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Correction of Errors | O Level Accounting 7707 & IGCSE Accounting 0452 | Detailed Free Notes To Score An A Star (A*)

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  • Errors can be of two types
    • Errors that have no effect on the balance of trial balance
      • In other words, the trial balance still appears equal on debit and credit side, but the equal amount is wrong
      • Such errors do not generate suspense
      • They are 7
        • Omission – you completely forgot an entry
          • Just pass the right entry
        • Commission
          • On either the debit side or the credit side, we made an issue between two items.
            • Remember, it will be on the same SIDE, so no effect on trial balance
            • For example, depreciation expense has a debit balance as it is an expense and machinery maintenance expense has a debit balance because it is an expense
            • We had to record 100 in the machinery maintenance expense but instead we recorded it as depreciation expense
            • All we need to do is take it out from the wrong account and put in the right account
              • So depreciation expense credit 100
              • Machinery expense debit 100
        • Original Entry
          • We made the wrong entry of the amount on both sides.
            • The amount was 560 for cash received from debtors
            • We made the entry for 540
            • So just make the entry that will correct the amount
              • So cash debit 20
                • Accounts Receivable credit 20
        • Reversal Entry
          • We Entered the debit amount on credit side and credit amount on debit side.
          • So the actual entry was 500 debit cash and 500 credit debtors
          • But we made a mistake of 500 credit cash and 500 debit debtors
          • Now we need to make twice the entry to ensure that we can correct the effect
            • So we will do Cash debit 1000
            • And Debtors credit 1000
        • Compensating error
          • Here, two errors occur on opposite sides that cancel out each other.
            • For example, in first transaction, we overstated the debit side by 200.
            • In the second transaction, we overstated the credit side by 200
            • So we will just debit the credit side by 200 and we will credit the debit side by 200.
        • Principle Error
          • When a class of account is done incorrectly
          • We take an asset as an expense or vice versa
          • We take a liability as an income or owner’s equity and vice versa
          • The thing is their treatment is same like liability and income both increase by credit, so the trial balance final balance won’t be affected, but the issue still exists.
          • Just take the money out of the wrong account and put in the right account to correct the issue
    • Errors that affect the trial balance
      • One side is either over stated or understated
      • The totals of the trial balance won’t match
      • This difference in total of the trial balance is called suspense
      • A suspense account has an opening balance on the side of the trial balance which is shorter.
      • The correct transactions are posted to correct it
      • In such corrective transactions, as one side of the original transaction was correct, we do not include this right side in the corrective transaction, instead we need suspense on this side.
      • For example, the original transaction is Cash received from debtor of 500.
      • Here, we made the original entry as Cash debit 500, but Accounts Receivable credit 1000
      • Here, cash has been posted correctly.
      • So, we can make the correction as follows
        • Account Receivable debit 500
          • Suspense credit 500.
  • REMEMBER
    • SUSPENSE ACCOUNT HAS NO CLOSING BALANCE
    • IF IT HAS A CLOSING BALANCE, YOU HAVE DONE IT INCORRECTLY
  • Then we make the corrective profit for the year
    • Profit before suspense correction+ Sales and income (corrected trial balance values) – expenses (corrected trial balance values) = Correct profit
Hunain Zia

Hunain Zia has previously achieved considerable success in the high-school educational stream, gaining a massive 154 Total A Grades and 7 Major Distinctions, a process in which he broke/ set 11 different world records, including the most A grades ever achieved, most subjects ever appeared in, most distinctions, gaining distinctions across two separate boards (Pearson Edexcel and CAIE) within the same year/ ever, and even 19 hours of constant examination. All records stand intact today. Hunain pursued his Honors Accounting Degree from the prestigious Bentley University, and then completed an LLB (in Honors) from University of London. Currently, he manages multiple social and commercial projects, has founded digital streams and works tirelessly in the education sector.

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