CORRECTING ERRORSLearning Objectives1. Identify types of errors2. Detect the errors and do the

correcting journal entry3. Function of Suspense Account4. Prepare Statement of Adjusted

Net Profit and Adjusted Balance Sheet

Why A Balanced Trial Balance maybe not free from errors ?

Errors

Tangible Errors Intangible Errors

Intangible Errors

Errors of OmissionErrors of PostingErrors of Original EntryCompensating ErrorsErrors of Reversal

Errors of Omission – Transaction not yet recorded in any

recordEg: A payment of RM1,000 was made to

creditor Ar Ltd by cheque. This transaction was not recorded yet.Correcting Journal Entry :

Dr Creditor – Ar Ltd 1,000

CR Bank 1,000

Errors of Posting-

amount debited or credited is correct, but recorded in the wrong a/c

Eg : Credit sales of RM500 to Pollin was posted to PollyCorrecting Journal Entry :

Dr Pollin 500

CR Polly 500

Errors of Original Entry

Wrong amount was recorded, causing posting entry also incorrect

Eg : Credit purchase of RM353 from Bestari Ltd was recorded in purchase journal as RM335Correcting Journal Entry :

Dr Purchase 18

CR Creditor-Bestari 18

Compensating Errors

Errors in debit entry was balanced by errros in credit entry

Eg : Commission received RM650 was posted as RM560 and renatl for RM1,190 was debited as RM1,100Correcting Journal Entry :Dr Rental expenses 90

CR Commission received 90

Errors of Reversal

Correct accounts were used, but was recorded on the opposite side.

Eg : Cash purchase RM1,500 was debited to Cash A/c and credited to Purchase A/cCorrecting Journal Entry :

Dr Purchase 3,000

CR Cash 3,000

Tangible Errors* When does tangible errors happened ?* A suspense a/c will be createdtemporarily * Suspense A/c – debit side( Balance Sheet – Asset)* Suspense A/c – credit side( Balance Sheet – Liab.)

Types of Tangible Errors* Incomplete Double Entry*Wrong Posting*Different amount were debited and credited*

Transaction recorded by two debit entries or vice versa

Incomplete Double Entry

Only one entry recordedEg : Cash sales RM200 was only debited to

Cash A/c

Correcting Journal Entry :Dr Suspense 200

CR Sales 200

Wrong Posting

Eg : Sales journal of RM690 was wrongly calculated as RM960 and this wrong amount was posted to sales a/c. Debtors a/c was correctly recorded.

Correcting Journal Entry :Dr Sales 270

CR Suspense 270

Different amount were debited and credited

Eg : Wages of RM1,130 was correctly recorded in Cash Book but wrongly recorded in Wages a/c as RM1,100

Correcting Journal Entry :

Dr Wages 30

CR Suspense 30

Transaction recorded by two debit entries or vice versa

Eg : Purchase of RM1,380 was credited to Purchase a/c and Creditors a/c

Correcting Journal Entry :

Dr Purchase (1,380+1,380)

2,760

CR Suspense 2,760How this

happen?

Effect of Errors On Profit Or Loss

Errors

In Trading A/c

Effects to Gross

Profit/Net Profit

In P&L* Revenue* Expenses

Effects Net Profit

In Balance Sheet

No effects to Gross/Net

Profit

REFER TO EXAMPLE 9.12PAGE 248

Trading account:

Sales - Cost of good sold = Gross Profit

Sales - (Opening stock + Purchases – Closing stock) = Gross Profit

Sales - Opening stock - Purchases + Closing stock = Gross Profit

Let’s recall…Background knowledge

Example of errors Action required on

the profit

Action required on the balance

sheet

Purchases undercast Subtract -

Purchases overcast Add -

Sales undercast Add -

Sales overcast Subtract -

Income undercast Add -

Income overcast Subtract -

Expenses undercast Subtract -

Expenses overcast Add -

Example of errors Action required on

the profit

Action required on the balance

sheet

Opening stock undervalued

Subtract -

Opening stock overvalued

Add -

Closing stock undervalued

Add Increase closing stock

Closing stock overvalued

Subtract Decrease closing stock

Example of errors Action required on

the profit

Action required on the balance

sheet

Prepayments of expenses omitted

Add Increase prepayments

(current assets)

Accruals of expenses omitted

Subtract Increase accruals (current

liabilities)

Fixed/current assets undervalued

- Increase fixed/ current asset

Liabilities understated - Increase liabilities