CORRECTION OF ERRORS Lesson Note
Learning Objectives
This SS2 ACCOUNTING lesson note covers CORRECTION OF ERRORS for First Term, Week 1.
Lesson Note
Learning Objectives
By the end of the lesson, students should be able to:
Define errors in accounting.
Explain the meaning of a suspense account.
Itemise errors that a trial balance will not disclose.
A. Introduction
Errors can occur when recording business transactions. Some errors can be discovered by preparing a trial balance, while some errors cannot be discovered by the trial balance.
When an error is discovered, it must be corrected so that the accounting records will show the correct information.
B. Meaning of Errors
An error is a mistake made when recording, classifying, calculating or posting an accounting transaction.
For example, if goods bought for ₦10,000 are recorded as ₦1,000, an error has occurred.
C. Correction of Errors
Correction of errors means making the necessary changes in the accounting records to remove mistakes that have been made.
Errors may be corrected by making a correcting journal entry or by making an appropriate adjustment in the affected accounts.
D. Suspense Account
A suspense account is a temporary account used to hold an amount when the correct account or the cause of an accounting difference is not yet known.
It is commonly used when the trial balance does not agree.
Example
If the debit side of a trial balance is ₦50,000 and the credit side is ₦48,000, there is a difference of ₦2,000.
The ₦2,000 may temporarily be placed in a suspense account while the error causing the difference is being investigated.
Once the error is found and corrected, the suspense account should be cleared.
E. Important Point
A suspense account is temporary. It should not normally have a balance after all errors causing the difference have been corrected.
Errors Not Disclosed by the Trial Balance
Some errors do not affect the agreement of the trial balance. Therefore, the trial balance cannot reveal them.
The main errors include:
1. Error of Complete Omission
This occurs when a transaction is completely left out of the accounting records.
Example: A credit purchase of ₦20,000 is not recorded anywhere.
The trial balance will still agree because both the debit and credit entries are missing.
2. Error of Commission
This occurs when a transaction is posted to the wrong account of the same class.
Example: Money received from Musa is wrongly credited to Musa’s brother, Sani’s account.
3. Error of Principle
This occurs when a transaction is recorded in the wrong type of account.
Example: Buying a machine for ₦500,000 is recorded as an ordinary expense instead of a fixed asset.
4. Compensating Errors
These occur when two or more errors cancel each other out.
Example: An account is understated by ₦5,000 while another account is also understated by ₦5,000 in a way that causes the errors to offset each other.
The trial balance may still agree.
5. Error of Original Entry
This occurs when the correct transaction is recorded in the wrong amount in both the debit and credit accounts.
Example: Goods bought for ₦8,000 are recorded as ₦800 in both the purchases account and the supplier’s account.
The trial balance will still agree.
6. Complete Reversal of Entries
This occurs when the correct accounts are used, but the debit and credit entries are completely reversed.
Example: Cash received from a customer is credited to the cash account and debited to the customer’s account instead of the correct entries.
The trial balance can still agree.
Summary
Errors are mistakes made in accounting records. They can occur during recording, posting or classification of transactions.
A suspense account is a temporary account used when there is a difference in the trial balance and the cause has not yet been identified.
Some errors cannot be discovered by the trial balance. These include:
Error of complete omission
Error of commission
Error of principle
Compensating errors
Error of original entry
Complete reversal of entries
Evaluation
Objective Questions
1. An error in accounting is a ______ made when recording a transaction. A. profit B. mistake C. balance D. payment
2. A suspense account is a ______ account. A. permanent B. temporary C. personal D. capital
3. Which of the following errors will not normally be disclosed by a trial balance? A. Error of complete omission B. Wrong addition of one side of the trial balance C. Posting only one side of a transaction D. Wrong balancing of an account
4. When a transaction is completely left out of the books, it is called an error of ______. A. principle B. commission C. omission D. calculation
5. Recording the purchase of a machine as an ordinary expense is an error of ______. A. principle B. omission C. commission D. calculation
6. An error that occurs when the correct amount is recorded in the wrong account of the same class is called error of ______. A. principle B. commission C. omission D. reversal
7. Two errors that cancel each other are known as ______ errors. A. original B. compensating C. commission D. principle
8. An error of original entry occurs when the wrong amount is entered in ______ accounts. A. one B. both affected C. no D. cash only
9. The main purpose of a suspense account is to temporarily record ______. A. profit B. capital C. an unexplained difference D. drawings
10. Which of the following is NOT an error that a trial balance may fail to disclose? A. Error of principle B. Error of complete omission C. Compensating error D. An error where only one side of an entry is posted
Theory Questions
1a) What is an error in accounting?
1b) Explain the meaning of a suspense account.
2a) State four errors that a trial balance will not disclose.
2b) Explain error of complete omission with an example.
What is an error of principle?