Unit 4C

CORRECTION OF CORRECTION OF ERRORSERRORS

Errors not revealed by the Trial Balance

The Trial Balance will not reveal any errors The Trial Balance will not reveal any errors which have been made in which have been made in bothboth accounts accounts involved in the double entry or where the involved in the double entry or where the same error is made in a debit and a credit same error is made in a debit and a credit accountaccount

The Trial Balance will balance but it is The Trial Balance will balance but it is concealing errors which have been madeconcealing errors which have been made

Errors not revealed by the Trial BalanceWhen a Trial Balance balances it does not mean there are no mistakes When a Trial Balance balances it does not mean there are no mistakes A document may have been misplaced and the transaction was never A document may have been misplaced and the transaction was never

entered at allentered at allThis is known as an error of This is known as an error of OMISSIONOMISSION ie it was missed out ie it was missed out

completely completely To correct an error of OMISSION simply enter the transaction in the To correct an error of OMISSION simply enter the transaction in the

ledger as you should have done ledger as you should have done Example – An invoice from T Brown for £100 of goods and £17.50 Example – An invoice from T Brown for £100 of goods and £17.50

VAT was omitted from the booksVAT was omitted from the booksSolution – Solution – Debit Purchases £100, Debit VAT £17.50 Debit Purchases £100, Debit VAT £17.50

Credit T Brown £117.50Credit T Brown £117.50

Another error not revealed by the Trial Balance

A Trial Balance will still balance even when you made entries A Trial Balance will still balance even when you made entries in the wrong customer’s accountin the wrong customer’s account

This is an error of This is an error of COMMISSIONCOMMISSION

Example – P Smith paid us a cheque for £200 Example – P Smith paid us a cheque for £200 This was entered in B Smith’s account by mistakeThis was entered in B Smith’s account by mistake

Solution – Solution – Credit P Smith A/c £200Credit P Smith A/c £200 (as you should have done) (as you should have done) and and Debit B Smith A/c £200Debit B Smith A/c £200 (to take out the error in B (to take out the error in B Smith’s account)Smith’s account)

Another error not revealed by the Trial Balance

When you make an entry in the wrong CLASS of When you make an entry in the wrong CLASS of account this is an error of account this is an error of PRINCIPLEPRINCIPLE

Example – The purchase of spare parts for Motor Example – The purchase of spare parts for Motor Vehicles was entered in the Motor Vehicles Account Vehicles was entered in the Motor Vehicles Account instead of Motor Vehicle Expenses Accountinstead of Motor Vehicle Expenses Account

Solution – Solution – Credit the Motor Vehicles A/cCredit the Motor Vehicles A/c (to remove (to remove it) and it) and Debit the Motor Vehicle Expenses A/cDebit the Motor Vehicle Expenses A/c (to enter where it belongs) (to enter where it belongs)

Another error not revealed by the Trial Balance

Two wrongs don’t make a right so when 2 Two wrongs don’t make a right so when 2 separate errors cancel each other out, the separate errors cancel each other out, the Trial Balance will balance but the errors need Trial Balance will balance but the errors need to be sorted. to be sorted.

These are referred to as These are referred to as COMPENSATINGCOMPENSATING errors.errors.

Example – Both Purchases and Sales A/c s Example – Both Purchases and Sales A/c s were overstated/overcast/overadded by £500were overstated/overcast/overadded by £500

Solution – Solution – Credit Purchases A/c £500 and Credit Purchases A/c £500 and Debit Sales A/c £500Debit Sales A/c £500 (this will restore both (this will restore both balances to the correct figure)balances to the correct figure)

Another error not revealed by the Trial Balance

When the wrong figure was taken from the When the wrong figure was taken from the document and entered throughout the document and entered throughout the accounts, the Trial Balance will still balanceaccounts, the Trial Balance will still balance

This is an error of This is an error of ORIGINAL ENTRYORIGINAL ENTRYExample – A cheque from ABC Co for £200 Example – A cheque from ABC Co for £200

was entered throughout as £20was entered throughout as £20Solution – Solution – Debit Bank A/c £180 and Credit Debit Bank A/c £180 and Credit

