Correction of Errors Principles of Accounting XI
Chapter contents Correction of errors. Errors where trial balance still balances: o Error of omission. o Error of commission. o Error of principle. o Compensating error. o Error of original entry. o Reversal of entries Steps to correct error. Examples of correction of errors where trial balance still balances. Errors where trial balance does not balances. Suspense account. Errors discovered after closing books of accounts. Effects of errors on net profit. Effects of errors on balance sheet. Illustrations. Practice questions. Multiple Choice Questions (MCQs). Page 176
CORRECTION OF ERRORS CORRECTION OF ERRORS Correcting entries are made to correct the error in the books of account. There are two types of errors: Errors where the trial balance still balances. Error where trial balance does not balances. ERRORS WHERE TRIAL BALANCE STILL BALANCES A transaction has been completely omitted from the accounting Error of Omission: records. For example, a cash purchase of merchandise of Rs.10,000 was not recorded. Error of Commission: Error of Principle: Compensating Error: Error of Original Entry: Reversal of Entries: A transaction has been recorded in the wrong account. For example, salaries expenses of Rs.3,000 has been debited to wages expenses account in error. A transaction has conceptually been recorded incorrectly. For example, building purchase of Rs.100,000 has been debited to the repair expense account rather than building account. Two different errors have been made which cancel each other out. For example, rent expense of Rs.12,000 has been debited to rent expense account as Rs.14,000 and a casting error on the sales account has resulted in sales being overstated by Rs.2,000. The correct double entry has been made but with the wrong amount. For example, cash sale of Rs.3,200 has been recorded as Rs.2,300. The correct amounts have been posted to the correct accounts but on the wrong side. For example, cash sales of Rs.20,000 has been debited to sales and credited to cash. STEPS TO CORRECT ERROR Step # 1: What was the double entry? Step # 2: Step # 3: What should the double entry have been? Correcting entry. Examples OF CORRECTION OF ERRORS WHERE TRIAL BALANCE STILL BALANCES Error of Omission: A cash purchase of merchandise of Rs.10,000 was not recorded. What should the double What was the double entry? Correcting entry entry have been? Purchases 10,000 Dr. Purchases 10,000 Dr. No entry Cash 10,000 Cr. Cash 10,000 Cr. Page 177
Error of Commission: Salaries expenses of Rs.3,000 has been debited to wages expenses account in error. What was the double entry? What should the double entry have been? Correcting entry Wages expenses 3,000 Dr. Cash 3,000 Cr. Salaries expenses 3,000 Dr. Cash 3,000 Cr. Salaries expenses 3,000 Dr. Wages expenses 3,000 Cr. Error of Principle: Building purchase of Rs.100,000 has been debited to the repair expense account rather than building account. What was the double entry? What should the double entry have been? Correcting entry Repair expenses 100,000 Dr. Cash 100,000 Cr. Building 100,000 Dr. Cash 100,000 Cr. Building 100,000 Dr. Repairs expense 100,000 Cr. Rent expense of Rs.12,000 has been debited to rent expense account as Compensating Error: Rs.14,000 and a casting error on the sales account has resulted in sales being overstated by Rs.2,000. What should the double What was the double entry? Correcting entry Rent expenses 14,000 Dr. Cash 12,000 Cr. Cash 10,000 Dr. Sales 12,000 Cr. Error of Original Entry: What was the double entry? Cash 2,300 Dr. Sales 2,300 Cr. entry have been? Rent expenses 12,000 Dr. Cash 12,000 Cr. Cash 10,000 Dr. Sales 10,000 Cr. Cash sale of Rs.3,200 has been recorded as Rs.2,300. What should the double entry have been? Cash 3,200 Dr. Sales 3,200 Cr. Sales 2,000 Dr. Rent expenses 2,000 Cr. Cash 900 Dr. Sales 900 Cr. Correcting entry Reversal of Entries: Cash sales of Rs.20,000 has been debited to sales and credited to cash. What was the double entry? What should the double entry have been? Correcting entry Cash 20,000 Dr. Sales 20,000 Cr. Sales 20,000 Dr. Cash 20,000 Cr. Cash 40,000 Dr. Sales 40,000 Cr. ILLUSTRATION # 1: 1989 Regular & Private BIEK (Correction of Errors Trial Balance Still Balances) Give entries in the General Journal to correct each of the following errors detected before closing the books. (a) On August 18, 1988 office supplies purchased for Rs.5,000 was incorrectly debited to office supplies expense account. (b) Depreciation on office furniture for 1988 Rs.500 was not recorded. (c) Purchase of office supplies for Rs.580 cash was recorded and posted as Rs.508. (d) Sale of an old office typewriter for Rs.800 was credited to sales account. (e) An amount of Rs.400 spent on repairs of office equipment was debited to office equipment account. Page 178
