1. CORRECTION OF ERRORS AND SUSPENSE ACCOUNT
Week 10
CORRECTION OF ERRORS AND SUSPENSE ACCOUNT

2. Learning Objectives Errors not affecting trial balance agreement
After you have studied this chapter, you should be able to:
correct all errors which do not affect trial balance totals being equal
distinguish between the different kinds of errors that may arise
Suspense accounts and errors
explain why a suspense account may be used
create a suspense account in order to balance the trial balance
correct errors using a suspense account
recalculate profits after errors have been corrected
explain why using a suspense account is generally inappropriate

3. Analyze each transaction and event form source documents
Recap: Analyzing and Recording Process
Record relevant transactions and events in a journal
Post journal information to ledger accounts
Prepare and analyze the trial balance
DISCOVER ERROR!!!

4. Errors
Most errors are found after preparing the trial balance. Errors cannot be crossed out or erased.
If there are errors, the trial balance will not agree.
But there are some errors which will not affect the agreement of the trial balance totals.

5. Steps in Analyzing and Correcting Errors
1st Step
Determine the correct journal entry and the appropriate debits and credits.
2. Analyze the original errors journal entry and determine all the debits and credits that were recorded.
3. Preparing the correcting entries.
2nd Step
3rd Step

6. Errors Revealed by Trial Balance
Errors in calculation – Miscalculation of the trial balance totals or the net account balances.
Errors of omission of one entry – Omission of either the debit or credit entry of a transaction.
Posting to the wrong side of an account.
Errors in amount – debit entry of a transaction differs in amount with the credit entry.
Note: Suspense account is opened to take care of errors which have caused an imbalance in the Trial Balance.

7. Errors NOT Revealed by Trial Balance
Errors of omission – A transaction is completely omitted from the books.
Errors of commission – An entry posted at the correct amount but to the wrong person’s account.
Errors of principle – An entry is made in the wrong class of account.
Complete reversal of entries – An account that should be debited is credited and vice versa.

8. Compensating errors – where errors cancel each other out.
Errors of original entry – The original figure incorrectly entered although the correct double-entry principle has been observed.

9. CORRECTION OF ERRORS - Errors of Omission
When a transaction has been completely omitted from the books, it can be corrected by simply making a double-entry to record the transaction.
EXAMPLE A cash payment of RM 1,600 for rent has been omitted from the books.
1st Step
Correction:
Dr Rent Account Cr
Cash RM 1,600
Dr Cash Account Cr
Rent RM 1,600
Correct entry:
Dr Rent Account Cr
Cash RM1,600
Dr Cash Account Cr
Rent RM1,600
Error:
Dr Rent Account Cr
Cash
Dr Cash Account Cr
Rent
2nd Step
3rd Step

10. CORRECTION OF ERRORS - Errors of Omission
The journal entry is as follows:
General Journal
Particulars
Dr (RM)
Cr (RM)
Actual:
Rent
1,600
Cash
Error:
Correction:
Being correction of error – payment for rent omitted from books
1st Step
2nd Step
3rd Step

11. CORRECTION OF ERRORS - Errors of Commission
An entry has been posted to the wrong account of the same category.
EXAMPLE
A sale of RM150 to Folin Brothers has been posted to Lin Associates.
Correction:
Dr Debtor- Folin Brother Cr
Debtor-
Lin Associates RM 150
Dr Debtor- Lin Associates Cr
Folin Brother RM 150
1st Step
Correct entry:
Dr Debtor-Folin Brother Cr
Sales RM 150
Dr Sales Cr
Debtor-
Folin Brother RM 150
Error:
Dr Debtor- Lin Associates Cr
Sales RM 150
Dr Sales Cr
Debtor
- Lin Associates RM 150
2nd Step X
3rd Step √

12. CORRECTION OF ERRORS - Errors of Commission
The journal entry is as follows:
General Journal
Particulars
Dr (RM)
Cr (RM)
Actual:
Folin Brother
150
Sales
Errors:
Lin Associates
Correction:
Being correction of error – Lin Associates wrongly debited
1st Step
2nd Step X √
3rd Step

