Correction of errors

using manual journal

entries
The trial balance, errors and
suspense accounts
• The trial balance is a summarised list of balances
from the ledger accounts extracted at a specific date

• A suspense account arises from errors causing the

TB not to balance

• Any balance on the suspense must be eliminated

before the final accounts can be prepared
ERRORS ON ACCOUNTS
There are two types of errors in accounts:
 Errors that don’t affect the trial balance
 Errors that affect the trial balance

Errors that don’t affect the trial balance

The trial balance produced from the accounts appears to be okay/correct, i.e the debits are the
same as the credits. However, on taking a close check on the balances and transactions posted,
errors may have been made and therefore the balances shown on the trial balance may be
incorrect i.e. under/over stated.
There are 6 main types of errors that don’t affect the trial balance and these are explained as
follows:
a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is not
made e.g. a sales invoice of £400 is not posted in the sales journal therefore no entry is made in
the debtor’s account and the sales account i.e. both debit of £400 in debtor’s account and credit
of £ 400 in the sales account.

The effect of the error is understates both the debtors and the sales.
To correct this error, the transaction is posted in the books by:

Debiting debtors £400

Crediting sales £400
a) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the same
class. Example: a credit sale to T Thompson is posted to L Thompson’s account for an amount
of £ 200. Instead of a debit to T Thompson’s account it is made to L Thompson’s account and
the corresponding credit in the sales account is correct.

Although the debit entry is made into the wrong account, the two accounts are of the same class
i.e. debtors.
To correct this error a transfer is made from L Thompson’s account to T Thompson by:
£

(i) Debit T Thompson a/c 200

(ii) Credit L Thompson a/c 200
a) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different
class e.g. Motor vehicle purchased for £ 400 is posted to the motor vehicle expenses a/c.
(Instead of debiting motor vehicles, we debited motor vehicle expenses a/c and the credit entry in
the cashbook is correct)

The motor vehicles account is a non-current asset, and motor vehicles expenses a/c is an expense
account. Therefore a capital expenditure has been posted as revenue expenditure.

To correct this error a transfer is made from the motor expenses account to the motor vehicles a/c
by:
£
(i) Debit Motor vehicles a/c 400
(ii) Credit Motor expenses a/c 400
a) Complete reversal of entries
A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a debit
is posted as a credit and a credit is posted as a debit. Example: cash drawn from the bank of
£150 for business use is posted as a debit in the bank account and credit in cash in hand.

To correct this error, two entries are made in the relevant accounts:
(i) Correct the error
(ii) Post the transaction correctly

The entries will therefore be as follows:

(i) Debit Cash in hand by £150

Credit bank by £150

To correct the error of £ 150 posted in the wrong sides of these account

(ii) Debit cash by £150

Credit bank by £150
To post the entries correctly
a) Error of Original entry
Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it is
either under/over stated. In some cases, this is known as a transposition error e.g. cash received
from a debtor of £980 is credited/posted to the customer’s account as £890.

To correct this error, the amount understated or overstated is posted to these accounts to reflect the
correct balance. In this case, we will:

£
Debit cash book 90
Credit debtors 90
a) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate the
debits or credits then another error may take place to overstate the debits or credits by the same
amount, hence canceling out each other. E.g. if the balance c/d of the purchases a/c is £3,980 but
shown in the trial balance as £3,890 and another error carried to the trial balance of fixture
amounting to £4,540 instead of £4,450: £
Purchases 3,980
3,890
(90)

£
Fixtures 4,450
(4,540)
90

This type of error is corrected by use of a suspense account.