Solution # 1: M/S. CORRECTING ENTRIES Date Particulars P/R Debit Credit 1 Office supplies 5,000 Office supplies expense 5,000 (To correct the office supplies expense account) 2 Depreciation expense 500 Allowance for depreciation 500 (To record the depreciation expense) 3 Office supplies 72 Cash 72 (To correct the purchase of office supplies) 4 Sales 800 Office equipment 800 (To correct the sale of office typewriter) 5 Repair expense 400 Office equipment 400 (To correct the repair expense on equipment) Explanation of Solution # 1: (a) Supplies expense account was wrongly debited. To rectify this error, supplies expense accounts is credited and supplies account is debited. (b) Depreciation was not recorded. To correct this error, entry for depreciation was passed. (c) Purchase of supplies for cash was recorded less than actual amount. To rectify this error, supplies was increased and cash was decreased with Rs.72 (580 508). Increase in supplies is recorded as debit and decrease in cash is recorded as credit Rs.72. (d) Sale of equipment was credited to sales account. For correction, sales is debited and equipment is credited. (e) Repair of equipment was debited to equipment account. Equipment is credited and repair expense account is debited to correct this error. ERRORS WHERE TRIAL BALANCE DOES NOT BALANCE Double Posting of a Transaction: For example, cash sales of Rs.20,000 was recorded in sales account Rs.20,000 as credit and recorded in cash account twice as Rs.20,000. Due to this error, debit side is increased by Rs.20,000. Posting One Aspect of Transaction: Posting Both Aspect of Transaction on Same Side: Error in Casting Special Journal: For example, purchase of furniture Rs.5,000 for cash was posted in cash account Rs.5,000 but no posting was made on furniture account. This error affects the credit side by increasing Rs.5,000. For example, payment to supplier Rs.3,000 was recorded as accounts payable debit Rs.3,000 and cash is also debited with Rs.3,000. No credit aspect is recorded. Due to this error, credit side of trial balance is decreased by Rs.6,000. For example, total purchases made during the month was Rs.43,000 but purchase journal showed a total of Rs.34,000. Due to this error, debit side of trial balance is decreased by Rs.9,000. Page 179
Error in Balancing Ledger Account: Difference in Amount in Entry: Casting Error of Trial Balance: Double Recording of a Ledger Account in Trial Balance: For example, total debits of accounts receivable were Rs.14,000 and total credits were Rs.4,000. The balance should have been Rs.10,000 but at the end of month accounts receivable showed a debit balance of Rs.8,000. Due to this error, debit side of trial balance is decreased by Rs.2,000. For example, purchase of building Rs.500,000 on account was debited to building account with Rs.500,000 but credited to accounts payable account with Rs.50,000. Due to this error, credit side of trial balance is reduced by Rs.450,000. For example, the debits and credits of trial balance showed a balance of Rs.340,000 and Rs.300,000 respectively due to error in calculation. Due to this error, credit side of trial balance is reduced by Rs.40,000. For example, trial balance showed office supplies account as debit Rs.2,000 twice in error. This error increases the debit side of trial balance by Rs.2,000. SUSPENSE ACCOUNT If the debits of trial balance do not agree with the credits of trial balance, then suspense account is used to correct the difference. A suspense account is an account in the general ledger in which amounts are temporarily recorded. The suspense account is used because the proper account could not be determined at the time that the transaction was recorded. When the proper account is determined, the amount will be moved from the suspense account to the proper account. An