Acc week 10

Week 10

CORRECTION OF ERRORS

AND SUSPENSE ACCOUNT

• At the conclusion of this lecture, you should have an appreciation of:

Identify types of errors in a Trial Balance

Explain ways to correct the errors

Learning Objectives

Errors not affecting trial balance agreement After you have studied this chapter, you should be able to: • correct all errors which do not affect trial balance totals

being equal • distinguish between the different kinds of errors that may

arise

Suspense accounts and errors After you have studied this chapter, you should be able to: • explain why a suspense account may be used • create a suspense account in order to balance the trial

balance • correct errors using a suspense account • recalculate profits after errors have been corrected • explain why using a suspense account is generally

inappropriate

Learning Objectives

Recap:Analyzing

and Recording

Process

Analyze each transaction and event form source

documents

Record relevant transactions and events in a journal

Post journal information to ledger accounts

Prepare and analyze the trial balance

DISCOVER ERROR!!!

Errors

Most errors are found after preparing the trial balance. Errors cannot be crossed out or erased.

If there are errors, the trial balance will not agree.

But there are some errors which will not affect the agreement of the trial balance totals.

Steps in Analyzing and Correcting Errors

1. Determine the correct journal entry and the appropriate debits and credits.

2. Analyze the original errors journal entry and determine all the debits and credits that were recorded.

3. Preparing the correcting entries.3rd Step

2nd Step

1st Step

Errors Revealed by Trial Balance

1. Errors in calculation – Miscalculation of the trial balance totals or the net account balances.

2. Errors of omission of one entry – Omission of either the debit or credit entry of a transaction.

3. Posting to the wrong side of an account.4. Errors in amount – debit entry of a transaction

differs in amount with the credit entry.

Note: Suspense account is opened to take care of errors which have caused an imbalance

in the Trial Balance.

Errors NOT Revealed by Trial Balance

1. Errors of omission – A transaction is completely omitted from the books.

2. Errors of commission – An entry posted at the correct amount but to the wrong person’s account.

3. Errors of principle – An entry is made in the wrong class of account.

4. Complete reversal of entries – An account that should be debited is credited and vice versa.

5. Compensating errors – where errors cancel each other out.

6. Errors of original entry – The original figure incorrectly entered although the correct double-entry principle has been observed.

CORRECTION OF ERRORS- Errors of Omission

When a transaction has been completely omitted from the books, it can be corrected by simply making a double-entry to record the transaction.

Correct entry: Dr Rent Account Cr

Cash RM1,600

Dr Cash Account Cr

Rent RM1,600

EXAMPLE A cash payment of RM 1,600 for rent has been omitted from the books.

1st Step

2nd Step

3rd Step

Error: Dr Rent Account Cr

Cash

Dr Cash Account Cr

Rent

Correction: Dr Rent Account Cr

Cash RM 1,600

Dr Cash Account Cr

Rent RM 1,600


- Errors of OmissionThe journal entry is as follows:

General Journal

Particulars Dr (RM)

Cr (RM)

Actual: Rent 1,600

Cash 1,600

Error: Rent 0

Cash 0

Correction:

Rent 1,600

Cash 1,600

Being correction of error – payment for rent omitted from books

1st Step

2nd Step

3rd Step

CORRECTION OF ERRORS- Errors of Commission

Correct entry: Dr Debtor-Folin Brother Cr

Sales RM 150

Dr Sales Cr

Debtor-Folin Brother RM 150

1st Step

2nd Step

3rd Step

Error: Dr Debtor- Lin Associates Cr

Sales RM 150

Dr Sales Cr

Debtor- Lin Associates RM 150

Correction:Dr Debtor- Folin Brother Cr

Debtor- Lin Associates RM 150

Dr Debtor- Lin Associates Cr

Debtor- Folin Brother RM 150

An entry has been posted to the wrong account of the same category.

X

EXAMPLEA sale of RM150 to Folin Brothers has been posted to Lin Associates.

