This document discusses different types of accounting errors and how to correct them. It describes errors that do not affect the trial balance, such as errors of commission, principle, original entry, omission, and compensating errors. It also covers errors that do affect the trial balance, such as omitting entries or posting wrong amounts. These errors are corrected by using a suspense account. The document provides examples of correcting journal entries to clear the suspense account. It also explains how correcting errors impacts the profit calculation and balance sheet figures.

1. Errors

2. Errors
 Errors not affecting trial balance
agreement
 Errors affecting trial balance agreement

3. Errors not affecting trial balance
agreement
E.g.
 Errors of commission
 Errors of principle
 Errors of original entry
 Errors of omission
 Compensating errors
 Complete reversal of entries

4. Errors affecting trial balance
agreement
 Suspense account

5. Correcting entry
1. Asset
2. Purchases
3. Expenses
4. Returns Inwards
5. Drawings
Increase – Debit
Decrease - Credit
Examples of account

6. Correcting entry
1. Liabilities/Capital
2. Sales
3. Income
4. Returns Outwards
Increase – Credit
Decrease – Debit
Examples of account

7. Errors Not Affecting Trial
Balance Agreement

8. Errors of Commission
 The correct amount is entered but in a
wrong personal account

9. Example
 A purchase of goods from C.Lee has
been posted to the credit side of C.Lai’s
account in error, amounting to $500.
The correcting entries should be:
Original entry:
Wrong entry:
Dr Purchase $500
Cr C Lee $500
Dr Purchase $500
Cr C Lai $500

10. $ $
C.Lai 500
C.Lee 500
Purchases entered in wrong personal account, now corrected.
The journal

11. $$
C.Lee 500
C. Lai
Purchases 500
$
C. Lee
C.Lai 500

12. Errors of Principle
 An item is entered in the wrong type of
account due to misunderstanding of the
nature of the item.

13. Example
 Office equipment purchased for $1,000
in cash has been debited to an office
expenses account. The correcting
entries should be:
Original entry:
Wrong entry:
Dr Office Equipment $1000
Cr Cash $1000
Dr Office Expenses $1000
Cr Cash $1000

14. $ $
Office Equipment 1,000
Office Expenses 1,000
Purchase of office equipment wrongly entered in the office expenses
account, now corrected.
The journal

15. $$
Cash 1,000
Office Expenses
Office Equipment 1,000
$
Office Equipment
Office Expenses 1,000

16. Errors of Original Entry
 Wrong original figure is entered in the
journals, and hence posted incorrectly
to the accounts.

17. Example
 A payment of $1,200 to a creditor,
M.Wong, has been entered as both a
debit and credit as $1,000. The
correcting entries should be:
Original entry:
Wrong entry:
Dr Mr. Wong $1200
Cr Bank $1200
Dr Mr. Wong $1000
Cr Bank $1000

18. $ $
M Wong(1200-1000) 200
Bank 200
Payment of $1,200 incorrectly entered as $1,000, now corrected.
The journal

19. $
M. Wong
Bank 1,000
Bank 200
$
Bank
M. Wong 1,000
M. Wong 200

20. Errors of Omission
 A transaction has been completely
omitted from the accounts.

21. Example
 A sale of $400 to John Leung has been
completely omitted from the accounts.
The correcting entries should be:
Original entry:
Wrong entry:
Dr John Leung $400
Cr Sales $400
No entry

22. $ $
John Leung 400
Sales 400
A sale of $400 was omitted, now corrected.
The journal

23. $
Sales
John Leung 400
$
John Leung
Sales 400

24. Compensating Errors
 Debit side errors are equal to credit side
errors.

25. Example
 The purchases account was undercast
by $2,200, and the sales account was
also undercast by $2,200. The
correcting entries should be:

26. $ $
Purchases 2,200
Sales 2,200
Purchases and sales accounts were undercast by $2,200, now
corrected.
The journal

27. $
Purchases
Sales 2,200
$
Sales
Purchases 400

28. Complete Reversal of Entries
 The correct amounts are entered in the
wrong sides of the two appropriate
accounts.

29. Example
 The purchase of goods on credit from
M. Lok for $60 was entered on the debit
side of M. Lok’s account and the credit
side of the purchases account. The
correcting entries should be:
Original entry:
Wrong entry:
Dr Purchase $60
Cr M Lok $60
Dr M Lok $60
Cr Purchase $60

30. $ $
Purchases ($60 x 2) 120
M. Lok ($60 x 2) 120
Purchases from M. Lok incorrectly debited to his account and
credited to the purchases account, now corrected.
The journal

31. $$
M. Lok 120
Purchases
M. Lok 60
$$
Purchases 60
M. Lok
Purchases 120

32. Errors Affecting Trial Balance
Agreement

33. Errors affecting trial balance
agreement may occur when
 (i) recording transactions in the
accounts:
– (1) omitting a debit or credit entry
– (2) posting a wrong amount to one of the
accounts
– (3) recording an entry on the wrong side
• E.g. a debit entry entered as a credit or a credit
entry as a debit

34.  (ii) Balancing of accounts:
Incorrect calculation of a balance
– E.g. overcast or undercast
 (iii) Drawing up a trial balance:
(1) omitting a balance from the trial balance
(2) incorrectly posting an amount to the trial
balance
(3) incorrectly posting a balance to the wrong
side of the trial balance

35. Suspense Account
 When the trial balance does not agree,
the amount of the difference is entered
in a suspense account.

