Correction of Errors 1Purpose of a Trial Balance A trial balance is prepared to test the __________...
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Transcript of Correction of Errors 1Purpose of a Trial Balance A trial balance is prepared to test the __________...
Correction of Errors
1 Purpose of a Trial Balance
A trial balance is prepared to test the __________ of the book keeping. As every transaction recorded follows the _____________ rule, it means ultimately, the total _______ must equal the total _________.
accuracy
double entrydebits credits
2 Types of Errors
There are 2 main types of errors:
a) _____________________________________
b) _____________________________________
Errors revealed by a trial balance( errors in which amount Dr not = amount Cr )
Errors not revealed by a trial balance( errors in which amount Dr = amount Cr )
3 Basic rules to correct errors inaccounts
Example 1:a) How to reduce the balance in Account A by
$40?b) How to increase the balance in Account A
by $50?Account A
Bal b/d 300
Answer: a) _________________________
b) _________________________
Credit Account A with $40
40 50
Debit Account A with $50
Example 2:a) How to reduce the balance in Account B by $80?b) How to increase the balance in Account B by $30?
Account BBal b/d 700
Answer: a) _________________________
b) _________________________
Debit Account B with $80
80
Credit Account B with $30
30
Simple Rule:
(a)To increase a balance, we enter on the _________ side;
(b)To reduce a balance, we enter on the ___________ side.
same
opposite
4 Correction of Errors revealed by a Trial Balance
A Error of recording in One account only
Example (text page 340)
Cash of $1,880 paid to Winston, a creditor, was recorded only in Winston’s account.
Step 1: Right entryCreditor-Winston Dr 1,880 Cash Cr 1,880
Step 2: Wrong entryCreditor-Winston Dr 1,880
Step 3:Compare
Step 4: Correcting entryCash Cr 1,880 Put in missing entry
B Arithmetic Errors in ledgers
Example (text page 340)Returns outwards account was overcast by $350
Step 1: Right balReturns Outwards eg. Cr 1,000
Step 2: Wrong balReturns Outwards eg. Cr 1,350
Step 3:Compare
Step 4: Correcting entryReturns Outwards Dr 350
Enter on opposite side to reduce amount
C Error in recording unequal amounts in the accounts
Example (text page 341)Cash purchase of equipment $1,000 was correctly credited in the Bank account but was incorrectly debited as $100 in the Equipment account.
Step 1: Right entryEquipment Dr 1,000 Bank Cr 1,000
Step 2: Wrong entryEquipment Dr 100 Bank Cr 1,000
Step 3:Compare
Step 4: Correcting entryEquipment Dr 900
Enter on same side to increase amount
D Error in recording on wrong side of a correct account
Example (text page 342)Discount received of $60 had been posted to the wrong side of the account as a debit instead of as a credit.
Step 1: Right entryCreditor Dr 60 Discount received Cr 60
Step 2: Wrong entryCreditor Dr 60Discount received Dr 60
Step 3:Compare
Step 4: Correcting entryDiscount received Cr 120
Enter on opposite side to reduce amount
E Entry made in an incorrect account with double entry effect
Example (text page 343)Payment of interest expense $100 had been credited to the Interest Revenue account.Step 1: Right entryInterest Expense Dr 100 Bank Cr 100
Step 2: Wrong entry Bank Cr 100 Interest Revenue Cr 100
Step 3:Compare
Step 4: Correcting entryInterest Expense Dr 100Interest Revenue Dr 100
Enter on opposite side to reduce amount
5 Correction of Errors not revealed by a Trial Balance
This type of errors have ________ equal to _______.
A Errors of OmissionExample (text book, pg 347) Cash payment of $400 for insurance expense was not recorded in the books.
debits credits
Step 1: Right entryInsurance expense Dr 400 Cash Cr 400
Step 2: Wrong entryNo entry was made
Step 4: Correcting entryInsurance expense Dr 400 Cash Cr 400
Step 3:Compare
Step 4:Put in missing entries
B Error of CommissionExample (text book pg 348)A purchase of goods of $500 from Karrim was posted to another supplier, Hassim’s account.
Step 1: Right entryPurchases Dr 500 Creditor-Karrim Cr 500
Step 2: Wrong entryPurchases Dr 500 Creditor-Hassim Cr 500
Step 3:Compare
Step 4: Correcting entryCreditor-Hassim Dr 500 Creditor-Karrim Cr 500
Enter on opposite side to reduce amount
C Error of PrincipleExample (text book pg 349)The purchase of equipment of $2,500 was posted incorrectly to the Repairs of Equipment account.