√


- Errors of CommissionThe journal entry is as follows:

General Journal

Particulars Dr (RM)

Cr (RM)

Actual: Folin Brother 150

Sales 150

Errors: Lin Associates 150

Sales 150

Correction:

Folin Brother 150

Lin Associates 150

Being correction of error – Lin Associates wrongly debited

1st Step

2nd Step

3rd Step

√X

Correct entry: Dr Repair expense Cr

Cash/Acct. payable RM 1,000

Dr Cash / Account payable Cr

Repair RM 1,000

1st Step

2nd Step

3rd Step

Error: Dr Vehicle Account Cr

Cash/acct payable RM 1,000

Dr Cash/ account payable Cr

Vehicle RM 1,000

Correction:Dr Repair expense Cr

Vehicle RM 1,000

Dr Vehicle Cr

Repair RM 1,000

X

√

CORRECTION OF ERRORS- Errors of Principle

An entry is posted to an account of a different category e.g. an expense is recorded as an asset.

EXAMPLERepairs to vehicles amounting to RM 1,000 has been posted to Vehicles Account.


- Errors of PrincipleThe journal entry is as follows:

General Journal

Particulars Dr (RM)

Cr (RM)

Actual: Repair 1,000

Cash/Accounts payable

1,000

Errors: Vehicle 1,000

Cash/Accounts payable

1,000

Correction:

Repair 1,000

Vehicle 1,000

Being correction of error – repairs to vehicles posted to Vehicles Account

1st Step

2nd Step

3rd Step

√X

Correct entry: Dr Purchases Cr

Paper Mfg Ltd RM 665

Dr Paper Manufacturers Ltd Cr

Purchases RM 665

1st Step

2nd Step

3rd Step

Error: Dr Purchases Cr

Paper Mfg Ltd RM 656


Purchases RM 656

Correction:Dr Purchases Cr

Paper Mfg Ltd RM 9


Repair RM 9

CORRECTION OF ERRORS- Errors of Original Entry

A wrong amount is recorded in a book of original entry or a document such as an invoice and subsequently posted to the ledger accounts

EXAMPLEA purchase of RM665 from Paper Manufacturers Ltd has been entered in the Purchases Journal and posted to the ledger as RM656.


- Errors of Original EntryThe journal entry is as follows:

General Journal

Particulars Dr (RM)

Cr (RM)

Actual: Purchases 665

Paper Manufacturers Ltd

665

Errors: Purchases 656


656

Correction:

Purchases 9


9

Being correction of error – purchases understated by RM 9

1st Step

2nd Step

3rd Step

1st Step

2nd Step

3rd Step

CorrectionDr Rent Revenue Account Cr

Cash RM350

Dr Wages Account Cr

Cash RM 600

CORRECTION OF ERRORS- Compensating Errors

EXAMPLERent revenue account is overcast by RM10, so as the Wages Account..

An error on the debit side is compensated by an error of equal amount on the credit side.

Wages RM10

Rent revenue RM10



General Journal

Particulars Dr (RM)

Cr (RM)

Actual:

Errors:

Correction:

Rent revenue 10

Wages 10

Being correction of error – rent received and wages paid overstated by $10 each

1st Step

2nd Step

3rd Step

Correct entry: Dr Martin Cr

Cash RM 700

Dr Cash Cr

Martin RM 700

1st Step

2nd Step

3rd Step

Error: Dr Cash Cr

Martin RM 700

Dr Martin Cr

Cash RM 700

Correction: Dr Martin Cr

Cash RM1,400

Dr Cash Cr

Martin RM 1,400

X

√

CORRECTION OF ERRORS - Complete Reversal of

EntriesWhen recording a transaction, the debit entry and the credit entry are reversed.

EXAMPLEA payment of RM 700 to a creditor, Martin, was debited to the Cash account and credited to Martin’s Account.



General Journal

Particulars Dr (RM)

Cr (RM)

Actual: Martin 700

Cash 700

Errors: Cash 700

Martin 700

Correction:

Martin 1400

Cash 1400

Being correction of error – payment to Martin debited to Cash Account and credited to Martin’s account

1st Step

2nd Step

3rd Step

XX

Lecture Exercise 1

Record the entries needed in the journal to correct the following errors. Narratives are not required:

(a) Motor expenses of RM56 entered incorrectly in the Motor Vehicles account.

(b) Insurance RM98 paid by cash should have been entered as RM89.

(c) Sale of goods for RM375 to S Lin entered into the account of S Lim.