36. $ $
Total balances extracted 90 100
Suspense account 10
100 100
Trial Balance as at 31 December 1996

37. $
Suspense Account
Dec 31 Difference per trial
balance 10
1996

38. How To Show a Suspense
Account on the Balance Sheet

39. Debit Balance of the
Suspense Account

40. $
T form
Fixed Assets X
Current Assets X
Suspense Account X
X
Balance Sheet

41. $ $
Fixed Assets X
Current Assets X
Less Current Liabilities X
Working Capital X
Suspense Account X
X
Vertical form
Balance Sheet

42. Credit Balance of the
Suspense Account

43. $
T form
Capital X
Long-term Liabilities X
Current Liabilities X
Suspense Account X
X
Balance Sheet

44. $ $
Fixed Assets X
Current Assets X
Less Current Liabilities X
Working Capital X
Suspense Account (X)
X
Vertical form
Balance Sheet

45. Correction of Errors
 To correct the errors, students should
make correcting entries in the ledger
accounts first, and hence clear the
suspense accounts.

46. Example
Original entry:
Wrong entry:
Dr Mr Chan $150
Cr Sales $150
Dr -
Cr Sales $150
A credit sale of $150 to Mr Chan has
been omitted from his account.
Correct entry: Dr Mr. Chan $150
Cr Suspense $150

47. Example
Original entry:
Wrong entry:
Dr C Lee $230
Cr Sales $230
Dr C Lee $320
Cr Sales $230
Correct entry: Dr Suspense $90
Cr C Lee $90
A sale to C. Lee for $230 was correctly
entered in the sales book but entered in C.
Lee’s account as $320.

48. Original entry:
Wrong entry:
Dr H Cheung $97
Cr Sales $97
Cr H Cheung $97
Cr Sales $97
Correct entry: Dr H Cheung (97*2) 194
Cr Suspense $194
Example
A credit sale of $97 has been credited
to H. Cheung’s account.

49. Correct entry: Dr Sales $200
Cr Suspense $200
 Sales day book was overcast by $200.
Example

50. Correct entry: Dr Suspense $40
Cr Sales $40
 Sales day book was undercast by $40.
Example

51. Correction of Errors
 A single entry in the suspense account.
 This occurs when errors are made in
extracting balances, rather than in the
recording phase.

52. Correct entry: Dr Suspense $1500
Example
 The total of the sales account of $1,500
has been omitted from the trial balance.

53. Correct entry: Dr Suspense $200
Example
 The total of the sales account of $1,500
has been extracted as $1300 in the trial
balance.

54. Correct entry: Dr Suspense (1500*2) $3000
Example
 The total of the sales account of $1,500
has been extracted to the debit column of
the trial balance.

55. Correction of Errors and Effects
on the Profit and Balance Sheet
 For errors affecting the final accounts
(I.e. profit calculation and balances
carried down)
 Corrections are also required for the
profit/loss and balances in the balance
sheet.

56. Trading account:
Sales - Cost of good sold = Gross Profit
Sales - (Opening stock + Purchases – Closing stock) = Gross
Profit
Sales - Opening stock - Purchases + Closing stock = Gross Profit

57. 1st
order
Sale increase Cr. Sales Increase in Net
Profit
Opening stock
increase
Dr. Stock Decrease in Net
Profit
Purchases
increase
Dr. Purchases Increase in Net
Profit
Closing stock
increase
Dr. Stock Increase in Net
Profit
2nd
order 3rd
order

58. Profit and loss account:
Gross Profit + Income (e.g. Rent received) – Expenses (e.g.
Motor expenses) = Net Profit
1st
order
Income
increase
Cr. Income Increase in Net
Profit
Expenses
Increase
Dr. Expenses Decrease in Net
Profit
2nd
order 3rd
order

59. Example of errors Action
required on
the profit
Action required
on the balance
sheet
Purchases undercast Subtract -
Purchases overcast Add -
Sales undercast Add -
Sales overcast Subtract -
Income undercast Add -
Income overcast Subtract -
Expenses undercast Subtract -
Expenses overcast Add -

60. Example of errors Action
required on
the profit
Action required
on the balance
sheet
Opening stock
undervalued
Subtract -
Opening stock
overvalued
Add -
Closing stock
undervalued
Add Increase closing
stock
Closing stock
overvalued
Subtract Decrease closing
stock

61. Example of errors Action
required on
the profit
Action required
on the balance
sheet
Prepayments of
expenses omitted
Add Increase
prepayments
(current assets)
Accruals of expenses
omitted
Subtract Increase
accruals (current
liabilities)
Fixed/current assets
undervalued
- Increase fixed/
current asset
Liabilities understated - Increase
liabilities