Errors & Journal Entries

There may be errors even though the totals in the trial balance are equal

These errors might be spotted by other means

• Control accounts

• Bank reconciliation statements

These errors cannot be ignored

• They could affect the stated profit

• They could affect the stated value of assets and liabilities

• They could affect the balances related to other businesses

The six types of errors which do not affect a trial balance are:

• Error of omission

• Error of original entry

• Error of complete reversal

• Error of commission

• Error of principle

• Compensating errors

You can correct errors by making the appropriate entries into the ledger accounts

The journal will be used as a book of prime entry

Enter the account that needs to be debited

• It is conventional for debit entries to appear first

Enter the account that needs to be credited

• It is conventional to indent the details for credit entries

Give a narrative for the journal entry

• State “Correction of error”

• Give a brief description of the error

An error of omission occurs when a transaction is not entered into any ledger accounts

• The transaction is omitted

• It is possible that the transaction was not entered into the books of prime entry

The transaction is not included in the total for the debits and the total for the credits

• The totals will therefore balance

Enter the transaction correctly into the ledger accounts

• You essentially just need to make the entries as normal

Make the journal entries

An error of original entry occurs when a transaction is entered into both of the ledger accounts using an incorrect amount

• The same incorrect amount is entered into both the debit account and the credit account

• It is possible that the amount of the transaction was entered incorrectly into the books of prime entry

The incorrect amount is included in the total for the debits and the total for the credits

• The totals will therefore balance

Find the difference between the incorrect amount and the correct amount

Enter the difference into both accounts

• To increase an amount

  • Put the difference on the same side as the original entry

• To decrease an amount

  • Put the difference on the opposite side to the original entry

An error of complete reversal occurs when a transaction is entered into the wrong sides of both of the correct ledger accounts

• The account that was debited should have been credited

• The account that was credited should have been debited

The correct amount is included in the total for the debits and the total for the credits

• The totals will therefore balance

Double the value of the transaction

• This is because you need to apply the transaction twice

  • Once to undo the error

  • Once to make the correct entries

Make the entries on the correct side

• This will be the opposite side to where it was entered

An error of commission occurs when one entry for a transaction is entered into an incorrect account but the type of account is correct

• A debit entry could have been entered into the wrong expense account

• A transaction could have been entered into an account for the incorrect customer

• A transaction could have been entered into an account for the incorrect supplier

The correct amount is included in the total for the debits and the total for the credits

• The totals will therefore balance

Undo the entry in the incorrect account

• This means making an equal entry on the opposite side of the account

Make an entry in the correct account

An error of principle occurs when one entry for a transaction is entered into an incorrect account and the type of account is also incorrect

• A transaction for an expense could have been entered into an asset account

The correct amount is included in the total for the debits and the total for the credits

• The totals will therefore balance

You correct an error of principle the same way as you would correct an error of commission

Undo the entry in the incorrect account

• This means making an equal entry on the opposite side of the account

Make an entry in the correct account

Compensating errors occur when the effects of unrelated errors balance out when totalling the debits and credits

Example

• A business sells $100 worth of goods to Steve and $200 worth of goods to Tony

• The transactions were entered correctly into the sales account

• Both Steve and Tony’s accounts were debited $150

  • Overall the assets have still increased by $300

Correct each error separately

The total of the debits should equal the total of the credits