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TYPES OF ACCOUNTING ERRORS AND THEIR CORRECTION
A Trial Balance is said to be a statement of proof done arithmetically to prove that proper double was observed in making accounting entries. The assumption is that the Trial balance totals will not agree whenever there is an accounting error. There are several errors in fact which will not affect the agreement of the trial balance totals. This means that there are two basic types of accounting errors:
i Errors which do not affect the Trial balance totals
ii Errors which do affect the trial balance totals
The correction of all accounting errors must be journalized by way of the General Journal.
Errors which do not affect the Trial balance totals
1. Errors of Omission
This is an error that occurs when a transaction is completely omitted from the books of accounts. For example if we bought a motor van Sh 90 000 cash and we neither debit the motor vehicle account nor credit the cash account the trial balance would not be affected and it would still balance.
2. Errors of Principle
This occurs when we enter a transaction in the wrong class of account, but still observe double entry. For example we purchase furniture (fixed asset) worth Sh 200 000 for cash. We debit purchases account instead of debiting the furniture account and crediting the cash account. In such an instance the trial balance would still balance.
3. Errors of Commission
These types of errors occur when the correct amount is entered but in the wrong persons personal account though the account is in the same class of accounts. For example sales of Sh 20 000 sold to
D. Waithaka but posted to P. Waithaka�s account in the sales ledger. The transaction would be as follows.
Dr. P. Waithaka 20 000
Cr. Sales 20 000 The correct entry would have been
Dr. D Waithaka 20 000
Cr sales 20 000
To correct such an error, the following entry will be passed in the books.
Dr. D. Waithaka 20 000
CR. D Waithaka 20 000
This is just a reversing transaction that transfers the amount from P. Waithaka to the correct account of D Waithaka. You will note that the sales entry is no affected by the reversal and since both P. Waithaka and D. Waithaka are in the sales ledger, the trial balance would still balance.
4. Compensating Errors
These are errors that cancel out each other e.g. an error that overstates booth the credits and the debits or an error that understates both the debits and the credits by the same amount. E.g. if If the purchases returns was overstated by shsSh2000 2000 and the sales return overstated by Sh 2000. Since the purchases returns appear on the credit side and the sales returns appear on the debit side of the trial balance, the two would cancel out each other.
To correct the above error
Dr. Purchases returns Sh 2 000
Cr. Sales returns Sh 2 000
Another example would be overstating purchases as well as sales by the same amount; overstating both sides of a particular account by the same amount e.t.c.
5. Errors of Original Entry
These are errors that occur when the original figure is incorrect and yet double entry is still observed using the incorrect figure. The figure could either be understated or overstated.
Example
Purchases worth shs20 000 recorded as Sh 200 000 in both the purchase account and the cash account.
The incorrect entry would appear as follows Dr. Purchases 200 000
Cr. Cash/ bank 200 000
The correct entry should have been
Dr. Purchases account 20 000
CR. Cash/bank 20 000
To correct the error, we make the following entries.
Dr. Cash at bank Sh 180 000
Cr. Purchases Sh 180 000
6. Complete Reversal of Entries
This is an error that occurs when the correct amount is posted in the correct account but in the wrong side of the account. For Example: if we sold goods on credit to D. Kameme worth Sh 100 000 the wrong entry would appear as follows.
Dr. Sales 100 000
Cr. P. Kameme 100 000 The correct entry would have been
Dr P Kameme 200 000
Cr. Sales 200 000
Correcting the above error is done in two stages:
i Canceling the initial recording
ii Recording the correct entry.
This is done as follows:
Dr P. Kameme 100 000
Cr. Sales 100 000
To cancel the initial entry in the accounts
Dr. P Kameme shsSh 100 000
Cr. Sales 100 000
To Record the correct entry
The accounts would appear as follows:
P. Kameme a/c
|
2016 |
Sh |
2016 |
|
Sh |
|
01/1
Sales (to cancel) |
100000 |
01/1
Sales(to cancel) |
|
100000 |
|
01/1
Sales (to enter correct entry) |
100000 |
|
|
|
Sales
|
Sh |
|
|
|
Sh |
|
27/5 |
/5 |
|
P. Kameme a/c(to cancel) |
100000 |
|
|
|
|
P. Kameme a/c(to enter correct entry) |
100000 |
This is a special type of an error of original entry. It occurs when the wrong sequence of individual characters in a figure is entered. Example For exampleentering, entering shsS870 h 870 as shsS h 780. itIt is an error that is very difficult to trace, however if it occurs only on one side of the entry then the difference will be a number divisible by nine and hence easier to trace.
Illustration
Cash sales Sh 9 260 entered as Sh 6 290 on both cash book and sales ledger
The wrong entry would appear as follows.
Dr. Cash Sh 6 290
Cr. Sales Sh 6 290
The correct entry would have been
Dr. Cash Sh 9 260
Cr. Sales Sh 9 260
To correct the above entry
Dr. Cash (9260 - 6290) Sh 2 970
Cr. Sales (9260 - 6290) Sh 2 970
Exercise:
Show the journal entries required to correct the following errors. Entries; narratives must be shown.
