Professional Documents
Culture Documents
Week 1 - Correction of Errors
Week 1 - Correction of Errors
ACCOUNTING
LECTURE NOTES
- CORRECTION OF ERRORS -
Most errors are found at a date later than the one on which they are first made. We
make corrections to double entry accounts by preparing journal entries:
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Error of commission
A purchase of goods, £44 from J Lo, was entered in error in J Law’s account.
To correct this:
J Law
2021 £ 2021 £
May 30 J Lo: Error corrected 44 May 30 Purchases 44
J Lo
£ 2021 £
May 30 Purchases: Entered
originally in J Law’s a/c 44
Error of omission
The sale of goods, £10, to Jay Fung, has been completely omitted from the books.
The journal
DR CR
£ £
J Fung 10
Sales account 10
Correction of error of omission on credit sales
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Error of principle
The purchase of a machine, £200, is debited into the purchase account instead of being
debited to a machinery account.
The journal
DR CR
£ £
Machinery 200
Purchase account 200
Correction of error of principle: purchase of non-current assets
debited purchase account
This is somewhat more difficult to adjust. First must come the amount needed to cancel
the error, then comes the actual entry itself. Hence, the correcting entry is double the
actual amount first recorded.
Cash
2022 £ 2022 £
T Holland 16
T Holland
2022 £ 2022 £
Cash 16
To correct this:
Cash
2022 £ 2022 £
T Holland 16 T Holland (error 32
corrected)
T Holland
2022 £ 2022 £
Cash (error corrected) 32 Cash 16
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The journal
DR CR
£ £
T Holland 32
Cash 32
Correction of error of reversal of entries on payment of cash
The journal
DR CR
£ £
A Winehouse 10
Sales account 10
Correction of error of original entry: sales were understated
by £10 (£38 – £28)
Compensating error
The sales were overcast by £200, as also in the wages account.
The journal
DR CR
£ £
Sales account 200
Wages 200
Correction of overcast of £200 each in the sales account and the
wages account which compensated each other
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meaning
This may be on the trial balance itself or perhaps in the
Addition error
general ledger account
Errors of Two figures are transposed.
transposition e.g., £78 is incorrectly transposed and posted as £87
This occur when one side of the transaction is posted to
Posting error
the wrong side of the account
This occur when the debit side of the posting does not
Unequal posting error
equal to the credit side
Should the trial balance does not balance, the difference is placed is a temporary
account called suspense account.
The balance of suspense account may be shown in the statement of financial position
until it is sorted – however, naturally, this must be solved by finalising the financial
statements for the period (especially, in the exam).
CORRECTION OF ERRORS
Each error must first have an entry in the journal describing it, and then be posted to
the account concerned:
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Suspense
£ 2015 £
16 Dec 31 Trial balance (i) 40
==
2016 £ 2016 £
Mar 31 Sales (ii) 40
Sales
£ 2016 £
16 Mar 31 Suspense (ii) 40
The journal
DR CR
2016 £ £
Mar 31 Suspense 40
Sales 40
Correction of undercasting of sales by £40 last yrar
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The trial balance at 31 December 2017 showed a difference of £77, being a shortage on
the debit side.
A suspense account in opened, and the difference of £77 is entered on the debit side of
the account.
On 28 February 2018 all the errors from the previous year were found:
(A) A cheque of £150 paid to M Williams had been correctly entered into the Cash
Book but had not been entered into Williams’s account.
(C) A cheque of £93 received from K Rowland had been correctly entered in the
Cash Book, but had not been entered in Rowland’s account.
These three errors resulted in a net error of £77, shown by debit of £77 on the debit
side of the suspense account.
(33.4)
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Some of the errors will have meant that original profits calculated will be wrong. Other
error will have no effect upon profits.
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physical
economic factors time depletion
deterioration
wear and tear (e.g. obsolescence (i.e. For example: Wasting
machinery and out of date) legal life fixed character, likely
building) in terms of due to extraction
years of raw materials
erosion, rust and rot inadequacy (i.e. an
patent (e.g. mine,
(e.g. land or wood) asset is no longer
quarries and oil
used because of the
well)
growth and changed
in the size of the
business
depreciation charge
Cost −residual value
straight line fixed amount for every year =
useful economic life
reducing balance carrying value (or net book value) × depreciation rate (%)
decrease in value
revaluation
(there is no fixed %, while the carrying value = valuation)
The considerations of choose the methods of depreciation and effects on profits are:
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small but
unreasonable to keep important item,
revaluation detailed record (due to –– e.g. tools in office,
the nature of the asset) home officer
printer
To record the purchase of the van and the depreciation of the first three years:
DR Statement of P/L
CR Provision for depreciation
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Step 2: Transfer the cost of asset sold from the debit of the asset cost
account to the credit of the asset disposal account
DR Disposal
CR Non-current asset (cost)
Step 3: Transfer the accumulated depreciation on the asset sold from the
credit of the provision for depreciation account to the debit of the
asset disposal account
DR Disposal
CR Provision for depreciation
Step 4: Record the amount received for the asset in the credit of the asset
disposal account
DR Bank or cash
CR Disposal
Step 5: The result balance on the disposal account (either profit or loss) is
then transferred to the statement of P/L at the end of the financial
period.
It is, then, necessary to assess whether a profit or a loss has been made on the sale of the
asset. If the sale proceeds are more than the net book value of the asset, then a profit
has been made, and loss if vice versa.
If the balance on the asset disposal account is a debit, then a loss has been made; if the
balance on the asset disposal account is a credit, then a profit has been made.
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Occasionally, a business may purchase new non-current asset and part exchange a
non-current asset that it wishes to dispose of, as part of the purchase price.
Step 3: Transfer the cost of the old asset that is being part exchanged to
the disposal account
Step 4: Transfer the part-exchange value of the old asset that is being of
the exchanged to the disposal account
Step 6: Record the amount of the cheque/cash paid in the assets at cost
account and in the bank/cash account
Step 7: Transfer the balance on the disposal account (DR) to the P/L.
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Step 1: Transfer the cost price of the asset sold to an assets disposal
account
DR Disposal
CR Non-current asset (cost)
DR Bank or cash
CR Non-current asset (cost)
Step 4: Transfer the difference (i.e. the amount needed to balance the non-
current asset account) to the statement of profit and loss.
DR Disposal
CR Statement of P/L
DR Statement of P/L
CR Disposal
In many cases, the disposal of an asset will mean that we have sold it. This will not
always be the case. For example, a vehicle may be given up exchanged against the
purchases of a new vehicle, and hence, the disposal value is the exchange value. Say, if a
new vehicle costing £10 000 was to be paid for by £6 000 in cash and an allowance of £4
000 for the old vehicle, then the disposal value of the old vehicle if £4 000.
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VAN (COST)
2020 £ 2020 £
Jan 1 Bank X
Dec 31 Bal c/d X
X X
2021 2021
Jan 1 Bal b/d X
Dec 31 Bal c/d X
X X
2022 2022
Jan 1 Bal b/d X
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Depreciation
DR Depreciation (Statement of P/L)
CR Provision for depreciation
ASSET (COST)
2018 £ 2018 £
Jan 1 Bank X
Dec 31 Bal c/d X
The journal
DR CR
£ £
The journal
DR CR
£ £
J Law 44
J Lo 44
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