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CORRECTING ERRORS Learning Objectives 1. Identify types of errors 2. Detect the errors and do the correcting journal entry 3. Function of Suspense Account.

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Presentation on theme: "CORRECTING ERRORS Learning Objectives 1. Identify types of errors 2. Detect the errors and do the correcting journal entry 3. Function of Suspense Account."— Presentation transcript:

1 CORRECTING ERRORS Learning Objectives 1. Identify types of errors 2. Detect the errors and do the correcting journal entry 3. Function of Suspense Account 4. Prepare Statement of Adjusted Net Profit and Adjusted Balance Sheet

2 Why A Balanced Trial Balance maybe not free from errors ? Errors Tangible Errors Intangible Errors

3 Errors of Omission Errors of Posting Errors of Original Entry Compensating Errors Errors of Reversal

4 Errors of Omission – Transaction not yet recorded in any record Eg: A payment of RM1,000 was made to creditor Ar Ltd by cheque. This transaction was not recorded yet. Correcting Journal Entry : Dr Creditor – Ar Ltd1,000 CR Bank1,000

5 Errors of Posting- amount debited or credited is correct, but recorded in the wrong a/c Eg : Credit sales of RM500 to Pollin was posted to Polly Correcting Journal Entry : Dr Pollin500 CR Polly500

6 Errors of Original Entry Wrong amount was recorded, causing posting entry also incorrect Eg : Credit purchase of RM353 from Bestari Ltd was recorded in purchase journal as RM335 Correcting Journal Entry : Dr Purchase18 CR Creditor-Bestari18

7 Compensating Errors Errors in debit entry was balanced by errros in credit entry Eg : Commission received RM650 was posted as RM560 and renatl for RM1,190 was debited as RM1,100 Correcting Journal Entry : Dr Rental expenses90 CR Commission received90

8 Errors of Reversal Correct accounts were used, but was recorded on the opposite side. Eg : Cash purchase RM1,500 was debited to Cash A/c and credited to Purchase A/c Correcting Journal Entry : Dr Purchase3,000 CR Cash3,000

9 Tangible Errors * When does tangible errors happened ? * A suspense a/c will be created temporarily * Suspense A/c – debit side ( Balance Sheet – Asset) * Suspense A/c – credit side ( Balance Sheet – Liab.)

10 Types of Tangible Errors * Incomplete Double EntryIncomplete Double Entry *Wrong PostingWrong Posting *Different amount were debited and creditedDifferent amount were debited and credited * Transaction recorded by two debit entries or vice versaTransaction recorded by two debit entries or vice vers

11 Incomplete Double Entry Only one entry recorded Eg : Cash sales RM200 was only debited to Cash A/c Correcting Journal Entry : Dr Suspense200 CR Sales200

12 Wrong Posting Eg : Sales journal of RM690 was wrongly calculated as RM960 and this wrong amount was posted to sales a/c. Debtors a/c was correctly recorded. Correcting Journal Entry : Dr Sales270 CR Suspense270

13 Different amount were debited and credited Eg : Wages of RM1,130 was correctly recorded in Cash Book but wrongly recorded in Wages a/c as RM1,100 Correcting Journal Entry : Dr Wages30 CR Suspense30

14 Transaction recorded by two debit entries or vice versa Eg : Purchase of RM1,380 was credited to Purchase a/c and Creditors a/c Correcting Journal Entry : Dr Purchase (1,380+1,380)2,760 CR Suspense2,760 How this happen?

15 Effect of Errors On Profit Or Loss ErrorsIn Trading A/c Effects to Gross Profit/Net Profit In P&L * Revenue * Expenses Effects Net ProfitIn Balance Sheet No effects to Gross/Net Profit

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17 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

18 Example of errorsAction required on the profit Action required on the balance sheet Purchases undercastSubtract- Purchases overcastAdd- Sales undercastAdd- Sales overcastSubtract- Income undercastAdd- Income overcastSubtract- Expenses undercastSubtract- Expenses overcastAdd-

19 Example of errorsAction required on the profit Action required on the balance sheet Opening stock undervalued Subtract- Opening stock overvalued Add- Closing stock undervalued AddIncrease closing stock Closing stock overvalued SubtractDecrease closing stock

20 Example of errorsAction required on the profit Action required on the balance sheet Prepayments of expenses omitted AddIncrease prepayments (current assets) Accruals of expenses omitted SubtractIncrease accruals (current liabilities) Fixed/current assets undervalued -Increase fixed/ current asset Liabilities understated-Increase liabilities

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