entry into a suspense account may be a debit or a credit. ILLUSTRATION # 2: (Correction of Errors Trial Balance Does Not Balances) Give entries in the General Journal to correct each of the following errors: (a) Goods sold to customer for Rs.2,000 on credit but was wrongly recorded in customer account as Rs.200. (b) Sales journal was under-cast by Rs.1,000. (c) Cash paid to supplier Rs.3,000 was not recorded in supplier account. (d) Furniture purchased for cash Rs.20,000 was wrongly recorded in furniture account as Rs.2,000. Solution # 2: M/S. CORRECTING ENTRIES Date Particulars P/R Debit Credit 1 Accounts receivable 1,800 Suspense account 1,800 (To correct the sale of goods on account) 2 Suspense account 1,000 Sales 1,000 (To correct the under-cast of sales day book) 3 Accounts payable 3,000 Suspense account 3,000 (To correct the payment to supplier) Page 180
Date Particulars P/R Debit Credit 4 Furniture 18,000 Suspense account 18,000 (To correct the purchase of furniture) Explanation of Solution # 2: (a) Customer s account (accounts receivable) was under cast by Rs.1,800. To correct this error, accounts receivable is increased by Rs.1,800. Increase in accounts receivable is recorded as debit Rs.1,800 and suspense account is credited. (b) Sales journal was under cast shows the decrease in sales. To correct this error, sales in credited as increase in sales Rs.1,000 and suspense account is debited. (c) Payment to supplier is not debited to accounts payable account. To rectify this error, accounts payable is debited with Rs.3,000 and suspense account is credited. (d) Furniture was debited Rs.2,000 instead of Rs.20,000. Increase in furniture accounts is recorded as debit Rs.18,000 (20,000 2,000 = 18,000) and suspense account is credited. ILLUSTRATION # 3: 1991 Regular & Private BIEK (Correction of Errors Before Closing Books of Accounts) The following errors were discovered before the closing of books: (i) Purchase return of Rs.1,000 was credited to purchases account. (ii) Sale of office equipment for Rs.5,000 was credited to Sales account. (iii) Purchase of typewriter costing Rs.10,000 was debited to Purchase account. (iv) Rs.10,000 spent on the repairs of old furniture was debited to Furniture account. (v) Drawing of Rs.500 for personal use of the proprietor was debited to Office Expense account. Record entries in the General Journal to correct each of the above errors. Solution # 3: M/S. CORRECTING ENTRIES Date Particulars P/R Debit Credit 1 Purchase returns 1,000 Purchases 1,000 (To correct the purchase account) 2 Sales 5,000 Office equipment 5,000 (To correct the sales account) 3 Equipment 10,000 Purchase 10,000 (To correct the purchase account) 4 Repairs expense 1,000 Furniture 1,000 (To correct the furniture account) 5 Drawings 500 Office expense 500 (To correct the office expense account) Page 181
ERRORS DISCOVERED AFTER CLOSING BOOKS OF ACCOUNTS Expense and income accounts are closed every year. Expense and income incurred in previous year was closed in the that particular year.. If any error is made in expense or income account in the previous year but discovered in current year, no rectification can be made in expense or income accounts in current year. Expense and income accounts effects the capital account. Increase in expense shows the reduction in capital and vice versa. Increase in income shows the increase in capital and vice versa. Under cast of expense account in previous year shows the increase in capital. To rectify this error in current year, capital account is to be decreased and recorded as debit. Over cast of expense account in previous year shows the decrease in capital. To rectify this error in current year, capital account is to be increased and recorded as credit. Under cast of income account in previous year shows the decrease in capital. To rectify this error in current year, capital account is to be increased and recorded as credit. Over cast of income account in previous year shows the increase in capital. To rectify this error in current year, capital account is to be decreased and recorded as debit. ILLUSTRATION # 4: 2008 Regular UOK (Correction of Errors After Closing Books of Accounts) The following errors were made during the year 2007 & were discovered in 2008: (a) Purchase of equipment for Rs.250,000 was debited to repairs