IGCSE Correction of Errors
In this lesson, we will learn to identify and correct different types of errors found in the accounts using journals. We will also learn how to prepare the suspense account to correct these errors, adjust the profit or loss figure after correcting for these errors and understand how it affects our Statement of financial position.
Related Lessons:
Identifying Errors and Correcting With Journals
A balanced trial balance does not necessarily mean that there are no errors. The following six types of errors may be present in the business accounts, yet do not affect the balancing of the trial balance.
Error of omission occurs when a transaction is not recorded in the books. To correct it, we record the transaction.
Error of original entry occurs when the amount of the transaction is recorded wrongly in the books. To correct,
if the amount is overstated, we reduce the affected account by the amount of the difference.
if the amount is understated, we increase the affected account by the amount of the difference.
Error of commission occurs when one of the accounts in the transaction was recorded to a wrong account that belongs to the same accounting group. To correct, we subtract the amount from the incorrect account and add it to the correct account.
Error of principle occurs when one of the accounts in the transaction was recorded to a wrong account that belongs to a different accounting group. To correct, we subtract the amount from the incorrect account and add it to the correct account.
Error of complete reversal occurs when a transaction is recorded on the wrong side of both accounts. To correct, the entries are reversed and then recorded on the correct side. As a result, the same journal entry is recorded twice, effectively doubling the amount recorded.
Error of compensation occurs when an overstatement in one account is canceled by an understatement in another account. To correct, we decrease the account that is overstated and increase the account that is understated.
Correction Of Errors Using Suspense Account
A Suspense account is prepared to temporarily balance a Trial Balance that does not balance. This enables the business to prepare a drafted copy of the income statement and statement of financial position, while the errors are being investigated and corrected.
Recording in Suspense Account
Only errors that affects the balancing of the trial balance are corrected in the Suspense account. Therefore, errors of commission and errors of principle are not recorded in the Suspense account.
If the debit side of the trial balance is understated or the credit side is overstated, we debit the Suspense account.
If the credit side is understated or the debit side is overstated, we credit the Suspense account.
Closing the Suspense Account
The Suspense account is closed in the same manner as an asset or liability account. The balancing amount is recorded on the last day of the accounting period as “Balance carried down” and brought over to the next accounting period as “Balance brought down”.
In the Statement of financial position, a debit balance in the Suspense account is recorded as a Current Asset while a credit balance is recorded as a Current Liability.
Correction of Errors on Profit or Loss
The Statement of Adjusted Profit or Loss is prepared to correct the profit or loss figure after adjusting for all errors found in the accounts.
We start off the statement with the header that states the date that this statement represents.
Next, we record the amount of the profit or loss containing the errors.
For errors that overstates the profit, we minus these amounts from our profit.
For errors that understated the profit, we add these amounts to our profit.
Finally, we calculate the adjusted profit or loss for the year.