Accounting | Correction of errors

Hello Future Accountant! Getting Control of the Books

Welcome to one of the most important (and sometimes trickiest) chapters in accounting: Correction of Errors! Don't worry if this sounds scary—it’s actually where you become an accounting detective. Every business makes mistakes, and your job is to find them, fix them, and ensure the financial reports are 100% accurate.

This chapter is vital because it shows how a business maintains control over its financial data. Without good control processes, nobody can trust the final Profit or Loss figure!

What you will learn:

• The difference between errors that are easy to spot and errors that are hidden.
• How to use the special tool called the Suspense Account.
• How to fix errors using the Journal according to the double-entry rule.

I. The Role of Control: Why Errors Matter

Accounting is all about keeping records reliable. Think of a pilot using a faulty altimeter—if the data is wrong, the outcome is dangerous. In business, if the accounts are wrong, management makes poor decisions, and shareholders lose trust.

The process of correcting errors is a core part of internal control. It ensures that the basic accounting equation (\( \text{Assets} = \text{Liabilities} + \text{Capital} \)) always holds true.

The Golden Rule of Correction

When correcting an error, you must always remember the double-entry system. You cannot just erase the mistake. You must enter a new transaction that cancels out the old, incorrect entry, and simultaneously puts the correct entry into the books.

II. Finding Errors: The Trial Balance Check

The first and most reliable check accountants perform is preparing the Trial Balance (TB). Ideally, the total Debits (Dr) should exactly equal the total Credits (Cr).

A. Errors Revealed by the Trial Balance

If the TB totals do not match, it means the double-entry rule was broken for one or more transactions. This is often the easiest type of error to spot and fix, as the amount of the difference gives you a clue.

Common errors revealed by the TB:

1. Single Entry: Only recording the Dr or the Cr side of a transaction, but not both.
2. Incorrect Calculation: Adding up a ledger account column incorrectly.
3. Wrong Transfer to TB: Listing a balance (e.g., Debtors) incorrectly in the TB (e.g., listing \$500 instead of \$5,000).
4. Wrong Side Entry: Putting a Debit balance on the Credit column of the TB, or vice versa.

Analogy: If you try to lift a box that weighs 10kg, and you only lift with 5kg of force, the system (the box) will not balance. The difference (5kg) tells you exactly how much effort you missed.

III. The Detective Tool: The Suspense Account

When the Trial Balance does not match, the accountant knows there is a mistake, but they might not have time to find it immediately. This is where the Suspense Account comes in.

A. Purpose of the Suspense Account

The Suspense Account is a temporary holding account. It is used to force the Trial Balance to balance so that the process of preparing the final accounts (Income Statement and Statement of Financial Position) can begin.

Key Concept: The value of the Suspense Account is always equal to the difference between the Debit and Credit totals in the unbalanced TB.

B. How the Suspense Account Works (Step-by-Step)

Suppose the total Debits are \$10,000 and the total Credits are \$9,800. The difference is \$200 (on the Credit side).

1. The difference (\$200) is placed into the Suspense Account.
2. Since the Debits were higher, the Suspense Account needs a Credit entry of \$200 to make the TB equal:
   \( \text{Dr total} = \$10,000 \)
   \( \text{Cr total} = \$9,800 + (\$200 \text{ in Suspense Account}) = \$10,000 \)
3. The TB now balances. The Suspense Account remains active until the original error is found and corrected.

When the real error(s) is found, the necessary correction entry (the double entry) is passed through the Suspense Account, slowly reducing its balance to zero. A successful correction process eliminates the Suspense Account.

IV. The Hidden Errors (Not Revealed by the TB)

These errors are much trickier! They are errors where the double-entry rule was followed correctly (one Dr, one Cr, equal value), but the wrong accounts were used, or the transaction was missed entirely.

Because these errors maintain the equality of Debits and Credits, the Trial Balance will still balance perfectly, hiding the mistake!

The Six Types of Errors Not Affecting the Trial Balance

We can remember these with the mnemonic C-PROVE (Almost! We need six, so let's stick to the names, focusing on what went wrong):

1. Error of Omission

What it is: Forgetting to record a transaction entirely. You omitted (left out) both the Debit and the Credit entry.

Example: A cash sale of \$500 was made but never recorded in the Cash account or the Sales account.

Correction: Simply record the full, correct double entry now.

2. Error of Commission

What it is: Posting the transaction to the correct type of account, but the wrong person's account.

Example: An invoice for Customer A (\$100) was correctly debited to the Debtors Ledger, but accidentally recorded in Customer B's account instead of Customer A's account.

Correction: Dr Customer A (Correct person), Cr Customer B (Wrong person).

