Common Mistakes

Common Mistakes: Correction of Errors

This chapter tests whether you can distinguish error types, correct them through the General Journal and ledger, and state their effect on profit and the Financial Statements. Below are the common mistakes candidates make and how to avoid them.

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Errors Affecting vs Not Affecting the Trial Balance

Mistake: assuming every error unbalances the Trial Balance. Avoid: only errors affecting the Trial Balance make total Debits differ from total Credits (e.g. a one-sided entry, different amounts on the two sides, or a casting error); errors not affecting the Trial Balance leave it in balance.
Mistake: listing the six types of errors not affecting the Trial Balance as examples of errors that do. Avoid: errors affecting the Trial Balance touch only one side or one account, such as an amount posted to one side but omitted on the other.
Mistake: thinking errors not affecting the Trial Balance can be found just by checking its totals. Avoid: these are found through checking source documents, confirming balances, or auditing; corrections are recorded in the General Journal and then posted to the ledger.

Misidentifying the Type of Error Not Affecting the Trial Balance

Confusing Commission with Principle. Avoid: an Error of Commission = correct amount posted to the wrong account of the SAME class (e.g. debtor Ali into debtor Abu's account); an Error of Principle = posted to the wrong TYPE of account (e.g. an asset purchase recorded as Purchases). Ask: do both accounts belong to the same class?
Confusing Omission with a one-sided error. Avoid: an Error of Omission means the WHOLE transaction was never recorded (both the Debit and Credit entries are missing); if only one side is missing, that is an error affecting the Trial Balance.
Confusing Complete Reversal with Commission. Avoid: in a Complete Reversal of Entries the accounts and amount are correct but Debit and Credit are swapped; an Error of Commission uses a wrong account, not swapped sides.
Misunderstanding Compensating Errors and Errors of Original Entry. Avoid: Compensating Errors are two or more errors whose effects cancel each other out; an Error of Original Entry happens when a wrong figure is carried from the source document into BOTH sides (e.g. an RM540 invoice recorded as RM450), so both sides are equally wrong and the Trial Balance still balances.

Correcting Entries in the General Journal and Ledger

Using only the original amount to correct a reversal error. Avoid: use DOUBLE the amount (twice the transaction value) because the correcting entry must (a) cancel the wrong entry and (b) record the correct one. Example (RM200 cash from a debtor): Debit Cash RM400, Credit the debtor's account RM400.
Trying to 'remove' an entry for an omission. Avoid: for an omission, record the full transaction as normal (correct Debit and Credit); there is nothing to cancel because no entry existed in the first place.
Fixing an amount error by re-recording the whole figure. Avoid: record only the DIFFERENCE in the correct direction. Example (purchases recorded as RM450 instead of RM540): Debit Purchases RM90, Credit the supplier's account RM90.
Leaving out the correction narration. Avoid: every correcting General Journal entry must carry a short narration explaining the correction, then be posted to the relevant ledger accounts so balances are updated before the Adjusted Trial Balance.

Effect on Profit/Loss and the Financial Statements

Assuming every error changes profit. Avoid: errors involving only Statement of Financial Position accounts (assets/liabilities/debtors/creditors) do NOT change profit. For example, in a commission error between two debtors, profit is unchanged; only the debtor detail is corrected.
Getting the direction of the profit effect wrong. Avoid: work out whether revenue or expense was overstated or understated. For example, in an Error of Principle (an asset purchase recorded as Purchases), purchases are overstated so profit is understated; after correction, Purchases fall, profit rises, and the asset appears in the Statement of Financial Position.
Forgetting the two-way effect on the statements. Avoid: one correction can touch both the Income Statement and the Statement of Financial Position at once; make sure both are adjusted so net profit and closing capital stay consistent.
Ignoring the effect of a prior-year error. Avoid: if last year's error was not corrected, last year's profit was wrong and the opening capital carried into the current year is wrong too; state this effect when explaining the current year's profit/loss.

Preparing the Adjusted Trial Balance

Sample Correcting Entries in the General Journal

Particulars	Debit	Credit
Motor vehicles	5,000
Purchases		5,000
Cash	400
Debtor's account		400
Total	5,400	5,400

The first entry corrects an Error of Principle (an asset recorded as Purchases); the second corrects a Complete Reversal of Entries for RM200 cash from a debtor, using the doubled amount of RM400.

Why must a reversal error be corrected using double the amount?

Because a single correcting entry must do two jobs: cancel the reversed entry and then record the correct one. For an RM200 transaction, the first RM200 cancels the error and the second RM200 records the real entry, giving RM400 on each side.

How do I know whether an error affects profit?

Check the accounts involved. If the correction touches a revenue or expense account (including Purchases and Sales), profit changes. If it touches only asset, liability, debtor or creditor accounts, profit is unchanged even though the Statement of Financial Position detail is corrected.

Do the six error types such as omission and principle make the Trial Balance disagree?

No. All six types (omission, commission, principle, original entry, complete reversal and compensating) still keep the Trial Balance in balance because each still has equal Debit and Credit entries. That is why they are hard to detect and need other checks.

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