How to correct errors via the General Journal

Correction of Errors

What you need

• An unbalanced trial balance and the amount of the difference between the debit and credit sides.
• A Suspense Account opened to hold the difference temporarily until the errors are traced.
• The relevant ledger accounts and source documents to verify the original entries.
• An understanding of correct double entry (debit and credit) for each transaction.

Step by step

1. 1

   Identify the difference and open the Suspense Account

   Compare the total of the debit side with the total of the credit side of the trial balance. For Perniagaan Setia on 31 December 2023, the debit total is RM250 less than the credit total. Enter the difference on the smaller side (Debit Suspense Account RM250) so the trial balance agrees for the time being.

2. 2

   Investigate and identify the type of error

   Check the ledger and source documents to find the cause of the difference. You find that an electricity payment of RM250 was credited to the Bank Account but not debited to the Electricity Expenses Account. This is a one-sided entry, an error that affects the trial balance, because only one side of the double entry was recorded.

3. 3

   Compare the correct entry with the actual entry

   The correct entry should have been: Debit Electricity Expenses Account RM250; Credit Bank Account RM250. The actual entry made was only Credit Bank Account RM250, while the RM250 debit to the Electricity Expenses Account was omitted. Therefore the debit side is short by RM250, and this is the difference entered in the Suspense Account.

4. 4

   Determine the correcting entry using the Suspense Account

   Record the missing side, with the Suspense Account as the other side of the entry. Since the debit to Electricity was the one omitted, the correcting entry is: Debit Electricity Expenses Account RM250; Credit Suspense Account RM250. The credit to the Suspense Account cancels the RM250 debit balance opened in the first step.

5. 5

   Record the correction in the General Journal with a narration

   Enter the correction in the General Journal, complete with the date, the account debited, the account credited, the amount and a narration. Example: 31 Dec, Electricity RM250 (Debit); Suspense Account RM250 (Credit). Narration: 'To correct the electricity payment not debited to the Electricity Expenses Account.'

6. 6

   Post the entry to the ledger

   Post the General Journal entry to the respective ledger accounts. Debit the Electricity Expenses Account RM250 so that its balance is now correct, and credit the Suspense Account RM250. The Suspense Account now shows a debit of RM250 (opening balance) and a credit of RM250 (correction), giving a nil balance.

7. 7

   Check the Suspense Account and the effect on net profit

   Make sure the Suspense Account shows a nil balance after all corrections; if a balance remains, there is still an undetected error. Because the electricity expense was understated by RM250, the original net profit was overstated by RM250. In the Statement of Corrected Net Profit, deduct RM250 from the original net profit to obtain the corrected net profit.

Second example

On 31 December 2023, the trial balance of Kedai Harmoni showed the debit side RM360 more than the credit side, so a Suspense Account was opened with a credit of RM360. Investigation found that interest received of RM180 had been wrongly debited to the Interest Received Account when it should have been credited. Because the entry sat on the wrong side, the correcting amount is doubled, that is RM360. The correcting entry is: Debit Suspense Account RM360; Credit Interest Received Account RM360, with the narration 'To correct interest received wrongly debited'. After posting, the Interest Received Account shows the correct net credit of RM180 and the Suspense Account has a nil balance.

In another case, suppose Kedai Harmoni's General Expenses Account was overcast by RM200 when it was totalled. This makes the debit side of the trial balance RM200 too high. The correcting entry involves only one expense account and the Suspense Account: Debit Suspense Account RM200; Credit General Expenses Account RM200, to reduce general expenses to the true amount and clear the suspense balance.

Common mistakes

Related chapter: Correction of Errors →

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