Accountancy Accountancy As Level(Form Five) Accountancy Notes Form Five (As Level) History Notes

ACCOUNTANCY ACCOUNTANCY As LEVEL(FORM FIVE) – CORRECTION OF ACCOUNTING ERRORS

ecolebooks.com


CORRECTION OF ACCOUNTING ERRORS

INTRODUCTION
Error-Mistake
Rectification-Correction
Errors may occur
1.While the transactions are initially recorded.
2.While the ledge account are being recorded.
3.While the trial balance is bean prepared.
CLASSIFICATION OF ERRORS
1.Arithmetical error
Error occur due to
a) Adding
b) Subtracting
c) Multiplying
d) Dividing
2.Clerical error
These are errors which arises due to falling to complete double entry system.

The Accounting errors are classified into two types which are;
  • 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:-
1. Omission of figure(s); It is among the errors in which it occurs when a transaction is completely omitted from the books.
Example: If we sold Tshs. 10,000/= goods to Usama but did not enter it in either sales or Usama’s personal account, the trial balance will still balance.
2. Commission; This is where the correct amount is entered but in the wrong personal account.
Example: where a sale of 100/= to K. Asaad is entered in the account of B. Asaad . It will be noted that the correct class of account was used; both the account concerned being personal accounts.
3. Original entry:
This error occurs when the original figure is incorrect, yet double entry is still observed using this incorrect figure. An instance of this could be where there were sales of 4500/= goods but an error is made in calculating the sales Invoice. If sales was calculated as 4300/= and credited as Sales and debited to the personal account of the customer, the customer, the trial balance will still balance.
4. Reversal of entries;
Where the correct accounts are used but each item is shown on the wrong side of account.
Example: Supposed we had purchased goods at 1200/= the double entry of which is Cr. Cash 1200/= and Dr. purchases 1200/=. In error it is entered as Cr. Purchase1200/= and Dr. Cash 1200. The Trial balance will still agree.

5. Application of principle;
Where an item is entered in which wrong class of account.

6. Compensating of figures;

Where errors cancel out each other. If the Sales account was added up to be 600/= too high and the purchases a/c also added up to be 600/= too high, then these two errors would cancels out in the trial balance.


2.ERRORS WHICH AFFECT THE AGREEMENT OF A TRIAL BALANCE RESULT:
(i) Incorrect additions either total too great or too small in any account.
(ii) Entering an item on only one side of the book.
For instance, if the debit entry is made but not the credit entry (once recording only).
(iii) Posting an entry twice in the books of accounts on the same side.
E.g. Dr. Sales 500 and Dr. Cash A/C 500 or vice – versa.
(iv) Failing to post an entry to the trial balance.
E.g. Balance of 100/= From Discount a/c is totally forgotten, not posted to trial balance through an account has been prepared.
(v) Entering one figure on the debit side of the books but another figure on the credit side.
E.g. If 800/= for cash received from K. Usama is entered in the cash book but 8,000/= is entered in respect of it in Usama’s A/c

SUSPENSE ACCOUNT
Is an A/C opened and used in corrections errors which can cause disagreement of the trial balance.
Since errors are discovered in trial balance, so as to prepare final accounts at the end of accounting period to enable work on the trial balance is often transferred to a temporary ledger account called suspense account. Either by debiting or crediting.
EFFECTS OF BOOK-KEEPING ERROR ON PROFIT
Sometime final account are prepared before detection and correction of errors which have been committed in the course of book-keeping for the period.
The trading, profit and loss account drawn up on the basis of erroneous trial balance will them show a wrong gross profit and net profit for the period ending.
Even the balance sheet will reveal a wrong financial position as at the end of the period under review
COMPUTATION OF CORRECT GROSS PROFIT AND NET PROFIT
The following hints should be followed when calculating the correct gross profit and net profit.
  1. Errors which direct affecting gross profit.
Are those errors which involve items normally posted to determine net income realized from sales or turnover. Involves items appear in the trading account.
  1. Errors direct affecting net profit
Are those errors which are normally posted to the profit and loss account to determine net profit for the period or items appeared in the profit and loss account.
  1. Errors involving personal account
Eg real account
HOW TO COMPLETE/CORRECT NET PROFIT FOR THE YEAR
Profit for the year ****
Add:any income undercast *
Any payment overcast * **
******
Less: any payment undercast *
any income overcast ** ***
corrected profit ***
Illustration;-
Show journal entries necessary to correct the following errors:-
(a) A selling of goods 70,000/= to Halima, had been posted to Halimu’s a/c.
(b) The purchase of machine from Lamu for 1,600,000/= had been omitted from the books.
(c) The purchase of office furniture 800,000/= had been posted to office furniture expenses.
(d) A receipt of cash from Halima 88,000/= had been entered in 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 Rama’s account.
(f) The purchases A/c has been under cast by 120,000/=
(g) The following accounts have been under cast;
(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 a/c.
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 prince is now being corrected )
800,000
800,000
d) Cash
Hamim
(Being cash received from Hamim)
176,000
176,000
e) Ram
Suspense
(Being error of commission)
115,000
115,000
f) Purchases
Suspense
(Being purchases under cast)
120,000
120,000
i. Rent
Suspense
(Being discount received under cast)
10,000
10,000
ii. Suspense
Discount received
(Being cash paid for goods supplied)
2,000
2,000
iii. Return inwards
Suspense
3,000
3,000
h. (i)Sales
Suspense
(Being sales over added)
11,000
11,000
(ii)Suspense
Purchases
(Being carriage inwards over added)
5,000
5,000
(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
Diff in books
246,000
Return Inwards
3,000
Sales
11,000
259,000
259,000
Below are particulars regarding Jones Ogooli’s FinaL A/c? The net profit per accounts is found to be Shs. 154,000. The balance sheet when drawn up appeared to be as follows:-

Exercise
Draft balance sheet as at 31/12/1986
LIABILITIES
ASSETS
Tshs:
Tshs:
Capital bal. 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
1,082,000
CURRENT ASSETS:
CURRENT LIABILITIES:-
Stock 170,000
Creditors
109,000
Debtors 50,000
Suspense A/c
9,000
Cash 30,000
250,000
12,000,000
12,000,000


The following errors were subsequently detected and corrected:-
1. The cash sales entry entered in cash book only Tshs. 6,000/=
2. Drawings (cash) completely omitted from books Tshs. 1,000/=.
3. Rent account under cast Tshs. 2,000/=.
4. Creditor Mr. Burasa paid , but entry in his ledger A/c.
Requirements:

  • Open up journal entry account.
  • Suspense a/c.
  • Statements of corrected net profit

ecolebooks.com

Some Contents on our website are localized for eg. Local languages, History, Government, and Civics studies. If you find contents not in your syllabus/curriculum, Please Go to Ecolebooks V2 or use Google Search to search for more relevant contents.