Topic 7 - Correction of Errors

Correction of
TOPIC
errors
7 100 Shares
Errors???
$1 par value
Reference: Chapter 2 of the textbook

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Learning
Learning Objectives
Objectives
 Identify types of errors in a Trial Balance
 Explain ways to correct the errors
 Explain ways to correct errors that require
more than two entries
Recap:
Recap:
Analyzing
Analyzing and
and Recording
Recording Process
Process
Analyze each transaction and Record relevant transactions

event form source documents and events in a journal
DISCOVER
ERROR!!!
Prepare and analyze Post journal information

the trial balance to ledger accounts
ERRORS
ERRORS
• Are omissions and misstatements for one or more

periods.
• Errors include:
1. result from mathematical mistakes

2. mistakes in applying accounting principles and
policies
3. oversights or misinterpretations of facts
4. fraud.
Types
Types of
of Errors
Errors
1. Errors of omission
2. Errors of commission
3. Errors of principles
4. Errors of original entry
5. Complete reversal of entries
Types
Types of
of Errors
Errors
A trial balance may be unequal because:
 Errors in account balances
• Incorrect addition of total balances in account,
• debit entry mistakenly recorded in credit column, or vice
versa
 Errors in posting from journal to ledger

• Omit a debit or credit posting
 Errors in trial balance preparation

• Incorrect addition of the trial balance column
• Omit a debit or credit item
Error
Error of
of Omission
Omission
 Where a transaction completely omitted from the books (record).
 There is no effect on balance for the trial balance because none
debit and credit items are recorded.
 Example: Ahmad sold an item by cash to Mila at the price of RM
2000. If Ahmad did not enter the transaction either the sales or
cash account, the trial balance will be remain the same.
 Correction needed: Enter the sale transaction in the accounting
record.
Dt Cash 2000
Ct Sales 2000
Error
Error of
of Commission
Commission
- Correct amount is entered but in the wrong person’s account.
- Example: A sale of RM1,500 to Ahmad is erroneously entered in
the account of Ahmed. Ahmad and Ahmed are your debtors.
Error: Suppose to be:
Dt Ahmed (a/r) 1,500 Dt Ahmad (a/r) 1,500
Ct Sales 1,500 Ct Sales 1,500
- Correction needed: Cancel out Ahmed’s account and entered to

Ahmad’s account.
DtAhmad 1,500 (correct account)
Ct Ahmed 1,500 (cancellation)
Error
Error of
of Principle
Principle
 Happens when an item is entered in the wrong class
of account
• E.g. if a fixed asset such as vehicle is debited to an
expenses account such as vehicle repair expense
account.
 Example: Farid purchased a machine RM 10,000.

His account’s clerk incorrectly debited to Purchases
account instead of being debited to Machinery
account.
Error
Error of
of Principle…cont
Principle…cont
 Calculation example: Farid purchased a machine
RM 10,000. His account’s clerk incorrectly debited the purchase to
purchases account instead of being debited to Machinery account.
 Error: Suppose to be:

Dt Purchases 10K Dt Machinery 10K
Ct A/P / Cash 10K Ct A/P / Cash 10K
-Purchases overstated- Machinery understated
Correction needed:
Dt Machinery 10,000
Ct Purchases 10,000
(cancellation of purchases account)
Errors
Errors of
of Original
Original Entry
Entry
 Happens when the original figure is incorrect.
 For instance, sales of RM2,020 were done but

the calculation of sales invoice were wrong. If it
were calculated as RM2,000 and RM2,000 were
credited as sales and RM2,000 were debited to
account receivables, the trial balance would still
be ‘balance’ but wrong.
Errors
Errors of
of Original
Original Entry…cont
Entry…cont
 Correction needed:
 Calculate the different:
RM2,020 – RM 2,000 = RM20 of sales
understated. This also means that the account
receivables value is also understated.
Journal entry to correct:

Dt Account receivables 20
Ct Sales 20
Complete
Complete Reversal
Reversal of
of Entries
Entries
 Happens where the correct accounts are used
but each items is shown on the wrong side of the
account.
 Example: A payment of cash RM 1000 to