13. CORRECTION OF ERRORS - Errors of Principle
An entry is posted to an account of a different category e.g. an expense is recorded as an asset.
EXAMPLE
Repairs to vehicles amounting to RM 1,000 has been posted to Vehicles Account.
Correction:
Dr Repair expense Cr
Vehicle RM 1,000
Dr Vehicle Cr
Repair RM 1,000
1st Step
Correct entry:
Dr Repair expense Cr
Cash/
Acct. payable RM 1,000
Dr Cash / Account payable Cr
Repair RM 1,000
Error:
Dr Vehicle Account Cr
Cash/
acct payable RM 1,000
Dr Cash/ account payable Cr
Vehicle RM 1,000
2nd Step X
3rd Step √

14. CORRECTION OF ERRORS - Errors of Principle
The journal entry is as follows:
General Journal
Particulars
Dr (RM)
Cr (RM)
Actual:
Repair
1,000
Cash/Accounts payable
Errors:
Vehicle
Correction:
Being correction of error – repairs to vehicles posted to Vehicles Account
1st Step
2nd Step √ X
3rd Step

15. CORRECTION OF ERRORS - Errors of Original Entry
A wrong amount is recorded in a book of original entry or a document such as an invoice and subsequently posted to the ledger accounts
EXAMPLE
A purchase of RM665 from Paper Manufacturers Ltd has been entered in the Purchases Journal and posted to the ledger as RM656.
1st Step
Correction:
Dr Purchases Cr
Paper Mfg Ltd RM 9
Dr Paper Manufacturers Ltd Cr
Repair RM 9
Correct entry:
Dr Purchases Cr
Paper Mfg Ltd RM 665
Dr Paper Manufacturers Ltd Cr
Purchases RM 665
Error:
Dr Purchases Cr
Paper Mfg Ltd RM 656
Dr Paper Manufacturers Ltd Cr
Purchases RM 656
2nd Step
3rd Step

16. CORRECTION OF ERRORS - Errors of Original Entry
The journal entry is as follows:
General Journal
Particulars
Dr (RM)
Cr (RM)
Actual:
Purchases
665
Paper Manufacturers Ltd
Errors:
656
Correction: 9
Being correction of error – purchases understated by RM 9
1st Step
2nd Step
3rd Step

17. CORRECTION OF ERRORS - Compensating Errors
An error on the debit side is compensated by an error of equal amount on the credit side.
EXAMPLE
Rent revenue account is overcast by RM10, so as the Wages Account..
Correction
Dr Rent Revenue Account Cr
Cash RM350
Dr Wages Account Cr
Cash RM 600
1st Step
Wages RM10
2nd Step
3rd Step
Rent revenue RM10

18. CORRECTION OF ERRORS - Errors of Principle
The journal entry is as follows:
General Journal
Particulars
Dr (RM)
Cr (RM)
Actual:
Errors:
Correction:
Rent revenue 10
Wages
Being correction of error – rent received and wages paid overstated by $10 each
1st Step
2nd Step
3rd Step

19. CORRECTION OF ERRORS - Complete Reversal of Entries
When recording a transaction, the debit entry and the credit entry are reversed.
EXAMPLE
A payment of RM 700 to a creditor, Martin, was debited to the Cash account and credited to Martin’s Account.
1st Step
Correction:
Dr Martin Cr
Cash RM1,400
Dr Cash Cr
Martin RM 1,400
Correct entry:
Dr Martin Cr
Cash RM 700
Dr Cash Cr
Martin RM 700
Error:
Dr Cash Cr
Martin RM 700
Dr Martin Cr
Cash RM 700
2nd Step X
3rd Step √

20. CORRECTION OF ERRORS - Errors of Principle
The journal entry is as follows:
General Journal
Particulars
Dr (RM)
Cr (RM)
Actual:
Martin
700
Cash
Errors:
Correction:
1400
Being correction of error – payment to Martin debited to Cash Account and credited to Martin’s account
1st Step
2nd Step X X
3rd Step

21. Lecture Exercise 1
Record the entries needed in the journal to correct the following errors. Narratives are not required:
(a) Motor expenses of RM56 entered incorrectly in the Motor Vehicles account.
(b) Insurance RM98 paid by cash should have been entered as RM89.
(c) Sale of goods for RM375 to S Lin entered into the account of S Lim.
(d) Private withdrawal of RM150 cash had been debited to Sundry expenses account
(e) Returns outwards of RM75 had been credited to Returns inwards by mistake.
(f) Purchase of stock on credit from D Wing for RM115 had been completely omitted.