Errors That Affect The Trial Balance And The Suspense Account
These types of errors are reflected on the trial balance because the debits will not be same as the
credits. The debits may be more than the credits and vice versa.
Examples include:

1. Transaction is posted on one side of the accounts i.e. only a debit entry or a credit entry.
Example cash received from a debtor is debited to the cashbook and no other entry is made in
the account, i.e. no credit entry on the debtor’s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits.
Example a payment to a creditor of £ 300 is credited in the cashbook and also credited in the
creditor’s accounts.
3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit.
Example – cash received from a debtor of £ 450 is debited in the cashbook as £ 450 and
credited as £ 540 in the debtor’s a/c.
4. Error on balances of accounts – i.e. understatement or overstatement of an account balance
due to mathematical errors.
5. Balance on an account is shown on the wrong side of the account when opening the ledger
accounts or when taken up to the trial balance. Example Bal c/d in the cash book for cash at
bank of £ 2000 is shown as a credit i.e. an overdraft, instead of a debit in the trial balance.
The balance may also be brought down as an overdraft instead of a debit balance in the trial
balance.
6. A balance is omitted from the trial balance on the accounts in total.
To correct the above errors, the appropriate or the adjusting entries are made through an account
called a suspense account.
The difference in the accounts is posted to this account and the entries to correct the accounts are
posted here. The balance to be shown on the suspense accounts depends on which side the error
is shown on the trial balance.

If the debits  credits, then an amount is included on the credit side of the trial balance so that the
debits = credits. This is a credit balance and will be taken to the suspense account on the credit
side.
Types of error
Errors where TB still balances Errors where TB does not balance
(suspense account created)

Error of omission Single sided entry

Error of commission Debit ≠ credit

Error of principle Same sided entry

Compensating error Incorrect addition of ledger

Error of original entry Extraction error

Reversal of entries
Suspense accounts
• An account in which debits and credits are held
temporarily pending identification and correction
of errors

• Create a suspense account when:

• the debits and credits of a trial balance do not
agree
• a bookkeeper is not sure where to post one side
of an entry
Example 5.7
A bookkeeper extracted a trial balance on 31 December 2002 that failed to agree by £3,300, a
shortage on the credit side of the trial balance. A suspense account was opened for the
difference.
In January 2003 the following errors made in 2003 were found:

(i) Sales daybook had been undercast by £1,000.

(ii) Sales of £2,500 to J Church had been debited in error to J Chane account.
(iii) Rent account had been undercast by £700.
(iv) Discounts received account had been under cast by £3,000.
(v) The sale of a motor vehicle at book value had been credited in error to Sales account
£3,600.
You are required to:

a) Show the journal entries necessary to correct the errors.

b) Draw up the suspense account after the errors described have been corrected.
c) If the net profit had previously been calculated at£79,000 for the year ended 31
December 2002, show the calculations of the corrected net profit
Example 5.8
Chi Knitwear Ltd is an old fashioned firm with a handwritten set of books. A trial balance is
extracted at the end of each month, and a profit and loss account and balance sheet are computed.
This month, however, the trial balance did not balance, the credits exceeding debits by £1,536.
Your are asked to help and after inspection of the ledgers discover the following errors:

(i) A balance of £87 on a debtor’s account has been omitted from the schedule of debtors,
the total of which was entered as debtors in the trial balance.
(ii) A small piece of machinery purchased for £1,200 had been written off to repairs.
(iii) The recipiets’ side of the cashbook had been under cast by £720.
(iv) The total of one page of the sales daybook had been carried forward as £8,154, whereas
the correct amount was £8,514.
(v) A credit note for £179 received from a supplier had been posted to the wrong side of his
account.
(vi) An electricity bill in the sum of £152, not yet accrued for, is discovered in a filing tray.
(vii) Mr. Smith, whose past debts to the company had been the subject of a provision, at last
paid £731 to clear his account. His personal account has been credited but the cheque has
not yet passed through the cashbook.
Example 5.5
Give the journal entries needed to record the corrections of the following. Narratives are
required.

a) Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use £ 700 had been debited to General Expenses.
c) Private insurance £ 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
e) Cash banked £ 390 had been credited to the bank column and debited to the cash column in
the cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.