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Unit 4C

Unit 4C. CORRECTION OF ERRORS. Errors not revealed by the Trial Balance. The Trial Balance will not reveal any errors which have been made in both accounts involved in the double entry or where the same error is made in a debit and a credit account

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Unit 4C

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  1. Unit 4C CORRECTION OF ERRORS

  2. Errors not revealed by the Trial Balance The Trial Balance will not reveal any errors which have been made in both accounts involved in the double entry or where the same error is made in a debit and a credit account The Trial Balance will balance but it is concealing errors which have been made

  3. Errors not revealed by the Trial Balance When a Trial Balance balances it does not mean there are no mistakes A document may have been misplaced and the transaction was never entered at all This is known as an error of OMISSION ie it was missed out completely To correct an error of OMISSION simply enter the transaction in the ledger as you should have done Example – An invoice from T Brown for £100 of goods and £17.50 VAT was omitted from the books Solution – Debit Purchases £100, Debit VAT £17.50 Credit T Brown £117.50

  4. Another error not revealed by the Trial Balance A Trial Balance will still balance even when you made entries in the wrong customer’s account This is an error of COMMISSION Example – P Smith paid us a cheque for £200 This was entered in B Smith’s account by mistake Solution – Credit P Smith A/c £200 (as you should have done) and Debit B Smith A/c £200 (to take out the error in B Smith’s account)

  5. Another error not revealed by the Trial Balance When you make an entry in the wrong CLASS of account this is an error of PRINCIPLE Example – The purchase of spare parts for Motor Vehicles was entered in the Motor Vehicles Account instead of Motor Vehicle Expenses Account Solution – Credit the Motor Vehicles A/c (to remove it) and Debit the Motor Vehicle Expenses A/c (to enter where it belongs)

  6. Another error not revealed by the Trial Balance Two wrongs don’t make a right so when 2 separate errors cancel each other out, the Trial Balance will balance but the errors need to be sorted. These are referred to as COMPENSATING errors. Example – Both Purchases and Sales A/c s were overstated/overcast/overadded by £500 Solution – Credit Purchases A/c £500 and Debit Sales A/c £500 (this will restore both balances to the correct figure)

  7. Another error not revealed by the Trial Balance When the wrong figure was taken from the document and entered throughout the accounts, the Trial Balance will still balance This is an error of ORIGINAL ENTRY Example – A cheque from ABC Co for £200 was entered throughout as £20 Solution – Debit Bank A/c £180 and Credit ABC Co A/c £180 (this restores both accounts to the correct value)

  8. Another error not revealed by the Trial Balance When the correct accounts are used but the double entry in them is the wrong way round This is known as a COMPLETE REVERSAL Example – Wages of £300 paid by cheque was Debited in the bank and Credited in Wages Solution – Debit Wages A/c £600 (£300 to undo the wrong credit entry and £300 to enter correctly) and Credit Bank A/c £600 (£300 to removed wrong debit entry and £300 to enter correctly)

  9. Now - Errors revealed by the Trial Balance Errors which cause the Trial Balance to fail to balance are errors which affect only one account involved in the double entry We need to make use of an extra ledger account called a Suspense Account in order to correct these types of errors

  10. Errors revealed by the Trial Balance When you cannot get the Trial Balance totals to agree: Make an entry called ‘Suspense Account’ in the Trial Balance and enter the amount in whichever column makes the totals agree Now open up a Suspense Account in the ledger for that amount When the errors are found and corrected, the Suspense Account balance will be reduced to zero See the following example for how it works

  11. Using the Suspense Account E COHAN’S LEDGER Suspense Account Dr Cr Bal Balance 1575 1575 Dr Suspense Account 1575 106000

  12. Using the Suspense Account Solution - Debit Rent and Rates A/c and The following are then discovered: Rent £760 was entered in Bank A/c but not in Rent & Rates A/c E COHAN’S LEDGER Suspense Account Details Dr Cr Bal Balance 1575(Dr) Rent and Rates A/c 760 815(Dr)

  13. Using the Suspense Account Solution – Credit Sales A/c £500 and Invoice for £500 sent to A Black had been omitted from Sales A/c only E COHAN’S LEDGER Suspense Account Details Dr Cr Bal Balance 1575 1575(Dr) Rent and Rates A/c 760 815(Dr) Sales A/c 500 1315 (Dr)

  14. Using the Suspense Account Solution – Credit Wages A/c £630 and Wages of £295 was posted to Wages A/c as £925 E COHAN’S LEDGER Suspense Account Details Dr Cr Bal Balance 1575 1575(Dr) Rent and Rates A/c 760 815(Dr) Sales A/c 500 1315(Dr) Wages A/c 630 1945(Dr)

  15. Using the Suspense Account Solution – Debit Motor Vehicles A/c and A second hand vehicle purchased for £1945 was correct in the Bank A/c but not posted to Motor Vehicles A/c E COHAN’S LEDGER Suspense Account Details Dr Cr Bal Balance 1575 1575(Dr) Rent and Rates A/c 760 815(Dr) Sales A/c 500 1315(Dr) Wages A/c 630 1945(Dr) Motor Vehicles A/c 1945 0

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