Content Standard 9.2

Financial Statements after Correction of Errors

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Explanation

Content Standard 9.2 focuses on what happens to the Financial Statements after errors are detected and corrected through the General Journal and the Suspense Account. Correcting an error involves a double entry, and it also changes the figures in the Income Statement (Penyata Pendapatan) and the Statement of Financial Position (Penyata Kedudukan Kewangan). Students must therefore be able to trace the effect of each error, prepare the corrected statements, and explain how net profit and the Statement of Financial Position change. The guiding principle is: every error involving a revenue or expense account affects net profit, whereas an error involving only assets, liabilities or equity does not change net profit but does change the financial position.

To trace the effect on net profit, we prepare an adjusted net profit computation (sometimes called the Revised Net Profit Statement). We begin with the original net profit, then ADD the effect of corrections that increase profit and DEDUCT the effect of corrections that decrease profit. The logic is simple: if an expense was overstated, correcting it reduces the expense, so profit rises (add). If an expense was omitted or understated, correcting it increases the expense, so profit falls (deduct). Conversely, if revenue was omitted or understated, correcting it increases revenue and profit rises (add); if revenue was overstated, correcting it reduces revenue and profit falls (deduct).

Some errors do not affect net profit at all because they involve only asset, liability or personal accounts. Examples are a non-current asset purchase recorded in the wrong asset account, or a receipt from one debtor credited to a different debtor. Such errors do not change the net profit figure, but they must still be corrected so that the values of assets, debtors or creditors in the Statement of Financial Position are accurate. Students must therefore clearly distinguish between errors that affect profit and errors that affect only the financial position.

When an error causes the Trial Balance to disagree, a Suspense Account is opened to hold the difference temporarily. If the Statement of Financial Position was prepared before the errors were found, the Suspense Account balance would appear as a temporary figure (under assets if a debit balance, or under equity/liabilities if a credit balance). Once all errors affecting the Trial Balance are corrected, the Suspense Account balance becomes zero and that temporary figure disappears from the statement. This is why the statements after correction must be redrawn without any Suspense Account.

The steps to prepare the Financial Statements after correction are: (1) identify the type of each error and whether it affects profit; (2) prepare the adjusted net profit computation, starting from the original net profit and adding or deducting the effect of each correction; (3) adjust the affected asset, liability and equity items in the Statement of Financial Position; (4) transfer the adjusted net profit into the Owner's Equity section; and (5) ensure total assets equal total equity plus liabilities, with no Suspense Account remaining. Accuracy depends on judging the direction of each correction's effect (add or deduct).

Worked examples

Example 1: Adjusted Net Profit Computation

Seri Wangi Trading reported an original net profit of RM32,000 before the following three errors were found.

Error 1: A salary expense of RM900 was wrongly recorded as RM1,900 (overstated by RM1,000). Correction: Debit Bank/Salary control, Credit Salary Expense RM1,000 to reduce the expense. Effect: expense falls by RM1,000, so ADD RM1,000 to profit.

Error 2: A credit sale of RM600 to a customer was completely omitted. Correction: Debit Debtor RM600; Credit Sales RM600. Effect: revenue rises by RM600, so ADD RM600 to profit.

Error 3: Rates expense of RM250 was paid but not recorded. Correction: Debit Rates Expense RM250; Credit Bank RM250. Effect: expense rises by RM250, so DEDUCT RM250 from profit.

Computation: Original net profit RM32,000 + RM1,000 + RM600 - RM250 = Adjusted net profit RM33,350. This RM33,350 is the figure transferred to Owner's Equity in the corrected Statement of Financial Position.

Example 2: An error that does not affect profit but changes the Statement of Financial Position

Bunga Raya Enterprise has an original net profit of RM18,000. A receipt of RM1,200 from debtor Ali was wrongly credited to debtor Abu's account.

Correction: Debit Abu's Account RM1,200; Credit Ali's Account RM1,200. This is an error of commission involving only two personal accounts.

Effect on net profit: NONE. Net profit stays at RM18,000 because no revenue or expense account is involved.

