Correction of Errors (Copy)
Cheat Sheet: 3.2 Correction of Errors
O Level and IGCSE Accounting – Quick Revision
What Are Errors?
- Errors are mistakes in the recording of transactions.
- Some errors affect the trial balance (unequal debit and credit).
- Others do not affect the trial balance (equal but wrong placement).
Types of Errors
| Error Type | Trial Balance Affected? | Example |
|---|---|---|
| Error of Omission | ❌ | Entire transaction missed |
| Error of Commission | ❌ | Paid Ali, but recorded in Ahmed’s account (both are debtors) |
| Error of Principle | ❌ | Asset recorded as an expense (e.g. buying machinery as repairs) |
| Error of Original Entry | ❌ | Incorrect figure recorded (e.g. $450 instead of $540) |
| Error of Reversal | ❌ | Correct accounts but Dr and Cr reversed |
| Compensating Error | ❌ | Two wrong entries cancel each other out |
| Single-sided Entry | ✅ | Only one side of a double entry is recorded |
| Unequal Entry | ✅ | Debit is $800, credit is $80 |
| Posting to Wrong Side | ✅ | Credit side instead of debit (or vice versa) |
✅ = Affects trial balance
❌ = Does NOT affect trial balance
Use of a Suspense Account
- When the trial balance does not balance, a suspense account is opened to temporarily store the difference.
- Once all errors are found and corrected, the suspense account balance should be zero.
Format of a Suspense Account
| Suspense Account |
|---|
| Debit or Credit the suspense account with the difference |
| Use correcting journal entries to clear it gradually |
Correcting Errors: Journal Entry Format
| Date | Details | Dr ($) | Cr ($) |
|---|---|---|---|
| 01 Jan | Sales (error corrected) | 100 | |
| Suspense Account | 100 |
Example: Correcting an Error with Suspense
Error: Rent of $200 was not recorded (should be Dr Rent, Cr Cash)
Effect: Trial balance is short by $200 on debit side
Journal Entry:
| Date | Details | Dr ($) | Cr ($) |
|---|---|---|---|
| 01 Jan | Rent | 200 | |
| Suspense A/C | 200 |
→ This clears $200 from the suspense account and records the missing rent expense.
Adjusting Profit After Errors
- Overstated expenses → reduce profit
- Understated expenses → increase profit
- Understated income → increase profit
- Overstated income → reduce profit
Example:
If insurance expense was recorded as $500 instead of $300 → expenses overstated by $200
→ Profit was understated by $200
Effect of Corrections on Statement of Financial Position
| Correction Type | Financial Impact |
|---|---|
| Asset overstated | Reduces total assets |
| Liability understated | Increases liabilities |
| Revenue understated | Increases retained earnings/capital |
| Expense overstated | Increases profit and equity |
Summary Table: Correction of Errors
| Key Area | Summary |
|---|---|
| Suspense Account | Temporary account for trial balance differences |
| Correcting Entries | Use journals to correct affected accounts |
| Trial Balance Mismatch | Fix with suspense account and correcting entries |
| Profit Adjustments | Identify income/expense effects and adjust accordingly |
| Financial Statement Impact | Update equity, profit, assets, or liabilities after corrections |