ABC Co A/c £180ABC Co A/c £180 (this restores both (this restores both accounts to the correct value)accounts to the correct value)

Another error not revealed by the Trial Balance

When the correct accounts are used but the When the correct accounts are used but the double entry in them is the wrong way rounddouble entry in them is the wrong way round

This is known as a This is known as a COMPLETE REVERSALCOMPLETE REVERSAL

Example – Wages of £300 paid by cheque was Example – Wages of £300 paid by cheque was Debited in the bank and Credited in Wages Debited in the bank and Credited in Wages

Solution – Solution – Debit Wages A/c £600Debit Wages A/c £600 (£300 to undo (£300 to undo the wrong credit entry and £300 to enter the wrong credit entry and £300 to enter correctly) correctly) and Credit Bank A/c £600and Credit Bank A/c £600 (£300 to (£300 to removed wrong debit entry and £300 to enter removed wrong debit entry and £300 to enter correctly)correctly)

Now - Errors revealed by the Trial Balance

Errors which cause the Trial Balance to fail to Errors which cause the Trial Balance to fail to balance are errors which affect only balance are errors which affect only oneone account involved in the double entry account involved in the double entry

We need to make use of an extra ledger We need to make use of an extra ledger account called a account called a Suspense AccountSuspense Account in order in order to correct these types of errorsto correct these types of errors

Errors revealed by the Trial Balance

When you cannot get the Trial Balance totals When you cannot get the Trial Balance totals to agree:to agree:

Make an entry called ‘Make an entry called ‘Suspense Account’Suspense Account’ in in the Trial Balance and enter the amount in the Trial Balance and enter the amount in whichever column makes the totals agreewhichever column makes the totals agree

Now open up a Suspense Account in the Now open up a Suspense Account in the ledger for that amountledger for that amount

When the errors are found and corrected, the When the errors are found and corrected, the Suspense Account balance will be reduced Suspense Account balance will be reduced to zeroto zero

See the following example for how it worksSee the following example for how it works

Using the Suspense Account

E COHAN'S TRIAL BALANCE AS AT 31 MARCH 2006Debit Credit

Capital at 1 April 2005 8920Motor Vehicles 22,500Sales 93000Purchases 50500Heating and Lighting 2000Wages 12050Rent and Rates 3800Bank 4275Debtors 9300Creditors 4000VAT 80

104425 106000Suspense Account 1575

106000

E COHAN’S LEDGER

Suspense Account

Dr Cr Bal Balance 1575 1575 Dr

Using the Suspense AccountThe following are then discovered:

Rent £760 was entered in Bank A/c but not in Rent & Rates A/c

E COHAN’S LEDGER

Suspense Account

Details Dr Cr Bal

Balance 1575(Dr)

Solution - Debit Rent and Rates A/c and

Rent and Rates A/c 760 815(Dr)

Using the Suspense Account

Invoice for £500 sent to A Black had been omitted Invoice for £500 sent to A Black had been omitted from Sales A/c onlyfrom Sales A/c only

Solution – Credit Sales A/c £500 and

E COHAN’S LEDGER

Suspense Account

Details Dr Cr Bal

Balance 1575 1575(Dr)Rent and Rates A/c 760 815(Dr)Sales A/c 500 1315 (Dr)

Using the Suspense Account

Wages of £295 was posted to Wages A/c as £925Wages of £295 was posted to Wages A/c as £925

Solution – Credit Wages A/c £630 and

E COHAN’S LEDGER

Suspense Account

Details Dr Cr Bal

Balance 1575 1575(Dr)Rent and Rates A/c 760 815(Dr)Sales A/c 500 1315(Dr) Wages A/c 630 1945(Dr)

Using the Suspense AccountA second hand vehicle purchased for £1945 was correctA second hand vehicle purchased for £1945 was correctin the Bank A/c but not posted to Motor Vehicles A/cin the Bank A/c but not posted to Motor Vehicles A/cSolution – Debit Motor Vehicles A/c and

E COHAN’S LEDGER

Suspense Account

Details Dr Cr Bal

Balance 1575 1575(Dr)Rent and Rates A/c 760 815(Dr)Sales A/c 500 1315(Dr)Wages A/c 630 1945(Dr)Motor Vehicles A/c 1945 0