Cash Book: 2 columns
Lesson 21: Errors in the accounts 1
Students often experience difficulty with this topic, and the terms used should be explained with care.
Step 1
1 Explain that errors in accounts may be classified as:
● those that have no effect on agreement of the trial balance;
● those that usually affect the trial balance.
2 Review the range of errors (below) that do not affect agreement of the trial balance.
Topic summary
● The basic classification of errors and errors that have no effect on agreement of the trial balance
● Errors that might affect agreement of the trial balance and how the trial balance might be affected
Aim: to be aware of the basic classification of errors and, in particular, of the errors that have no effect on agreement of the trial balance
Extended Syllabus references
11.3 Errors in the accounts and their effect on the trial balance 11.4 The revising of an incorrectly drafted trial balance
11.5 The limitations of the trial balance as a means of check
17.1 The difference between errors which affect agreement of the trial balance and those errors which do not affect such agreement
17.2 Those errors which do not affect agreement of the trial balance; types of such error
17.3 From data provided, the selection of the relevant type of error 17.4 The drafting of appropriate adjusting journal entries
(a) Errors of omission
This type of error occurs when a transaction is completely omitted from the books.
Use the example that follows to illustrate errors of omission.
Example
Credit note number 387 for £73 is issued to a customer. A Doyle, on the return of goods, has not been entered in the accounts.
An adjusting journal entry should be made, as follows, before making the necessary correcting entries in the two ledger accounts concerned.
JOURNAL
Dr Cr
£ £
Returns inwards 73
A Doyle 73
Correction of omission of entry of credit note no 387
(b) Errors of commission
These errors occur when a transaction is entered in a wrong account of the same class as the one in which it should have been recorded. Often, this error means that a transaction is entered in the wrong person’s account (either debtor or creditor). Use the example below to illustrate this type of error of commission.
Example
Invoice number S/598 for goods bought on credit for £345 from Eastern Supplies had been entered in the account of Eastern Sundries.
The adjusting entry would appear as:
JOURNAL
Dr Cr
£ £
Eastern Sundries 345
Eastern Supplies 345
Purchase invoice no S/598 entered in wrong supplier account, now corrected
In the Purchases Ledger, the 2 accounts would appear as:
Eastern Supplies
£ Purchases (entered wrongly
in Eastern Sundries Account) 345
(continued)
Errors in the accounts 1
Eastern Sundries
£ £
Eastern Supplies Purchases 345
(posting error corrected) 345
The correction of an error involving impersonal accounts is as follows:
JOURNAL
Dr Cr
£ £
Postage 19
Telephone 19
Payment in cash for postage was wrongly posted to Telephone Account, now corrected
Stress that both accounts are in the same class, ie they are both nominal accounts.
A further example for impersonal accounts is as follows:
JOURNAL
Dr Cr
£ £
Office furniture 463
Fixtures and fittings 463
Purchase by cheque of office furniture, wrongly posted to Fixtures and Fittings Account, now corrected
In this case, both accounts are real accounts.
(c) Reversal of entries
Debit and credit entries for the correct amount have been made, but on the wrong side of the 2 accounts. Use the example that follows to illustrate the reversal of entries.
Example
The sale of goods for £420 cash has been entered as a debit to the Sales Account and a credit to the Cash Account.
Errors in the accounts 1
The correct entries should be:
If the correct entries are adjusted by crediting the Sales Account and debiting the Cash Account with £420, it merely cancels the errors.To adjust fully, and to achieve what was first intended, it is necessary to double the amount.
Sales
£ £
Cash 420 Cash (correction of error) 840
Cash
£ £
Sales (correction of error) 840 Sales 420
Therefore, the journal entry would be:
JOURNAL
Dr Cr
£ £
Cash 840
Sales 840
Sales of goods for £420 cash and wrongly reversed in the accounts, now corrected
(d) Error of principle
When a transaction is entered in the wrong class of account, an error of principle occurs. Use the example given below to illustrate this type of error.
Example
The purchase of office equipment for £1,264 has been wrongly debited to the Purchases Account. This purchase is an item of capital expenditure that, wrongly, has been treated as revenue expenditure and entered in a nominal account. As capital expenditure, it should have been recorded in a real account. It is therefore necessary to cancel the incorrect entry in the Purchases Account, ie using a credit entry, and to make a debit entry in the Office Equipment Account.
Errors in the accounts 1
JOURNAL
Dr Cr
£ £
Office equipment 1,264
Purchases 1,264
Purchase of office equipment wrongly debited in Purchases Account, now corrected
(e) Error of original entry
When an error of original entry occurs, the correct accounts have been used and the entries are on the correct sides, but the amount has been entered incorrectly in both accounts. Often, although not necessarily, this error is the result of the source document being incorrect. Use the following example to illustrate error of original entry.
Example
Sale of goods £350 on credit to T Hogan has been entered in the accounts as £380.
Both entries are £30 too much.
JOURNAL
A compensating error occurs when errors cancel each other out. Use the example that follows to illustrate this type of error.
Example
Purchases account (debit) is understated by £10 and rent receivable (credit) also is understated by £10. The trial balance is still in balance, provided there are no other errors in the accounts.
Purchases Account and Rent Receivable Account each undercast by £10, now corrected
Errors in the accounts 1
(g) Error of duplication
In this instance, a transaction is entered correctly in the accounts and then, in error, is entered again.This error is not revealed by the trial balance.
3 Copy and hand out or show exercises T/21.1, T/21.2, and T/21.3 in the Appendix (pages 288–9) on the overhead projector. Ask the students to work through them.
Step 2
1 Outline the errors that would usually affect the trial balance, including:
● an incorrect posting on one side of the transaction;
● an error in addition, eg of entries within an account;
● a balance wrongly brought forward to the trial balance;
● a balance omitted from the trial balance.
These errors affect agreement within the trial balance only if they do not compensate one another.
2 Ask the students when the errors are likely to become known.The answer is that some will become known during the course of the year, partly through checks in the system.
They will then be corrected. Others will become known at the end of the year when the trial balance is prepared. Either way, the adjustments necessary to correct the errors should be ‘journalized’.
3 Discuss with the students how the various errors will affect the trial balance.
4 Explain that agreement between the 2 sides of a trial balance does not prove that all entries have been made correctly in the accounts.The trial balance is limited as a means of checking entries.
The 2 sides of the trial balance could be in agreement even though any of the errors outlined in Step 1 could have been made, eg the complete omission of a transaction, a compensating error, or an error of commission.
5 Fully discuss the limitations of the trial balance with the students.
6 Copy and hand out or show exercises T/21.4 and T/21.5 in the Appendix (pages 290–1) on the overhead projector. Ask the students to work through them.
7 Review and discuss the answers to the questions.
Errors in the accounts 1
Aim: to be aware of errors that might affect agreement of the trial balance and of how the trial balance might be affected