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

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

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

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 Ltd 1,000 CR Bank

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 Pollin 500 CR Polly

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 Purchase 18 CR Creditor-Bestari

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 expenses 90 CR Commission received

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 Purchase 3,000 CR Cash

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.)

Types of Tangible Errors * Incomplete Double Entry *Wrong Posting *Different amount were debited and credited * Transaction recorded by two debit entries or vice versa

Incomplete Double Entry Only one entry recorded Eg : Cash sales RM200 was only debited to Cash A/c Correcting Journal Entry : Dr Suspense 200 CR Sales

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 Sales 270 CR Suspense

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 Wages 30 CR Suspense

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 Suspense How this happen?

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

REFER TO EXAMPLE 9.12 PAGE 248

Trading account: Let’s recall… Background knowledge Sales - Cost of good sold = Gross Profit Sales - (Opening stock + Purchases – Closing stock) = Gross Profit Sales - Opening stock - Purchases + Closing stock = Gross Profit Let’s recall… Background knowledge

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

Action required on the profit Action required on the balance sheet 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 Increase closing stock Closing stock overvalued Decrease closing stock

Action required on the profit Action required on the balance sheet 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