CORRECTION OF ACCOUNTING ERRORS
INTRODUCTION
An error is a mistake, while rectification means correction. Errors may occur at various stages in the accounting process, including:
- When transactions are initially recorded.
- When ledger accounts are being recorded.
- When the trial balance is being prepared.
CLASSIFICATION OF ERRORS
1. Arithmetical errors occur due to mistakes in:
- Adding
- Subtracting
- Multiplying
- Dividing
2. Clerical errors arise from failing to complete the double entry system properly.
Accounting errors are classified into two main types:
- 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:
- Omission of figure(s): This occurs when a transaction is completely omitted from the books.
Example: If goods worth Tshs. 10,000/= were sold to Usama but the transaction was not entered in either the sales account or Usama’s personal account, the trial balance will still balance.
- Commission: This happens when the correct amount is entered but in the wrong personal account.
Example: A sale of 100/= to K. Asaad is entered in the account of B. Asaad. The correct class of account was used; both accounts concerned are personal accounts.
- Original entry:
This error occurs when the original figure is incorrect, yet double entry is still observed using this incorrect figure. For example, sales of 4,500/= goods but an error is made in calculating the sales invoice. If sales were calculated as 4,300/= and credited as Sales and debited to the personal account of the customer, the trial balance will still balance.
- Reversal of entries: This occurs when the correct accounts are used but each item is shown on the wrong side of the account.
Example: Suppose goods were purchased at 1,200/=, the double entry of which is Cr. Cash 1,200/= and Dr. Purchases 1,200/=. In error, it is entered as Cr. Purchases 1,200/= and Dr. Cash 1,200/=. The trial balance will still agree.
- Application of principle: This happens when an item is entered in the wrong class of account.
- Compensating errors: These occur when errors cancel each other out. For example, if the Sales account was added up to be 600/= too high and the Purchases account was also added up to be 600/= too high, these two errors would cancel out in the trial balance.
2. ERRORS WHICH AFFECT THE AGREEMENT OF A TRIAL BALANCE RESULT:
- Incorrect additions, where totals are either too great or too small in any account.
- Entering an item on only one side of the books. For instance, if the debit entry is made but not the credit entry (one-sided recording).
- Posting an entry twice in the books of accounts on the same side. For example, Dr. Sales 500 and Dr. Cash A/C 500 or vice versa.
- Failing to post an entry to the trial balance. For example, a balance of 100/= from Discount A/c is totally forgotten and not posted to the trial balance, even though an account has been prepared.
- Entering one figure on the debit side of the books but another figure on the credit side. For example, if 800/= cash received from K. Usama is entered in the cash book but 8,000/= is entered in Usama’s account.
SUSPENSE ACCOUNT
A suspense account is opened and used to correct errors that cause disagreement in the trial balance.
Since errors are discovered during the preparation of the trial balance, to prepare final accounts at the end of the accounting period, work on the trial balance is often transferred to a temporary ledger account called the suspense account, either by debiting or crediting it.
EFFECTS OF BOOK-KEEPING ERRORS ON PROFIT
Sometimes final accounts are prepared before detection and correction of errors committed during bookkeeping for the period.
The trading, profit and loss account drawn up on the basis of an erroneous trial balance will then show incorrect gross profit and net profit for the period.
Even the balance sheet will reveal an incorrect financial position as at the end of the period under review.
COMPUTATION OF CORRECT GROSS PROFIT AND NET PROFIT
The following guidelines should be followed when calculating the correct gross profit and net profit:
- Errors directly affecting gross profit.
These are errors involving items normally posted to determine net income realized from sales or turnover. They involve items appearing in the trading account.
- Errors directly affecting net profit.
These are errors normally posted to the profit and loss account to determine net profit for the period or items appearing in the profit and loss account.
- Errors involving personal accounts.
For example, errors in real accounts.
HOW TO COMPLETE/CORRECT NET PROFIT FOR THE YEAR
Profit for the year ****
Add: any income undercast *
Add: any payment overcast **
******
Less: any payment undercast *
Less: any income overcast ***
Corrected profit ***
Illustration
Show journal entries necessary to correct the following errors:
- (a) A sale of goods worth 70,000/= to Halima had been posted to Halimu’s account.
- (b) The purchase of a machine from Lamu for 1,600,000/= had been omitted from the books.
- (c) The purchase of office furniture worth 800,000/= had been posted to office furniture expenses.
- (d) A receipt of cash from Halima amounting to 88,000/= had been entered on 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 Ram’s account.
- (f) The purchases account has been undercast by 120,000/=.
- (g) The following accounts have been undercast:
- (i) Rent 10,000/=
- (ii) Discount received 2,000/=
- (iii) Return Inwards 3,000/=
- (h) The following accounts had been over added:
- (i) Sales 11,000/=
- (ii) Purchases 5,000/=
- (iii) Carriage inwards 6,000/=
Requirements:
- Open up journal entry account.
- Suspense account.
JOURNAL ENTRY
| S/N | DETAILS | DEBIT | CREDIT |
|---|---|---|---|
| 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 principle is now being corrected) | 800,000 | 800,000 |
| d) | Cash Halima (Being cash received from Halima) | 176,000 | 176,000 |
| e) | Ram Suspense (Being error of commission) | 115,000 | 115,000 |
| f) | Purchases Suspense (Being purchases undercast) | 120,000 | 120,000 |
| g) i. | Rent Suspense (Being rent undercast) | 10,000 | 10,000 |
| g) ii. | Suspense Discount received (Being discount received undercast) | 2,000 | 2,000 |
| g) iii. | Return inwards Suspense | 3,000 | 3,000 |
| h) i. | Sales Suspense (Being sales over added) | 11,000 | 11,000 |
| h) ii. | Suspense Purchases (Being purchases over added) | 5,000 | 5,000 |
| h) iii. | Suspense Carriage inwards (Being carriage inwards over added) | 6,000 | 6,000 |
DR SUSPENSE A/C CR
| Discount received | 2,000 | Ram | 115,000 |
| Purchases | 5,000 | Purchases | 120,000 |
| Carriage inwards | 6,000 | Rent | 10,000 |
| Difference in books | 246,000 | Return Inwards | 3,000 |
| Sales | 11,000 | 259,000 |
Below are particulars regarding Jones Ogooli’s final account. The net profit per accounts is found to be Shs. 154,000. The balance sheet when drawn up appeared as follows:
Draft Balance Sheet as at 31/12/1986
| LIABILITIES | ASSETS | ||
|---|---|---|---|
| Capital balance at 1/1/86 | 1,000,000 | Plant and machinery cost | 1,010,000 |
| Add: Net profit | 154,000 | Less: Depreciation | 60,000 |
| 1,154,000 | 950,000 | ||
| Less: Drawings | 72,000 | CURRENT ASSETS: | |
| 1,082,000 | Stock | 170,000 | |
| CURRENT LIABILITIES: | Debtors | 50,000 | |
| Creditors | 109,000 | Cash | 250,000 |
| Suspense A/c | 9,000 | ||
| 1,200,000 | 1,200,000 |
The following errors were subsequently detected and corrected:
- The cash sales entry entered in the cash book only was Tshs. 6,000/=.
- Drawings (cash) completely omitted from books amounting to Tshs. 1,000/=.
- Rent account undercast by Tshs. 2,000/=.
- Creditor Mr. Burasa was paid, but the entry in his ledger account was omitted.
Requirements:
- Open up journal entry account.
- Suspense account.
- Statements of corrected net profit.