Step 1: Right entryEquipment Dr 2,500 Bank Cr 2,500
Step 2: Wrong entryRepairs of Equipt Dr 2,500 Bank Cr 2,500
Step 3:Compare
Step 4: Correcting entryEquipment Dr 2,500 Repairs of Equipt Cr 2,500
Enter on opposite side
to reduce amount
D Error of Original EntryExample (text book pg 349)A purchase of goods of $800 from Ali was entered in the Purchases journal as $880 and the amount was posted to the ledger accounts.
Step 1: Right entryPurchases Dr 800 Creditor-Ali Cr 800
Step 2: Wrong entryPurchases Dr 880 Creditor-Ali Cr 880
Step 3:Compare
Step 4: Correcting entryCreditor-Ali Dr 80 Purchases Cr 80
Enter on opposite side
to reduce amount
E Error of Complete ReversalExample (text book pg 350)A cheque of $400 received from Pipi was credited in the Bank account and debited in Pipi’s account.
Step 1: Right entryBank Dr 400 Debtor-Pipi Cr 400
Step 2: Wrong entryDebtor-Pipi Dr 400 Bank Cr 400
Step 3:Compare
Step 4: Correcting entryBank Dr 800 Debtor-Pipi Cr 800
Enter on opposite side
to reduce amount
F Compensating ErrorsExample (text book pg 351)The Purchases account and the Sales account are each overstated by $600.
Step 1: Right balPurchases eg. Dr 1,000Sales eg. Cr 4,000
Step 2: Wrong balPurchases Dr 1,600Sales Cr 4,600
Step 3:Compare
Step 4: Correcting entrySales Dr 600 Purchases Cr 600
Enter on opposite side
to reduce amount
6 Effects of correction of errors onnet profit
Where errors are detected / corrected before the Trading, Profit and Loss a/c and the Balance Sheet have been prepared, the corrections would involve the correcting journal entries in the _______________ and correction of the ________________.
general journalledger accounts
However, where the Trading, Profit and Loss a/c have been prepared before the errors have been detected / corrected, it would mean that the __________ and some items in the ______________ have been wrongly stated.
net profitBalance sheet
The correction of such errors would involve correcting journal entries, restatement of the __________ and restatement of some items in the ______________.
net profitBalance sheet
Analysis of corrections on Net Profit
Net profit = __________ - ___________Revenue Expenses
Rule 1:
Debiting any expense / revenue account would __________ net profit.reduce
Rule 2:
Crediting any expense / revenue account would __________ net profit.increase
Effects of Errors on Net Profit and Balance Sheet
Trading, Profit and Loss Account for the year ended 31 Dec 20X2
Opening stock 500 Sales 8,000Purchases 6,100
6,600less Closing stock 700COGS 5,900Gross profit c/d 2,100
8,000 8,000Rent 200 Gross profit b/d 2,100Insurance 120 Discount received 250Lighting and heating 180Depreciation 250Net Profit 1,600
2,350 2,350
Balance Sheet as at 31 Dec 20X2
Fixed Assets $ Owner’s Equity $Fixtures 2,200 Capital 1,800less Prov for depn 800 Add Net Profit 1,600
1,400 3,400Current Assets Less Drawings 900Stock 700 2,500Debtors 600 Current liabilitiesBank 340 Creditors 600
1,6403,040 3,100
Subsequently, the following errors were discovered:
i) Sales were overcast by $70ii) Rent was undercast by $40iii) Cash $50 received from a debtor was entered in the cash book onlyiv) A purchase of $59 from Abel is entered in the books, debit and credit entries, as $95
Required:
a) Correcting journal entries for the above errors;
b) A Statement of Corrected Net Profit for the year ended 31 Dec 20X2;
c) The Corrected Balance Sheet as at 31 Dec 20X2
a) Correcting Journal entries
i) Sales Dr 70
ii) Rent Dr 40
iii) Debtor Cr 50
iv) Creditor-Abel Dr 36 Purchases Cr 36
b) Statement of Corrected Net Profit for yr ended 31 Dec 20X2
$Net Profit as per accounts 1,600
Add(iv) Purchases under stated 36
1,636Less(i) Sales overcast 70(ii) Rent undercast 40Corrected Net Profit 1,526
Corrected Balance Sheet as at 31 Dec 20X2
Fixed Assets $ Owner’s Equity $Fixtures 2,200 Capital 1,800less Prov for depn 800 Add Net Profit 1,526
1,400 3,326Current Assets Less Drawings 900Stock 700 2,426Debtors(-50) 550 Current liabilitiesBank 340 Creditors(-36) 564
1,5902,990 2,990
d)