ERRORS ON ACCOUNTS

There are two types of errors in accounts:

 Errors that don’t affect the trial balance

 Errors that affect the trial balance

Errors that don’t affect the trial balance The trial balance produced from the accounts appears to be
okay/correct, i.e the debits are the same as the credits. However, on taking a close check on the
balances and transactions posted, errors may have been made and therefore the balances shown on the
trial balance may be incorrect i.e. under/over stated.

There are 6 main types of errors that don’t affect the trial balance and these are explained as follows:

a) Error of omission
Here, a transaction is completely omitted from the accounts and therefore the double entry is
not made e.g. a sales invoice of £400 is not posted in the sales journal therefore no entry is
made in the debtor’s account and the sales account i.e. both debit of £400 in debtor’s account
and credit of £ 400 in the sales account. The effect of the error is understates both the debtors
and the sales. To correct this error, the transaction is posted in the books by: Debiting debtors
£400 Crediting sales £400
b) Error of Commission
This error occurs when a transaction is posted to a wrong account but the account is of the
same class. Example: a credit sale to T Thompson is posted to L Thompson’s account for an
amount of £ 200. Instead of a debit to T Thompson’s account it is made to L Thompson’s
account and the corresponding credit in the sales account is correct. Although the debit entry is
made into the wrong account, the two accounts are of the same class i.e. debtors. To correct
this error a transfer is made from L Thompson’s account to T Thompson by: £ (i) Debit T
Thompson a/c 200 (ii) Credit L Thompson a/c 200

c) Error of principle
In this type of error a transaction is posted not only to the wrong account but also of a different
class e.g. Motor vehicle purchased for £ 400 is posted to the motor vehicle expenses a/c.
(Instead of debiting motor vehicles, we debited motor vehicle expenses a/c and the credit entry
in the cashbook is correct) The motor vehicles account is a non-current asset, and motor
vehicles expenses a/c is an expense account. Therefore a capital expenditure has been posted as
revenue expenditure. To correct this error a transfer is made from the motor expenses account
to the motor vehicles a/c by: £ (i) Debit Motor vehicles a/c 400 (ii) Credit Motor expenses a/c
400 116 Further Adjustments to Accounts

d) Complete reversal of entries

A transaction is posted to the correct accounts but to the wrong sides of the accounts i.e. a
debit is posted as a credit and a credit is posted as a debit. Example: cash drawn from the bank
of £150 for business use is posted as a debit in the bank account and credit in cash in hand. To
correct this error, two entries are made in the relevant accounts: (i) Correct the error (ii) Post
the transaction correctly The entries will therefore be as follows: (i) Debit Cash in hand by £150
 Credit bank by £150 To correct the error of £ 150 posted in the wrong sides of these account (ii)
Debit cash by £150 Credit bank by £150 To post the entries correctly
e) Error of Original entry
Here a transaction is posted to the correct accounts but the amount posted is not correct i.e. it
is either under/over stated. In some cases, this is known as a transposition error e.g. cash
received from a debtor of £980 is credited/posted to the customer’s account as £890. To correct
this error, the amount understated or overstated is posted to these accounts to reflect the
correct balance. In this case, we will: £ Debit cash book 90 Credit debtors 90
f) Compensating Errors
These are errors that tend to cancel out each other i.e. if the effect of one error is to understate
the debits or credits then another error may take place to overstate the debits or credits by the
same amount, hence canceling out each other. E.g. if the balance c/d of the purchases a/c is
£3,980 but shown in the trial balance as £3,890 and another error carried to the trial balance of
fixture amounting to £4,540 instead of £4,450: Lesson Five 1Purchases 3,980 3,890 (90) £
Fixtures 4,450 (4,540) 90 This type of error is corrected by use of a suspense account.

Example

5.5 Give the journal entries needed to record the corrections of the following. Narratives are
required.
a) Extra capital of £ 10,000 paid into the bank had been credited to Sales account.
b) Goods taken for own use £ 700 had been debited to General Expenses.
c) Private insurance £ 89 had been debited to Insurance account.
d) A purchase of goods from C Kelly £ 857 had been entered in the books as £ 587.
e) Cash banked £ 390 had been credited to the bank column and debited to the cash column in
the cashbook.
f) Cash drawings of £ 400 had been credited to the bank column of the cashbook.
g) Returns inwards £ 168 from M McCarthy had been entered in error in J Charlton’s account.
h) A sale of a motor van £ 1,000 had been credited to Motor Expenses.

