Transcript topic 4 correcting errors

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
Why A Balanced Trial Balance maybe
not free from errors ?
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
CR Bank
1,000
1,000
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
CR Polly
500
500
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
CR Creditor-Bestari
18
18
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
CR Commission received
90
90
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
CR Cash
3,000
3,000
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
CR Sales
200
200
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
CR Suspense
270
270
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 :
DrWages
CR Suspense
30
30
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)
CR Suspense
How this
happen?
2,760
2,760
Effect of Errors On Profit Or Loss
Errors
In Trading A/c
In P&L
* Revenue
* Expenses
In Balance Sheet
Effects to Gross
Profit/Net Profit
Effects Net Profit
No effects to
Gross/Net Profit
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
Example of errors
Action
required on
the profit
Action required
on the balance
sheet
Purchases undercast
Subtract
-
Purchases overcast
Add
-
Sales undercast
Add
-
Sales overcast
Subtract
-
Income undercast
Add
-
Income overcast
Subtract
-
Expenses undercast
Subtract
-
Expenses overcast
Add
-
Example of errors
Action
required on
the profit
Action required
on the balance
sheet
Opening stock
undervalued
Opening stock
overvalued
Subtract
-
Add
-
Closing stock
undervalued
Closing stock
overvalued
Add
Increase closing
stock
Decrease
closing stock
Subtract
Example of errors
Action
required on
the profit
Add
Action required
on the balance
sheet
Increase
prepayments
(current assets)
Accruals of expenses
omitted
Subtract
Increase
accruals (current
liabilities)
Fixed/current assets
undervalued
Liabilities understated
-
Increase fixed/
current asset
Increase
liabilities
Prepayments of
expenses omitted
-