expense account in error. Because of this error, depreciation on equipment Rs.20,000 could not be recorded. (b) Credit purchase of merchandise of Rs.170,000 was not recorded in 2007 although the goods were received and included in the ending inventory of 2007. (c) Merchandise of Rs.180,000 purchased in the month of December 2007 & included in the ending inventory of 2007, but the purchase was recorded on January 5, 2008. (d) Ending inventory of 2007 was understated by Rs.5,000. Pass correcting entries in General Journal entries in the year 2008. Solution # 4: M/S. CORRECTING ENTRIES Date Particulars P/R Debit Credit 1 Equipment 250,000 Capital 250,000 (To correct the purchase of equipment) 2 Capital 20,000 Allowance for depreciation Equipment 20,000 (To correct the depreciation on equipment) 3 Capital 170,000 Accounts payable 170,000 (To correct the purchase of merchandise on account) 4 Capital 180,000 Purchases 180,000 (To correct the purchases recorded in 2008) 5 Merchandise inventory 5,000 Capital 5,000 (To correct the overstatement of ending inventory) Page 182
Explanation of Solution # 4: (a) Equipment was wrongly debited to repair expense account in the year 2007 but discovered in the year 2008. Increase in expense reduces the capital. To correct this error, capital accounts is increased and recorded as credit and equipment is also increased and recorded as debit Rs.250,000. (b) Depreciation expense was not recorded which results increase in capital. To correct this error, capital is reduced and debited and allowance for depreciation is credited with Rs.20,000. (c) Purchases was not recorded. It increases the capital. To correct this error, capital is debited by Rs.170,000 and accounts payable was credited Rs.170,000. (d) Purchases made in the year 2007 but recorded in the purchase of 2008. This error increase the current year expense (purchases) and reduces the capital of 2007. To correct this year, capital is debited as with Rs.180,000 and purchases of 2007 is also decreased by Rs.180,000 recorded as credit. (e) Under cast in ending inventory decreased the profit of 2007 and decrease in profit results in decrease in capital. To rectify this error, capital is increased and inventory is also increased. Increase in inventory is recorded as debit and increase in capital is recorded as credit by Rs.5,000. EFFECTS OF ERROR on net profit Effect on Net Profit Error Before Correction Correction Effect on Net Income After Correction Increase in expense Decrease in net profit Decrease in expense (Expense Credit) Increase in net profit Decrease in expense Increase in net profit Increase in expense (Expense Debit) Decrease in net profit Increase in revenue Increase in net profit Decrease in revenue (Revenue Debit) Decrease in net profit Decrease in revenue Decrease in net profit Decrease in expense (Revenue Credit) Increase in net profit Omission of expense Increase in net profit Increase in expense (Expense Debit) Decrease in net profit Omission of revenue Decrease in net profit Decrease in expense (Revenue Credit) Increase in net profit EFFECTS OF ERROR on BALANCE SHEET If an error is committed in a real or personal account, it will effect assets, liabilities, debtors or creditors of the firm and as a result it will have its impact on balance sheet alone. Because these items are shown in balance sheet only and balance sheet is prepared after the income statement has been prepared. Page 183
Error Effects on Balance Sheet Before Correction Correction Effects on Balance Sheet After Correction Increase in asset Increase in asset Decrease in decrease (Assets Credit) Decrease in asset Decrease in asset Decrease in asset Increase in decrease (Assets Debit) Increase in asset Increase in liability Increase in liability Decrease in liability (Liability Debit) Decrease in liability Decrease in liability Decrease in liability Increase in liability (Liability Credit) Increase in liability (Capital Debit) (Capital Credit) Omission of asset Decrease in asset Increase in decrease (Assets Debit) Increase in asset Omission of liability Decrease in liability Increase in liability (Liability Credit) Increase in liability Omission of capital (Capital Credit) Increase in expense (Capital Credit) Decrease in expense (Capital Debit) Increase in revenue (Capital Debit) Decrease in revenue (Capital Credit) Page 184