3. Error of Principle

What it is: Posting the transaction to the wrong type of account (violating basic accounting principles).

This is a very common IGCSE question! It involves confusing a Capital Expenditure (Asset) with a Revenue Expenditure (Expense), or vice versa.

Example: Buying new machinery (\$1,000) was debited to the Repairs Account (Expense) instead of the Machinery Account (Asset).

Correction: Dr Machinery (Asset - correct type), Cr Repairs (Expense - wrong type).

4. Error of Original Entry

What it is: The starting figure (in the book of original entry, like the Sales Journal) was wrong, and the incorrect figure was used for both the Debit and Credit postings.

Example: A \$900 sale was accidentally recorded as \$90 in the Sales Journal. The Debtors account was debited \$90 and the Sales account was credited \$90.

Correction: Record the difference needed to fix it. Dr Debtors (\$810), Cr Sales (\$810).

5. Compensating Errors

What it is: Two separate errors cancel each other out. One error makes the Dr side too high, and another error makes the Cr side too high by the exact same amount.

Example: Error 1: Sales account overstated by \$50. Error 2: Purchases account overstated by \$50. The TB still balances, but both figures are wrong.

Correction: Fix both errors individually.

6. Reversal of Entries

What it is: The correct accounts and amounts were used, but the Debit and Credit were swapped (reversed).

Example: Received \$300 cash from a customer. Cash (Asset, Dr) should increase, Customer (Liability, Cr) should decrease. Instead, Cash was credited \$300 and the Customer was debited \$300.

Correction: You must correct the error by double the amount! (If you put the amount on the wrong side, you need one entry to fix the mistake, and a second entry to put the amount on the correct side.)

V. The Correction Process (Using the Journal)

All corrections, whether they involved the Suspense Account or not, are formally recorded in the General Journal.

A. The Journal Entry Structure

The Journal is a book of original entry used to document transactions that don't fit into the other specialized journals (like sales or cash books). It always includes a brief written explanation called the narration.

Journal Format (Essentials for IGCSE):

• Date
• Details (Account to be Debited, Account to be Credited)
• Folio (F) (Usually blank for exams)
• Debit Amount (Dr)
• Credit Amount (Cr)
• Narration (e.g., Being correction of wages debited to machinery.)

B. Step-by-Step Guide to Correction

When you encounter an error correction problem, ask yourself three questions:

1. What was the correct entry (The Target)? (e.g., Dr Wages, Cr Bank for \$500)
2. What was the actual, wrong entry (The Mistake)? (e.g., Dr Machinery, Cr Bank for \$500)
3. What do I need to do to fix it (The Journal Entry)? (e.g., Undo Dr Machinery, Make Dr Wages)

Crucial Step: Undoing the Mistake

To undo a wrong entry, you do the opposite.

• If you wrongly Debited Machinery, you must now Credit Machinery.
• If you wrongly Credited the Bank, you must now Debit the Bank.

C. Example Corrections involving the Suspense Account

These examples show errors that broke the double-entry rule and therefore had to be held in the Suspense Account initially.

Example 1: Correction of a Single Entry Error

Error: Sales of \$400 were correctly recorded in the Sales Account (Cr), but were completely omitted from the Debtors Account (Dr). This caused a difference in the TB, offset by the Suspense Account.

Fix: The Debtors account needs a Dr of \$400. The balancing entry must be the Suspense Account.

Journal Entry:

Dr Debtors Account \$400
Cr Suspense Account \$400
Narration: Being correction for sales previously omitted from the Debtors account.

Example 2: Correction where a Figure was Transposed

Error: The Purchases Day Book was totaled as \$6,500 instead of the correct total of \$5,600. The full incorrect amount (\$6,500) was posted to the Purchases Account (Dr). (The difference, \$900, is currently sitting in the Suspense Account on the Credit side).

Fix: Purchases is overstated (too high) by \$900. To reduce an expense, you Credit it. The balancing entry is the Suspense Account.

Journal Entry:

Dr Suspense Account \$900
Cr Purchases Account \$900
Narration: Being correction of over-cast figure in Purchases Account.

VI. Comprehensive Quick Review

| Error Type | Affects TB? | Fix Requires Suspense Account? | Correction Method | | :--- | :--- | :--- | :--- | | Single Entry (Dr or Cr missed) | Yes | Yes | Dr/Cr the correct account; balance with Suspense. | | Error of Principle (Asset vs Expense) | No | No | Journal entry to reverse the wrong account and enter the right account. | | Error of Original Entry (Wrong figure used) | No | No | Journal entry to adjust both accounts by the difference. | | Reversal of Entries (Dr/Cr swapped) | No | No | Journal entry for double the amount to first undo and then correct. |