1. Errors

2. Errors Errors not affecting trial balance agreement
Errors affecting trial balance agreement

3. Errors not affecting trial balance agreement
E.g.
Errors of commission
Errors of principle
Errors of original entry
Errors of omission
Compensating errors
Complete reversal of entries

4. Errors affecting trial balance agreement
Suspense account

5. Examples of account
Correcting entry
Asset
Purchases
Expenses
Returns Inwards
Drawings
Increase – Debit
Decrease - Credit

6. Correcting entry
Liabilities/Capital
Sales
Income
Returns Outwards
Increase – Credit
Decrease – Debit
Examples of account

7. Errors Not Affecting Trial Balance Agreement

8. Errors of Commission
The correct amount is entered but in a wrong personal account

9. Example
A purchase of goods from C.Lee has been posted to the credit side of C.Lai’s account in error, amounting to $500. The correcting entries should be:
Original entry:
Dr Purchase $500
Cr C Lee $500
Wrong entry:
Dr Purchase $500
Cr C Lai $500

10. The journal $ $ C.Lai 500 C.Lee 500
$ $
C.Lai
C.Lee
Purchases entered in wrong personal account, now corrected.

11. C. Lai $ $
C.Lee
Purchases
C. Lee $
C.Lai

12. Errors of Principle
An item is entered in the wrong type of account due to misunderstanding of the nature of the item.

13. Example
Office equipment purchased for $1,000 in cash has been debited to an office expenses account. The correcting entries should be:
Original entry:
Dr Office Equipment $1000
Cr Cash $1000
Wrong entry:
Dr Office Expenses $1000
Cr Cash $1000

14. The journal $ $ Office Equipment 1,000 Office Expenses 1,000
$ $
Office Equipment ,000
Office Expenses ,000
Purchase of office equipment wrongly entered in the office expenses account, now corrected.

15. Office Expenses $ $
Cash ,000
Office Equipment ,000
Office Equipment $
Office Expenses ,000

16. Errors of Original Entry
Wrong original figure is entered in the journals, and hence posted incorrectly to the accounts.

17. Example
A payment of $1,200 to a creditor, M.Wong, has been entered as both a debit and credit as $1,000. The correcting entries should be:
Original entry:
Dr Mr. Wong $1200
Cr Bank $1200
Wrong entry:
Dr Mr. Wong $1000
Cr Bank $1000

18. The journal $ $ M Wong(1200-1000) 200 Bank 200
$ $
M Wong( )
Bank
Payment of $1,200 incorrectly entered as $1,000, now corrected.

19. M. Wong $
Bank ,000
Bank
Bank $
M. Wong ,000
M. Wong

20. Errors of Omission
A transaction has been completely omitted from the accounts.

21. Example
A sale of $400 to John Leung has been completely omitted from the accounts. The correcting entries should be:
Original entry:
Dr John Leung $400
Cr Sales $400
Wrong entry:
No entry

22. The journal $ $ John Leung 400 Sales 400
$ $
John Leung
Sales
A sale of $400 was omitted, now corrected.

23. Sales $
John Leung
John Leung $
Sales

24. Compensating Errors
Debit side errors are equal to credit side errors.

25. Example
The purchases account was undercast by $2,200, and the sales account was also undercast by $2,200. The correcting entries should be:

26. The journal $ $ Purchases 2,200 Sales 2,200
$ $
Purchases ,200
Sales ,200
Purchases and sales accounts were undercast by $2,200, now corrected.

27. Purchases $
Sales ,200
Sales $
Purchases

28. Complete Reversal of Entries
The correct amounts are entered in the wrong sides of the two appropriate accounts.

29. Example
The purchase of goods on credit from M. Lok for $60 was entered on the debit side of M. Lok’s account and the credit side of the purchases account. The correcting entries should be:
Original entry:
Dr Purchase $60
Cr M Lok $60
Wrong entry:
Dr M Lok $60
Cr Purchase $60

30. The journal $ $ Purchases ($60 x 2) 120 M. Lok ($60 x 2) 120
$ $
Purchases ($60 x 2)
M. Lok ($60 x 2)
Purchases from M. Lok incorrectly debited to his account and credited to the purchases account, now corrected.

31. Purchases $ $
M. Lok
M. Lok
M. Lok $ $
Purchases
Purchases

32. Errors Affecting Trial Balance Agreement

33. Errors affecting trial balance agreement may occur when
(i) recording transactions in the accounts:
(1) omitting a debit or credit entry
(2) posting a wrong amount to one of the accounts
(3) recording an entry on the wrong side
E.g. a debit entry entered as a credit or a credit entry as a debit

34. (ii) Balancing of accounts:
Incorrect calculation of a balance
E.g. overcast or undercast
(iii) Drawing up a trial balance:
(1) omitting a balance from the trial balance
(2) incorrectly posting an amount to the trial balance
(3) incorrectly posting a balance to the wrong side of the trial balance

35. Suspense Account
When the trial balance does not agree, the amount of the difference is entered in a suspense account.