Practice questions Question # 1: 2007 Regular & Private BIEK (i) Purchase return of Rs.500 was credited to purchase account. (ii) Drawings of Rs.1,000 for personal use of the proprietor was debited to office expense account. (iii) Sales of office equipment for Rs.2,000 was credited to sales account. (iv) Rs.500 spent on the repair of computer was debited to computer accounts. (v) Purchase of furniture for Rs.5,000 was wrongly debited to purchase account. Record entries in the General Journal to correct each of the above errors. Question # 2: 2014 Regular BIEK Give entries in General Journal to correct each of the following errors deducted before closing the books of Erma Stores: i) Purchase return of Rs.185 was credited to purchase account. ii) Sales of office furniture of Rs.160 was credited to sales account. iii) Depreciation on furniture Rs.55 was overcharged. iv) Drawings of Rs.1,200 for personal use of the proprietor was debited to capital account. v) Cash Rs.40 received from Hamna was recorded as received from Yamna. Question # 3: 2009 Regular & Private BIEK The following errors were discovered before closing the books of accounts of Ehsan Company: (i) Purchase of furniture for Rs.9,000 was debited to purchase account. (ii) Return of defective goods worth Rs.2,000 to the supplier was credited to purchase account. (iii) Ordinary repair costing Rs.1,000 to office equipment was debited to office equipment account. (iv) Depreciation was overcharged by Rs.3,000 through the allowance for depreciation account. (v) Purchase of office supplies on credit for Rs.9,000 was recorded as Rs.6,000. (vi) Payment of rent expense Rs.5,000 was recorded as receipt of rent income. Prepare correcting entries in general journal. Question # 4: 2010 Regular & Private BIEK The following errors were discovered before closing the books of Zakir & Company. (a) Sale of old equipment for Rs.3,000 was credited to sales account. (b) Payment of sales salaries expense was charged to sales supplies account amounted to Rs.6,000. (c) Return of defective part of machinery worth Rs.2,000 was recorded in purchase return account. (d) An amount of Rs.12,000 paid to Raheem & Co. was incorrectly debited to the account of Raheem Bros. (e) Purchases of office supplies worth Rs.2,500 recorded in purchase account. (f) Cash received Rs.5,000 from Mr. Ansar was recorded as received from Mr. Abrar. Prepare correcting entries in General Journal of Zakir & Company. Question # 5: 2011 Regular BIEK (i) Purchased office table amounting to Rs.1,600 has been recorded as office equipment. (ii) Sales return of Rs.550 from a customer has been debited to sales discount. Page 185
(iii) Drawings made by owner Rs.500 has been charged to general expense account. (iv) Receipt of Rs.600 from Rana & Co., a customer, has been charged to the account of Rani & Co. (v) Payment for machinery repairs Rs.200 has been charged to machinery account. (vi) Construction as addition to office building for Rs.50,000 was wrongly debited to building repair account. Prepare correcting entries in General Journal. Question # 6: 2012 Regular BIEK The following errors were discovered before closing the books of Mr. Farhan: (a) Office supplies amounting to Rs.1,500 were debited to purchase account. (b) Construction as addition to office building for Rs.50,000 was wrongly debited to building repairs account. (c) Withdrawal by proprietor of Rs.8,000 had been debited to salaries expense account. (d) Purchase of office furniture on account for Rs.6,500 was recorded and posted as Rs.5,600. (e) Sale of office equipment Rs.2,000 was credited to sales account. Prepare correcting entries in General Journal. Question # 7: 2012 Private BIEK Following errors were found before closing the books: (i) Purchase of office furniture for Rs.12,000 cash was recorded in office equipment account. (ii) Wages amounting to Rs.1,500 were debited to repairs expense account. (iii) Purchase of merchandise for Rs.40,000 on account were recorded and posted as Rs.4,000. (iv) Sale of old furniture for Rs.3,500 cash was charged to sales account. (v) Merchandise worth Rs.5,000 taken by the proprietor for his personal use, were debited to drawings account and credited to sales account. Prepare entries in General Journal to rectify the above errors. Question # 8: 