Effect on the Statement of Financial Position: total debtors remain unchanged, but the individual balances are corrected so that Ali and Abu show the right amounts. This shows that some corrections only fix details within the financial position without changing profit.

Example 3: The Suspense Account disappears after correction

Cerdik Stationery prepared a Trial Balance that did not balance, with debits exceeding credits by RM400, and opened a Suspense Account with a credit balance of RM400. This figure was placed temporarily in the original Statement of Financial Position.

Cause of error: The discount received total of RM400 in the Cash Book was not posted to the Discount Received account. Correction: Debit Suspense Account RM400; Credit Discount Received RM400. Discount received is revenue, so ADD RM400 to profit.

After this entry, the Suspense Account shows a nil balance and no longer appears in the corrected Statement of Financial Position.

If the original net profit was RM40,000, the adjusted net profit becomes RM40,000 + RM400 = RM40,400, and the Statement of Financial Position is redrawn with no Suspense Account.

Practice

Damai Trading reported an original net profit of RM45,000. Two errors were found: (i) Insurance expense of RM700 was wrongly recorded as RM70 (understated by RM630); (ii) A sale of RM1,500 was recorded twice (overstated by RM1,500). Prepare the adjusted net profit computation.

Answer: Error (i): the expense was understated by RM630, so the correction increases it by RM630; DEDUCT RM630 from profit. Error (ii): sales were overstated by RM1,500, so the correction reduces sales by RM1,500; DEDUCT RM1,500 from profit. Computation: Original net profit RM45,000 - RM630 - RM1,500 = Adjusted net profit RM42,870.

State whether each of the following errors affects net profit and give a reason: (a) The purchase of a non-current asset for RM3,000 was wrongly entered in the Purchases Account; (b) A receipt from debtor Siti of RM500 was wrongly credited to debtor Sara's account.

Answer: (a) AFFECTS net profit. A non-current asset recorded in the Purchases Account overstates purchases (an expense) by RM3,000, so profit is understated; after correction (Debit Non-current Asset; Credit Purchases RM3,000) ADD RM3,000 to profit, and assets rise. (b) DOES NOT affect net profit. It is an error of commission between two personal accounts (Debit Sara's Account; Credit Siti's Account RM500); total debtors stay the same, only the individual balances are corrected in the Statement of Financial Position.

Harmoni Store opened a Suspense Account with a debit balance of RM250 because the Trial Balance did not balance. The error: Discount allowed of RM250 was omitted from the Discount Allowed Account. Original net profit is RM28,000. Correct the error, compute the adjusted net profit, and state the effect on the Suspense Account.

Answer: Correction: Debit Discount Allowed RM250; Credit Suspense Account RM250. Discount allowed is an expense, so the RM250 increase in expenses is DEDUCTED from profit. Adjusted net profit = RM28,000 - RM250 = RM27,750. After the correction, the Suspense Account balance becomes zero and no longer appears in the corrected Statement of Financial Position.

Restu Trading's original net profit is RM60,000. Errors: (i) Rent revenue received of RM800 was omitted; (ii) Utility expense of RM450 was recorded as RM540 (overstated by RM90); (iii) Carriage expense of RM300 was not recorded. Prepare the adjusted net profit computation.

Answer: Error (i): revenue of RM800 was omitted; the correction increases revenue, so ADD RM800. Error (ii): an expense was overstated by RM90; the correction reduces it, so ADD RM90. Error (iii): an expense of RM300 was omitted; the correction increases expenses, so DEDUCT RM300. Adjusted net profit = RM60,000 + RM800 + RM90 - RM300 = RM60,590.

Exam tips

Key terms

Adjusted net profit: The net profit updated after the effect of all error corrections is added to or deducted from the original net profit.
Suspense Account: A temporary account opened to hold a Trial Balance difference; it becomes nil and disappears once all related errors are corrected.
Error affecting profit: An error involving a revenue or expense account that changes net profit when corrected.
Statement of Financial Position: The statement showing assets, liabilities and owner's equity at a date; redrawn after correction using the adjusted net profit.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

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