1. Commissions received Sh 44 000 had been credited to rent receivable account
2. bank Bank charges Sh 3 850 had been debited to rent account
3. Completely omitted from the books of account is a payment of sundry expenses by cheque Sh 1 150
4. purchase Purchase of fixtures Sh 23 700 had been entered in purchases account
5. Return inwards of Sh 41 650 had been entered on the debit side of the return outwards account
6. A loan from R. Simiyu shsSh 25 000 had 25 000 had been entered on the credit side of capital account
7. Loan interest Sh 2 500 had been debited in the premises account
8. Goods taken for own use shs1 250 had worth Sh 1 250 had been debited to purchases account and credited to drawings account.
Suggested solution:
1 Dr Rent received account 44000
Cr. Commissions received 44000
Correction of an error where commission received was credited to rent received
2 Dr. bank charges a/c 3850
Cr. rent a/c 3850
To correct wrong debit of bank charges in the rent account
3 Dr. Sundry expenses a/c 1150
Cr. Bank a/c 1150
To record omitted payment of sundry expenses
4 Dr. Fixtures 23700
Cr. Purchases a/c 23 700
To correct the error understating the credit balances of the trial balance
5 Dr. Return outwards 41 650
Cr. Return inwards 41 650
To correct entry return inwards in the debit of return outwards a/c
6 Dr Capital account 25 000
Cr. R. Simiyu a/c 25 000
To correctly record loan received from R. Simiyu
7 Dr. Loan interest a/c 2500
Cr. Premises a/c 2500
To correctly record interest on loan
8 Dr Drawings a/c 1250 x 2 2500
Cr. Purchases a/c 1250x2 2500
Note
We double the figures when correcting errors of complete reversal of entries like that in (8) above. This is because if an amount was debited instead of being credited in the same account, a single credit entry would just cancel the initial debit. However the second credit entry will now enter the required credit entry. Instead of showing the two credit entries separately, the amount involved is doubled and a single entry made but with a double value made.
SUSPENSE ACCOUNT
Due to poor double entry or other errors not falling in the category described above, the trial balance may fail to balance. In most cases the error causing this may take long to be identified. Before then the accountant is allowed to open up an account known as the suspense account.
To this account, he assigns the balance equal to the difference between the credit and debit sides of the trial balance to ensure that the trial balance balances. For example if the debit side exceeds the credit side by Sh100 000, suspense account will be assigned a credit balance equal to Sh100 000 thus balancing the trial balance. Later on when the cause of the error is identified, journal entries are passed against the suspense account till its balance is cleared thus eliminating it from the books.
Basically all errors affecting the balancing of the trial balance necessitate the creation of a suspense account. A few of such are discussed below.
Failure to enter a corresponding entry for every debit or credit entry made Making a wrong corresponding entry e.g. if cash sales of Sh 20 000 are made and a debit entry correctly made in the cash book. However the sales account is credited with Sh2 000. This means that the credit side of the trial balance will be understated by Sh 18 000. A suspense account will thus be created and assigned accredit balance of Sh 18 000 to make the trial balance appear balanced awaiting identification and correct of the error.
Once the error is identified then journal entries need to be passed to remove the suspense account as follows:
Dr. Suspense account 18 000
Cr. Sales account 18 000
To correct the error understating the credit balances of the trial balance
Students are however cautioned that the suspense account should not be used to balance the trial balance unless the examiner specifically asks the students to do so.
Illustration 1
Martin is an accountant at Zabiri Ltd. During the year ended 30 June 2014 he prepared a trial balance which did not balance. He posted the difference to the suspense account. He then prepared the financial statement for the year ended 30 June 2014. The net profit for the company was sh.483,840.
Upon investigating the following errors were later discovered:
1. The total of purchases day book had been under cast by sh. 11,200,000
2. The total of the discount column on the debit side of the cash book amounting to sh. 2,240,000 had been posted to the credit of discount received amount.
3. Motor vehicles repairs amounting to sh. 8,512,000 had been posted to the motor vehicle account.
4. A cheque for sh. 4,368,000 received form Barnabas Bundi a debtor had been debited in the cash book but no other entry had been made.
5. The returns outwards had been overcast by sh. 5,600,000.
Required:
i Journal entries to correct the errors
ii Suspense account
iii Statement of corrected net profit
Solution a
i. Journal entries
Journal Entries Dr. 000 Cr. 000
Dr. Purchases Cr. Suspense
The total purchases had been understated error now corrected.
Dr. Discount Received 11,200
2,240
11,200
Dr. Discount Allowed Cr. Suspense
Disc allowed posted in discount received, error now corrected.
Dr. Motor Vehicle Repairs 2,240
8,512
4,480
Cr. Motor Vehicle
Motor Vehicle repairs expense posted to Motor vehicle account.
Dr. Suspense 8,512
4,368
Cr. Barnabas Debtor
Receipt from debtor recorded in the ledge in error. Error of omission now corrected.
Dr. Return outwards 4,368
5,600
Cr. Suspense
To correct return outwards overcast. 5,600
ii. Suspense account
Dr. "000" Cr. "000"
|
11,200 2,240 |
|
11,200
|
|
2,240 8,512 |
|
4,480 |
|
4,368 |
|
8,512 |
|
5,600 |
|
4,368 |
|
|
|
5,600 |
Suspense
account
|
|
|
Shs '000' |
|
Shs '000' |
|
Balance b/d Barnabas |
|
16,912 4,368 1,280 |
Purchases Discount received Returns outwards |
11,200 4,480
5,600 21,280 |
ii.
Statement
of corrected profit
Statement of Corrected Net Profit
|
Net profit before adjustment |
From KES 300
KES 1000
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KES. 300
KES 1500
|