(d) Private withdrawal of RM150 cash had been debited to Sundry expenses account

(e) Returns outwards of RM75 had been credited to Returns inwards by mistake.

(f) Purchase of stock on credit from D Wing for RM115 had been completely omitted.

BREAK

CORRECTION OF ERRORS- Suspense Account

• A Suspense Account is opened to take care of errors which have caused an imbalance in the Trial Balance.

• When they are discovered, they have to be corrected by a double-entry, one in the Suspense Account and the other in the account concerned.


EXAMPLE• The credit side of a Trial Balance is short of

RM100.• A Suspense Account is temporarily opened. • The difference between the two sides in the

Trial Balance is entered in this account.

Trial Balance as at 31 December 2002Dr (RM) Cr (RM)

Totals 95,600 95,500

Suspense Account 100

95,600 95,600


• The Suspense Account will have a credit balance when the credit total in the Trial Balance is short and a debit balance when the debit total is short.

Dr Suspense Account Cr

Dec 31 Difference in books RM100

Errors Affecting TB Agreement and their

Correction•Errors which cause an imbalance in the Trial

Balance affect only one side of an account.•This class of errors requires only one entry,

either on the DR or CR side, to correct them. •The other entry has to be made in the

Suspense Account, thus adhering to the double-entry principle.


CorrectionEXAMPLE•A sale of RM80 to Linda has been credited to

Sales Account but omitted from Linda’s account.

•The debit side of the Trial Balance was later found to have a deficiency of RM80.

Dr Sales Account Cr

Linda RM80


Difference in books RM80


Correction

Dr Linda Cr



To correct the error...

Suspense Account RM80

Linda RM80

The journal entry is as follows:

General Journal

Date Particulars Dr ($) Cr ($)

Linda 80

Suspense Account 80

Being correction of error – amount not posted to Linda’s account


Correction

.

Correction of an Error Requiring More Than Two

EntriesEXAMPLE• Returns outwards RM100 to Samy has been

correctly entered in Samy’s account but wrongly debited to Purchases Account.

Dr Purchases Account Cr

Samy RM100

Dr Returns Outwards Account Cr





Purchases RM100Return outwards RM100

The journal entry is as follows:

General Journal

Date

Particulars Dr ($) Cr ($)

Suspense Account 200

Purchases 100

Returns Outwards 100

Being correction of error – returns outwards wrongly posted to Purchases Account

Correction of an Error Requiring More Than Two

Entries

Lecture Exercise 2

The following errors were made:i. $78 cash paid for stationery was entered in

the Stationery Account and the Cash Account as $87.

ii. $400 paid for repairs for machinery was debited to Machinery Account.

iii. Sales Account and Purchases Account were overcast by $300 each.

iv. Commission received $1,500 was wrongly debited to the Commission Revenue Account and credited to the Cash Account.

What entries should be made to correct these errors?

Lecture Exercise 3The debit total in the Trial Balance exceeded the credit total by

RM32. On checking the books, the following errors were found:

i. Rent received, RM400 had been recorded on the payment side of the Cash Book and debited to the Rent Expenses Account.

ii. Goods amounting to RM70, returned to Alex, had been treated as sales. The amount was debited to the account of a debtor, B. Fowler and credited to the Sales Account.

iii.A cheque of RM51 received from K. Jack had been debited in error to R. Jackson’s account. The entry in the Bank Account was correct.

iv. A purchase of equipment, paid by a cheque of RM1,100, was entered as RM1,000 in the books.

v. The remainder of the difference in the books was due to an error in over casting the Sales Journal.

Show how these errors could be corrected.

Lecture Exercise 4You have extracted a trial balance on 31 December 2006

which failed to agree by RM350, a shortage on the debit side of the trial balance. A suspense account was opened for the difference. The following errors were later found:

– The purchases daybook had been undercast by RM200.

– The insurance account had been undercast by RM50.– Sale of equipment of RM400 had been credited in error

to the Sales account. – Sales account had been overcast by RM175– Discounts received had been undercast by RM75

You are required to:(a) Show the journal entries necessary to correct the errors.(b) Draw up the suspense account after the errors have been

corrected

Business

Acc week 10