Key Terms
Key Terms: Correction of Errors
The key terms of Chapter 9: how to tell errors that affect the Trial Balance from those that do not, correct them through the General Journal and ledger, and judge their effect on the Financial Statements.
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Errors Affecting the Trial Balance
- Meaning: an error affecting the Trial Balance (Kesilapan Ketara) causes the Trial Balance NOT to balance, i.e. total debits do not equal total credits. It is 'ketara' (visible) because the imbalance itself signals that something is wrong.
- Examples: a casting (addition) error in an account, wrongly transferring an account balance to the Trial Balance, recording only one aspect of a transaction (debit only or credit only), recording different amounts on the debit and credit sides, and entering an amount on the wrong side of a single account.
- Correction method: apparent errors are corrected directly in the ledger account involved, without going through the General Journal, for example by cancelling the wrong figure and writing the correct one, because only one side is wrong.
- Memory hook: 'Ketara = you can see it'. The Trial Balance fails to balance, so the problem shows up the moment you total the columns.
- How it is tested: candidates are asked to identify why a Trial Balance does not balance, classify whether an error affects the Trial Balance, and explain the correct method of correction.
Errors Not Affecting the Trial Balance
- Meaning: an error not affecting the Trial Balance (Kesilapan Tidak Ketara) does NOT upset its balance: total debits still equal total credits even though the records contain a mistake.
- Why it stays hidden: the debit and credit are still recorded with equal amounts; only the account, the type of account, the original amount or the side is wrong. So the Trial Balance still balances and hides the error.
- Correction method: non-apparent errors are corrected through entries in the General Journal, then posted to the relevant ledger accounts, after the Trial Balance has been prepared.
- Memory hook: 'Balances but still wrong'. The Trial Balance looks correct, so the error is only found when transactions are rechecked. There are six types you must memorise.
- How it is tested: given a scenario after the Trial Balance is prepared, candidates prepare General Journal entries to correct the errors and post them to the ledger.
Errors of Omission, Commission & Principle
- Error of omission: a transaction is completely left out and not recorded in any account at all. Because both the debit and credit are missing, the Trial Balance stays balanced.
- Error of commission: the correct amount is recorded in the wrong account, but of the same class, e.g. a sale to Aisyah is wrongly recorded in Aina's account (both are debtors). Right type, wrong name.
- Error of principle: a transaction is recorded in the wrong TYPE of account, e.g. the purchase of an asset (a machine) is wrongly recorded as an expense such as Purchases or Repairs, breaching the capital-versus-revenue expenditure principle.
- Memory hook: Omission = 'nothing at all', Commission = 'right type of account, wrong name', Principle = 'wrong type of account'. All three leave the Trial Balance in balance.
- How it is tested: candidates must distinguish commission (same class of account) from principle (different type of account) and prepare the exact correcting journal for each.
Errors of Original Entry, Reversal & Compensating
- Error of original entry (from the source document): a wrong amount is taken from the source document and recorded in both accounts, e.g. an invoice of RM540 is recorded as RM450. The same wrong amount on debit and credit keeps the Trial Balance balanced.
- Error of complete reversal: the account that should be debited is credited and vice versa. The amount and accounts are correct but the sides are swapped. To correct it, the journal must use DOUBLE the amount: once to cancel, once to record correctly.
- Compensating errors: two or more errors on opposite sides of equal amount that cancel each other, e.g. one account over-debited by RM100 and another over-credited by RM100. Each error is corrected separately.
- Memory hook: Original entry = 'wrong number on both sides', Reversal = 'remember DOUBLE', Compensating = 'two errors that cancel out'.
- How it is tested: reversal errors are frequently tested because many candidates forget to double the amount; questions also test whether candidates can spot the two separate errors in a compensating case.
General Journal & Adjusted Trial Balance
- The General Journal is the book of prime entry for correcting non-apparent errors. Each correction is written as a double entry (one debit, one credit) with a short narration explaining the reason for the correction.
- After journalising, the correcting entries are posted to the relevant ledger accounts so that each account balance is updated to its correct value.
- An Adjusted Trial Balance is prepared after all errors not affecting the Trial Balance have been corrected. It lists the updated balances, must balance, and becomes the basis for preparing accurate Financial Statements.
- Memory hook: 'Journal first, ledger next, Adjusted Trial Balance last'. This is the fixed order of the correction steps.
- How it is tested: questions ask for complete General Journal entries with narrations, posting to selected ledgers, and preparation of a balanced Adjusted Trial Balance.
Effect on Financial Statements & Profit/Loss
- Errors involving revenue or expense accounts affect net profit in the Income Statement, while errors involving only assets or liabilities affect the Statement of Financial Position only.
- Example effect: an error of principle recording capital expenditure (an asset purchase) as revenue expenditure inflates expenses, so profit is understated and non-current assets are also understated.
- After correction, the Financial Statements are re-prepared using the adjusted balances so that profit or loss and the financial position show a true and fair value.
- Prior-year effect: if an error was not corrected in a previous financial year, that year's profit was misstated, so the opening capital (capital brought forward) for the current year is also misstated and must be adjusted.
- Memory hook: 'Revenue/expense → profit; asset/liability → financial position; last year's error → opening capital'. How it is tested: candidates state whether profit is over- or understated and prepare the amended statements.
| Type of Error | Brief Meaning | Example |
|---|---|---|
| Omission | Transaction not recorded at all | A credit sale is forgotten |
| Commission | Wrong account, same class | Aisyah's sale posted to Aina |
| Principle | Wrong type of account | Machine purchase posted to Purchases |
| Original entry | Wrong amount in both accounts | RM540 recorded as RM450 |
| Complete reversal | Debit and credit swapped | Correct using double the amount |
| Compensating | Two errors that cancel each other | Over-debit RM100 vs over-credit RM100 |
All six types do NOT affect the balancing of the Trial Balance and are corrected through the General Journal.
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Aisyah Account | 250 | |
| Aina Account | 250 | |
| (Correcting a sale to Aisyah wrongly recorded in Aina's account) | ||
| Total | 250 | 250 |
Same class of account (both debtors), so only the account name changes; the Trial Balance is unaffected before and after correction.
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