36. Trial Balance as at 31 December 1996
$ $
Total balances extracted
Suspense account

37. Suspense Account
1996 $
Dec 31 Difference per trial
balance

38. How To Show a Suspense Account on the Balance Sheet

39. Debit Balance of the Suspense Account

40. T form
Balance Sheet $
Fixed Assets X
Current Assets X
Suspense Account X X

41. Vertical form
Balance Sheet
$ $
Fixed Assets X
Current Assets X
Less Current Liabilities X
Working Capital X
Suspense Account X X

42. Credit Balance of the Suspense Account

43. T form
Balance Sheet $
Capital X
Long-term Liabilities X
Current Liabilities X
Suspense Account X X

44. Vertical form Balance Sheet $ $ Fixed Assets X Current Assets X
$ $
Fixed Assets X
Current Assets X
Less Current Liabilities X
Working Capital X
Suspense Account (X) X

45. Correction of Errors
To correct the errors, students should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.

46. Example
A credit sale of $150 to Mr Chan has been omitted from his account.
Original entry:
Dr Mr Chan $150
Cr Sales $150
Wrong entry:
Dr -
Cr Sales $150
Correct entry:
Dr Mr. Chan $150
Cr Suspense $150

47. Example
A sale to C. Lee for $230 was correctly entered in the sales book but entered in C. Lee’s account as $320.
Original entry:
Dr C Lee $230
Cr Sales $230
Wrong entry:
Dr C Lee $320
Cr Sales $230
Correct entry:
Dr Suspense $90
Cr C Lee $90

48. Example A credit sale of $97 has been credited to H. Cheung’s account.
Original entry:
Dr H Cheung $97
Cr Sales $97
Wrong entry:
Cr H Cheung $97
Cr Sales $97
Correct entry:
Dr H Cheung (97*2) 194
Cr Suspense $194

49. Example Sales day book was overcast by $200. Dr Sales $200
Cr Suspense $200
Correct entry:

50. Example Sales day book was undercast by $40. Dr Suspense $40
Cr Sales $40
Correct entry:

51. Correction of Errors A single entry in the suspense account.
This occurs when errors are made in extracting balances, rather than in the recording phase.

52. Example
The total of the sales account of $1,500 has been omitted from the trial balance.
Correct entry:
Dr Suspense $1500

53. Example
The total of the sales account of $1,500 has been extracted as $1300 in the trial balance.
Correct entry:
Dr Suspense $200

54. Example
The total of the sales account of $1,500 has been extracted to the debit column of the trial balance.
Correct entry:
Dr Suspense (1500*2) $3000

55. Correction of Errors and Effects on the Profit and Balance Sheet
For errors affecting the final accounts (I.e. profit calculation and balances carried down)
Corrections are also required for the profit/loss and balances in the balance sheet.

56. Trading account: Sales - Cost of good sold = Gross Profit
Sales - (Opening stock + Purchases – Closing stock) = Gross Profit
Sales - Opening stock - Purchases + Closing stock = Gross Profit

57. Opening stock increase Dr. Stock Decrease in Net Profit
Sale increase
Cr. Sales
Increase in Net Profit
Opening stock increase
Dr. Stock
Decrease in Net Profit
Purchases increase
Dr. Purchases
Closing stock increase
1st order
3rd order
2nd order

58. Profit and loss account:
Gross Profit + Income (e.g. Rent received) – Expenses (e.g. Motor expenses) = Net Profit
Income increase
Cr. Income
Increase in Net Profit
Expenses Increase
Dr. Expenses
Decrease in Net Profit
1st order
2nd order
3rd order

59. Action required on the profit Action required on the balance sheet
Example of errors
Action required on the profit
Action required on the balance sheet
Purchases undercast
Subtract -
Purchases overcast
Add
Sales undercast
Sales overcast
Income undercast
Income overcast
Expenses undercast
Expenses overcast

60. Action required on the profit Action required on the balance sheet
Example of errors
Action required on the profit
Action required on the balance sheet
Opening stock undervalued
Subtract -
Opening stock overvalued
Add
Closing stock undervalued
Increase closing stock
Closing stock overvalued
Decrease closing stock

61. Action required on the profit Action required on the balance sheet
Example of errors
Action required on the profit
Action required on the balance sheet
Prepayments of expenses omitted
Add
Increase prepayments (current assets)
Accruals of expenses omitted
Subtract
Increase accruals (current liabilities)
Fixed/current assets undervalued -
Increase fixed/ current asset
Liabilities understated
Increase liabilities