PART E PREPARING A TRIAL BALANCE Study guide Correction af errors Identity the types of error which may occur in bookkeeping systems ‘Identity errors which would be highlighted by the extraction of a tial _ balance ‘Understand the provision of FAS governing financial latements regarding tateraerors which result in prior yer adustment [ Prepare journal envi tocorect errs Calculate and understand the impact of errors on the income statement and. | balance sheet | Suspense accounts Understand the purpose of a suspense account Identity erors leading tothe creation of suspense account Record entries ina suspense account ‘Make journal entries to clear a suspense account Exam guide Be prepared for theoretical questions on errors as well as questions asking you to correct errors. 1 Types of error in accounting MESES) rere are ive main types of eror. Some canbe corrected by journal entry, some require the use ofa suspense account. tis not really possible to draw up a complete list of all the errors which might be made by bookkeepes ‘and accountants. Even if you tried, its more than likely that as soon as you finished, someone would commit a completely new error that you had never even dreamed off However, its possible to describe five types of error which cover most of the errors which might occur. They are as follows. Errors of transposition Errors of omission Errors of principle Errors of commission Compensating errors Once an error has been detected, it needs to be put right. ‘+ Ifthe correction involves a double entry in the ledger accounts, then itis done by using # journal entry in the journal. When the error breaks the rule of double entry, then itis corrected by the use of a suspense account as well as a journal entry.Topics covered in this chapter + The five common types of error [Review journal entries (which we briefly looked at carer in this text) * Define a suspense account, and describe how itis used 1.1 Errors of transposition {an Srror of transposition is when two digits in an amount are aoc identally recorded the wrong way round, Fer example, suppose that a sali recorded inthe sales account 288 $6,843, butt has been incorrectly Teed in the total receivables account as $8,483. The err le the ‘transposition of the 4 and the 8, The consequence is that total detits vill ot be equal to toon Credits. You can often detect a tra Srtor by checking whether the difference betwoen debits and credits can be divided exactly by 9 example, $6,843 ~ $6,489 = $960; $360 + 9 = 40, position 1.2 Errors of omission fh 289¢ of omission means fing to record a ransaction ata on ‘making a the corresponding double entry Here is an example (2) Ma business receive Ae aaa OM a Supplier for $260, the transaction might be omited ho &resull oth the total debits andthe toal credits ofthe business will be out by $250, (©) Ma business receives an invoice trom a supplier for $300, the payables control account ‘might be credited, but the debit entry in the purchases account Might be omitted. In this they oan leeds would not equal total debits (because total deve are $300 less than they ought to be) 1.3 Errors of principle te coney inel valves mating ove ety in th beet ate vancacton is being entored in | the correct accounts, but subsequently finding outer the accounting entry breaks the ‘ules’ ofan [ e2untng principle or concept Atypical example of such an error isto tr ertan revenue expenditure incorrectly as capital expenditure, {@) For example, repairs toa machine costing $150 should be treated as revenue expenditure, and debited to a repairs acount. instead, the repair caste ne ‘added to the cost of the eat afc set (capital expenditure) an error of principle wou have occurred. As a result although total debits stil equal total credits, the ‘pairs account is $150 less than it Should be and the cost of the non-current asset is $150 ‘greater than it should be. Similarly, suppose thatthe proprietor of the business Sometimes takes cash out of the tll Tor his personal use and during a certain year these withdrawals on account of profit cach hc? $280. The book-keepr states that he has reduced cash Sales by $280 so that the ash book could be made t ‘Ould be an error of principle, and the result of it would be thatthe withdrawal account is understated by $260, and So is the total value of Sales in the sales account, by 3PARTE PREPARING A TRIAL BALANCE 1.4 Errors of commission Key term Errors of commission are where the bookkeeper makes a mistake in carrying out his or her task of recording transactions in the accounts. ee Here are two common types of errors of commission. (2) Putting debit entry or a credit entry inthe wrong account. For example i tlephone expenses of $540 are debited tothe electricity expenses account, an error of commis would have occurred. The results that although total debits and total credits balance, telephone expenses ae understated by $540 and electricity expenses ae overstated ty same amount les im the ledger accounts, Although ‘otal debits and total credits are stil equal, they are incorrect by $400, 1.5 Compensating errors For example, 'wo transposition erfors of $540 might occur in extracting ledger balances, one on eath of the double entry. Inthe administration expenses account, $2,282 might be written instead of $2622 while in the sundry income account, $8,391 might be written instead of $8,931. Both the debits and te Credits would be $540 too low, and the mistake would not be apparent when the trial balance is cast Consequently, compensating errors hide the fact that there are errors in the tral balance. 1.6 Summary: errors that can be detected by a trial balance + Exrors of transposition + Errors of omission (tthe omission is one-sided) + Errors of commission (i one-sided, or two debit entries are made, for example) ther errors will rot be detected by extracting a trl balance, but may be spotted by other controls (th 45 bank or control account reconciliations), 2 The correction of errors HESIOD rors which cave total debits and ced nthe ledger accounts in balance can be corrected by using tourna enris. Otherwise a suspense account has o be opened fist, and later cleared bya ound ei 2.1 Journal entries Some errors can be corrected by journal ents. To remind you, the format ofa journal enty is Date Debit cred $ Account to be debited x ‘Account to be credited (Narrative to explain the transaction) Exam focus x : As already indicated, you are often required in an exam to select answers in the form of journal enti. 334 Bey