2013 Private BIEK Following errors were found before closing the books of Karim Brothers: a) Purchases of stationary for Rs.1,200 has been recorded as purchases. b) Construction as addition of office building for Rs.30,000 was wrongly debit to repairs expense account. c) Defective goods returned by a customer for Rs.2,000 were charged to sales account. d) Depreciation expense on machinery was overcharged by Rs.1,000 through allowance for depreciation account. e) Cash Rs.900 received from a customer Naseem was recorded as received from Nasreen. f) Rs.600 was paid for repair of proprietor s home T.V set and debit to general expense account. Question # 9: 1997 Regular & Private BIEK Pass Journal Entries with full narration to rectify any Eight of the following errors before closing the accounts:- (a) Purchase of an office table amounting to Rs.1,600 has been entered as office equipment. (b) Sales return of Rs.550 from a customer has been debited to sales discount account. (c) Withdrawal by the proprietor of Rs.500 has been debited to General expense account. Page 186
(d) Payment to technicians for installation of computer Rs.1,500 has been debited to repairs Expense account. (e) Receipt of Rs.600 from Rana and Company, a customer, has been recorded in the account of Rani and Company. (f) Old office furniture sold for Rs.750 has been recorded as Rs.720 in furniture account wrongly. (g) Machinery repairs payment Rs.200 has been debited to Machinery account. (h) Construction as addition of office building for Rs.50,000 was wrongly debited to building repairs account. (i) Purchase of stationary for Rs.1,200 has been recorded as purchases. (j) Wages paid to carpenter for making office furniture Rs.500 has been recorded as wages expense account. Question # 10: 2011 Private BIEK Following errors were found before closing of books of Daniyal Brothers. You are required to make improper form of General Journal to rectify the errors. (a) A cheque of Rs.5,000 was received from Irfan Sons and deposited in the bank but in the cash book receipt was recorded as Rs.500. (b) The invoice of Rs.8,000 was paid to Akram after discount period but payment was recorded with discount of 2%. (c) Bad debts expense was overstated by Rs.2,000. (d) Accrued interest on overdraft of Rs.4,000 was overlooked. (e) Accrued commission revenue was understated by Rs.5,000. Question # 11: 2013 Regular BIEK The following General Journal contains some incorrect entries. However, the correct narrations below each entry show the actual transaction: GENERAL JOURNAL Date Particulars P/R Debit Credit 2013 February Sales 25,000/- 02 Accounts receivable 25,000/- (Return inferior goods from customer) March Purchase returns and allowance 2,000/- 05 Accounts payable 2,000/- (Return defective goods to supplier) March Accounts payable 5,000/- 29 Cash 5,000/- (Payment to supplier within discount period, terms 2/10, n/30) June Cash 6,000/- 11 Sales 6,000/- (Sold old furniture) August Rent expenses 7,000/- 08 Bank 7,000/- (Payment of cheque for the rent of residential building of owner) Maintain revised General Journal after correcting entries. Writing narrations is not necessary here. Page 187
MULTIPLE CHOICE QUESTIONS (MCQS) 1) Which of the following errors will cause an imbalance in the trial balance? a) Omission of a transaction in the journal b) Posting an entire journal entry twice to the ledger c) Posting a credit of Rs.720 to Accounts Payable as a credit of Rs.720 to Accounts Receivable d) Listing the balance of an account with a debit balance in the credit column of the trial balance 2) Which of the following will affect the agreement of a trial balance? a) Complete omission of a transaction b) Partial omission of a transaction c) Error of principle d) Compensating error 3) Salaries paid Rs.10,000 were posted to salaries account as Rs.1,000. To rectify the error, the salaries account will be: a) Debited by Rs.10,000 b) Credited by Rs.10,000 c) Debited by Rs.9,000 d) Credited by Rs.9,000 4) The errors which cancel themselves out are called: a) Error of omission b) Error of commission c) Compensating error d) None of these 5) Errors discovered after a transaction has been journalized and posted must be corrected by: a) A correcting entry b) A reversing entry c) Crediting the accounts d) Debiting the accounts Page 188