22. BREAK

23. CORRECTION OF ERRORS - Suspense Account
A Suspense Account is opened to take care of errors which have caused an imbalance in the Trial Balance.
When they are discovered, they have to be corrected by a double-entry, one in the Suspense Account and the other in the account concerned.

24. CORRECTION OF ERRORS - Suspense Account
EXAMPLE
The credit side of a Trial Balance is short of RM100.
A Suspense Account is temporarily opened.
The difference between the two sides in the Trial Balance is entered in this account.
Trial Balance as at 31 December 2002
Dr (RM)
Cr (RM)
Totals
95,600
95,500
Suspense Account
100

25. CORRECTION OF ERRORS - Suspense Account
The Suspense Account will have a credit balance when the credit total in the Trial Balance is short and a debit balance when the debit total is short.
Dr Suspense Account Cr
Dec 31 Difference in books RM100

26. Errors Affecting TB Agreement and their Correction
Errors which cause an imbalance in the Trial Balance affect only one side of an account.
This class of errors requires only one entry, either on the DR or CR side, to correct them.
The other entry has to be made in the Suspense Account, thus adhering to the double-entry principle.

27. Errors Affecting TB Agreement and their Correction
EXAMPLE
A sale of RM80 to Linda has been credited to Sales Account but omitted from Linda’s account.
The debit side of the Trial Balance was later found to have a deficiency of RM80.
Dr Sales Account Cr
Linda RM80
Dr Suspense Account Cr
Difference in books RM80

28. Errors Affecting TB Agreement and their Correction
To correct the error...
Dr Linda Cr
Dr Suspense Account Cr
Difference in books RM80
Suspense Account RM80
Linda RM80

29. Errors Affecting TB Agreement and their Correction
The journal entry is as follows:
General Journal
Date
Particulars
Dr ($)
Cr ($)
Linda 80
Suspense Account
Being correction of error – amount not posted to Linda’s account

30. Correction of an Error Requiring More Than Two Entries
EXAMPLE
Returns outwards RM100 to Samy has been correctly entered in Samy’s account but wrongly debited to Purchases Account. .
Dr Purchases Account Cr
Samy RM100
Dr Returns Outwards Account Cr
Dr Suspense Account Cr
Difference in books RM200
Suspense Account RM100
Suspense Account RM100
Purchases RM100
Return outwards RM100

31. Correction of an Error Requiring More Than Two Entries
The journal entry is as follows:
General Journal
Date
Particulars
Dr ($)
Cr ($)
Suspense Account
200
Purchases
100
Returns Outwards
Being correction of error – returns outwards wrongly posted to Purchases Account

32. Lecture Exercise 2 The following errors were made:
$78 cash paid for stationery was entered in the Stationery Account and the Cash Account as $87.
$400 paid for repairs for machinery was debited to Machinery Account.
Sales Account and Purchases Account were overcast by $300 each.
Commission received $1,500 was wrongly debited to the Commission Revenue Account and credited to the Cash Account.
What entries should be made to correct these errors?

33. Lecture Exercise 3
The debit total in the Trial Balance exceeded the credit total by RM32. On checking the books, the following errors were found:
i. Rent received, RM400 had been recorded on the payment side of the Cash Book and debited to the Rent Expenses Account.
ii. Goods amounting to RM70, returned to Alex, had been treated as sales. The amount was debited to the account of a debtor, B. Fowler and credited to the Sales Account.
iii. A cheque of RM51 received from K. Jack had been debited in error to R. Jackson’s account. The entry in the Bank Account was correct.
iv. A purchase of equipment, paid by a cheque of RM1,100, was entered as RM1,000 in the books.
v. The remainder of the difference in the books was due to an error in over casting the Sales Journal.
Show how these errors could be corrected.

34. Lecture Exercise 4
You have extracted a trial balance on 31 December 2006 which failed to agree by RM350, a shortage on the debit side of the trial balance. A suspense account was opened for the difference. The following errors were later found:
The purchases daybook had been undercast by RM200.
The insurance account had been undercast by RM50.
Sale of equipment of RM400 had been credited in error to the Sales account.
Sales account had been overcast by RM175
Discounts received had been undercast by RM75
You are required to:
(a) Show the journal entries necessary to correct the errors.
(b) Draw up the suspense account after the errors have been corrected