Errors That Affect The Trial Balance And The Suspense Account

These types of errors are reflected on the trial balance because the debits will not be same as the
credits. The debits may be more than the credits and vice versa. Examples include: 1. Transaction is
posted on one side of the accounts i.e. only a debit entry or a credit entry. Example cash received from a
debtor is debited to the cashbook and no other entry is made in the account, i.e. no credit entry on the
debtor’s a/c.
2. A transaction is posted on one side of both the accounts i.e. two debits or two credits. Example a
payment to a creditor of £ 300 is credited in the cashbook and also credited in the creditor’s accounts.

3. A transaction is posted correctly but different amounts i.e. debit is not the same as the credit.
Example – cash received from a debtor of £ 450 is debited in the cashbook as £ 450 and credited as £
540 in the debtor’s a/c.

4. Error on balances of accounts – i.e. understatement or overstatement of an account balance due to

mathematical errors.

5. Balance on an account is shown on the wrong side of the account when opening the ledger accounts
or when taken up to the trial balance. Example Bal c/d in the cash book for cash at bank of £ 2000 is
shown as a credit i.e. an overdraft, instead of a debit in the trial balance. The balance may also be
brought down as an overdraft instead of a debit balance in the trial balance.

6. A balance is omitted from the trial balance on the accounts in total.

To correct the above errors, the appropriate or the adjusting entries are made through an account called
a suspense account.

Then,If the debits  credits, then an amount is included on the credit side of the trial balance so that the
debits = credits. This is a credit balance and will be taken to the suspense account on the credit side.

. In some cases, after checking for all errors that can affect the trial balance, the suspense a/c has a
appropriate or the adjusting entries are made through an account called a suspense account. The
difference in the accounts is posted to this account and the entries to correct the accounts are posted
here. The balance to be shown on the suspense accounts depends on which side the error is shown on
the trial balance

a) ACCRUALS AND PREPAYMENTS

Revenue and costs must be recognized as they are earned or incurred, not as money is received
or paid. They must be matched with one another so far as their relationship can be established
or justifiably assumed, and dealt with in the profit and loss account of the period to which they
relate. Therefore all incomes and expenses that relate to a particular financial period will be
matched together to determine the profit for the year. ACCRUALS Income: Accrued Income This
is income that relates to the current year but cash has not yet been received. An accrued
income should be reported in the profit & loss account and the same income will be shown in
the balance sheet as a current asset.
Example 4.1
A firm lets out part of its properties and receives rent of £2,000 per month, assuming that this is
the first year of renting and rent is received in arrears (rent 4 January is received early Feb). The
ledger accounts of the firm will be as follows:
Cashbook Year 1
£2000 Feb (rent 4 Jan)
2,000 Mar (rent 4 Feb)
2,000 April (rent 4 Mar)
2,000 May (rent 4 Apr)
2,000 June (rent 4 May)
2,000 July (rent 4 Jun)
2,000 Aug (rent 4 July)
2,000 Sept (rent 4 Aug)
2,000 Oct (rent 4 Sept)
2,000 Nov (rent 4 Oct)
2,000 Dec (rent 4 Nov)
22,000

Although the cashbook is showing that rent received amounts £22,000, the full rental income of
£24,000 will be reported in the Profit & Loss a/c as rent income and the accrued rent for Dec of
£2,000 will be reported in the balance sheet as a current asset.

Expenses

: Accrued Expenses
An accrued expense is an expense that is payable or due for payment but has not yet been paid
during that period. An accrued expense should be charged in the P&L account and shown in the
balance sheet as a current liability

PREPAYMENTS
Prepaid Income
This is income that is not yet due but cash has been received for it. This happens where an
income is payable in advance e.g. Rent payable 3 months in advance. A prepaid income should
not be reported in the current financial period but should be carried forward and reported in
the period it relates to. The accounting treatment will be to show it as a current liability.

Prepaid Expenses
A prepaid expense is an expense that is not payable but cash has already been paid. A prepaid
expense should not be charged in the P&L a/c but should be carried forward to the next
financial period and should be shown in the balance sheet as a current asset.
Accrued Incomes and Expenses and Prepaid Incomes and Expenses are shown in the Balance
Sheet as follows:
Balance Sheet Extracts £
£ Current Assets
Stock x
Debtors x
Accrued Incomes/Prepaid Expenses x
Cash at bank x
Cash in hand x

Current Liabilities
Bank overdraft x
Creditors x
Prepaid Incomes/Accrued Expenses x

The accruals and expenses items may also be adjusted in the relevant income and expense
accounts so that the correct amount of expense or income is reported in the profit and loss
account for the year.e following is the summary of treatment for Accruals and Prepayments:
P&L B/Sheet Accrued