Mr.Asraf (account payable) was entered on the
debit side of cash account and credited to
Mr.Asraf account.
Complete
Complete Reversal
Reversal of
of Entries…
Entries…
 Error: Suppose to be:
Dt Cash 1000 Dt A/Payable 1000
Ct A/Payable 1000 Ct Cash 1000
This means that the cash debit side is overstated to RM2,000 and
account payable is overstated to RM2,000.
 Correction:
Dt A/Payable 2,000
Ct Cash 2,000
-to cancel both overstatements in order to reverse the effect of errors.
Steps
Steps to
to detect
detect errors
errors
If the trial balance does not balance, the
error(s) must be found and corrected.
Make sure the trial balance Recompute each account
columns are correctly added. balance in the ledger.
Make sure account

balances are correctly Verify that each journal
entered into the ledger. entry is posted correctly.
See if debit or credit Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial balance. debits and credits.
Correcting
Correcting the
the errors
errors
 If an error was discovered during journalizing
(before posting to ledger)
replace with correct account or amount at previous
journal entry.
 Eg. A purchase of RM1,000 supplies by cash was wrongly

recorded as RM100 in journal entry. The error was
discovered before posting.
Replace previous entry with correct amount:
Dr. Supplies 100 1,000
Cr. Cash 100 1,000
Correcting
Correcting the
the errors
errors
 If an error was discovered after posting to ledger 
write down correcting journal entry to remove the
amount from the wrong account and records it in
correct account.
• E.g. A purchase of RM1,000 supplies by cash was wrongly
recorded as RM100 in journal entry. This error was
discovered after posting to ledger.
Incorrect journal entry:
Dr. Supplies 100
Cr. Cash 100
Incorrect posting to ledger:
___Supplies a/c ___ Cash a/c_____
Cash 100 Supplies 100
Effect: Understate Supplies and Overstate Cash a/c by RM900.
Correcting
Correcting the
the errors
errors (cont…)
(cont…)
Correcting journal entry:
Dr. Supplies 900
Cr. Cash 900
Correct posting to ledger respectively:

___Supplies a/c ___ Cash a/c_____
1,000 1,000
Now, correct balance of Supplies RM1,000 (Debit balance) and

Cash RM1,000 (credit balance)
Errors
Errors requiring
requiring more
more than
than two
two entries
entries
 Imbalanced trial balance sometimes can be caused by more than
one error at one time.
 E.g. Owner invested RM50,000 motor vehicle and RM100,000
cash into business.
Incorrect journal entry:
Dr. Motor vehicle 50,000
Dr. Capital 100,000
Cr. Cash 150,000
Error 1: Wrongly debited Capital a/c with wrong amount.
Error 2: Wrongly credited Cash a/c.
Correct journal entry:

Dr. Motor vehicle 50,000
Dr. Cash 100,000
Cr. Capital 150,000
 Correction:
Dr. Cash 250,000

Cr. Capital 250,000
End of Topic 7

Topic 7 - Correction of Errors

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Topic 7 - Correction of Errors

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Correction of

Reference: Chapter 2 of the textbook

Analyze each transaction and Record relevant transactions

Prepare and analyze Post journal information

• Are omissions and misstatements for one or more

1. result from mathematical mistakes

 Errors in posting from journal to ledger

 Errors in trial balance preparation

- Correction needed: Cancel out Ahmed’s account and entered to

 Example: Farid purchased a machine RM 10,000.

 Error: Suppose to be:

 For instance, sales of RM2,020 were done but

Journal entry to correct:

 Example: A payment of cash RM 1000 to

-to cancel both overstatements in order to reverse the effect of errors.

Make sure account

See if debit or credit Verify that each original

 Eg. A purchase of RM1,000 supplies by cash was wrongly

Effect: Understate Supplies and Overstate Cash a/c by RM900.

Correct posting to ledger respectively:

Now, correct balance of Supplies RM1,000 (Debit balance) and

Correct journal entry:

Dr. Cash 250,000

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