but not in Rama’s account.
(f) The purchases A/c has been under cast by 120,000/=
(g) The following accounts have been under cast;
(ii) Discount received………………………2, 000/=
(iii) Return Inwards…………………………3, 000/=
(h) The following accounts had been over added;-
(i) Sales…………………………..11, 000/=
(iii) Carriage inwards………6,000/=
- Open up journal entry account.
- Suspense a/c.
|a) Halima’s a/c Halimu’s a/c (Commission error is now being corrected )||70,000||70,000|
|b) Machine Lamu (Omission of figure is now being corrected )||1,600,000||1,600,000|
|c) Office furniture Office furniture expenses (Application of prince is now being corrected )||800,000||800,000|
|d) Cash Hamim (Being cash received from Hamim)||176,000||176,000|
|e) Ram Suspense (Being error of commission)||115,000||115,000|
|f) Purchases Suspense (Being purchases under cast)||120,000||120,000|
|i. Rent Suspense (Being discount received under cast)||10,000||10,000|
|ii. Suspense Discount received (Being cash paid for goods supplied)||2,000||2,000|
|iii. Return inwards Suspense||3,000||3,000|
|h. (i)Sales Suspense (Being sales over added)||11,000||11,000|
|(ii)Suspense Purchases (Being carriage inwards over added)||5,000||5,000|
|(iii) Suspense Carriage inwards (Being carriage inwards over added)||6,000||6,000|
DR SUSPENSE A/C CR
|Diff in books||246,000||Return Inwards||3,000|
Below are particulars regarding Jones Ogooli’s FinaL A/c? The net profit per accounts is found to be Shs. 154,000.
The balance sheet when drawn up appeared to be as follows:-
Draft balance sheet as at 31/12/1986
|Capital bal. at 1/1/86||1,000,000||Plant and machinery cost||1,010,000|
|Add: Net profit||154,000||Less: Depreciation||60,000|
|CURRENT LIABILITIES:-||Stock 170,000|
|Suspense A/c||9,000||Cash 30,000||250,000|
The following errors were subsequently detected and corrected:-
1. The cash sales entry entered in cash book only Tshs. 6,000/=
2. Drawings (cash) completely omitted from books Tshs. 1,000/=.
3. Rent account under cast Tshs. 2,000/=.
4. Creditor Mr. Burasapaid , but entry in his ledger A/c.
- Open up journal entry account.
- Suspense a/c.
- Statements of corrected net profit