Revision Notes
Revision Notes: Correction of Errors
These notes cover errors that affect the Trial Balance (Kesilapan Ketara) and errors that do not (Kesilapan Tidak Ketara), how to correct them in the General Journal and ledger, preparing the Adjusted Trial Balance, and their effect on the Financial Statements.
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Basic Concept: Errors Affecting vs Not Affecting the Trial Balance
- Errors affecting the Trial Balance cause it to disagree (total debits do not equal total credits), so they are easy to detect.
- Errors not affecting the Trial Balance do NOT upset its agreement: debits still equal credits even though an error exists.
- Errors affecting the Trial Balance are corrected directly in the ledger (or through a Suspense Account); errors not affecting it are corrected through the General Journal and then posted to the ledger.
- After all errors are corrected, an Adjusted Trial Balance is prepared so that correct figures are used for the Financial Statements.
Errors Affecting the Trial Balance and How to Correct Them
- Examples: errors in adding/subtracting an account balance; recording only one side (debit only or credit only); an amount omitted from the Trial Balance; a balance entered in the wrong column of the Trial Balance.
- Correction is made by adding or reducing the amount directly in the affected ledger account so the balance becomes correct.
- If the Trial Balance difference cannot be traced immediately, a Suspense Account is opened to hold the difference so the Trial Balance balances temporarily.
- When errors are found, correcting entries are made between the affected accounts and the Suspense Account; once all are correct, the Suspense Account balance becomes zero.
Six Types of Errors Not Affecting the Trial Balance
- (i) Error of Omission: a whole transaction is not recorded in any book (both debit and credit are left out).
- (ii) Error of Commission: the correct amount is recorded but in the wrong account of the same type/class (e.g. Ahmad's payment recorded in Aziz's account).
- (iii) Error of Principle: recorded in the wrong type of account (e.g. purchase of a vehicle recorded as Purchases instead of the Vehicle asset).
- (iv) Error of Original Entry: the wrong amount is taken from the source document and recorded on both the debit and credit sides (e.g. RM540 recorded as RM450).
- (v) Complete Reversal of Entries: the account that should be debited is credited and vice versa (both sides reversed).
- (vi) Compensating Errors: two or more errors occur and their effects cancel each other out so the Trial Balance still agrees.
Correction Procedure & Adjusted Trial Balance
- Step 1: identify the wrong entry; Step 2: determine the correct entry; Step 3: prepare the correcting entry in the General Journal; Step 4: post to the relevant ledger accounts.
- An error of omission is corrected by recording the omitted transaction; errors of commission/principle are corrected by transferring the amount from the wrong account to the correct account.
- An error of complete reversal is corrected with an entry of TWICE the original amount: once to cancel the wrong entry and once to record the correct entry.
- Each General Journal entry must include a short narration explaining the type of error being corrected.
- After the corrections are posted, an Adjusted Trial Balance is prepared with each account's updated balance and must balance.
Effect of Errors on the Financial Statements
- Errors on revenue or expense items affect the net profit/loss for the current year in the Income Statement; errors on assets/liabilities/equity affect the Statement of Financial Position.
- Example: an omitted expense causes profit to be overstated; overstated revenue also causes profit to be overstated.
- State the direction of the effect for each item: whether profit increases or decreases, and whether assets/liabilities are overstated or understated.
- The corrected Financial Statements are re-prepared taking all corrections into account so that profit/loss and financial position show the true figures.
Prior-Year Errors & Exam Tips
- If a prior year's error was not corrected, that year's profit/loss is wrong, so the opening balances (capital/assets/liabilities) carried into the current year are also wrong.
- A prior-year revenue/expense error has a knock-on effect: e.g. an omitted expense last year overstates last year's profit and overstates this year's opening capital.
- Remember: the Suspense Account is only for errors affecting the Trial Balance; errors not affecting it do NOT involve the Suspense Account because they do not cause the Trial Balance to disagree.
- Always write the journal narration, use twice the amount for reversal errors, and re-check that the Adjusted Trial Balance balances.
| Particulars | Debit | Credit |
|---|---|---|
| Vehicle | 5,000 | |
| Purchases | 5,000 | |
| Accounts Receivable | 500 | |
| Sales | 500 | |
| Total | 5,500 | 5,500 |
Error of principle: purchase of a vehicle wrongly recorded as Purchases. Error of omission: a credit sale was left unrecorded.
What is the main difference between errors that affect the Trial Balance and errors that do not?
Errors affecting the Trial Balance make it disagree and may involve a Suspense Account, while errors not affecting it leave the totals in agreement and are corrected through the General Journal only.
Why is an error of complete reversal corrected using twice the amount?
Because one amount is needed to cancel the wrong (reversed) entry and another to record the correct entry, so the total is twice the original amount.
What happens if last year's expense error is not corrected?
Last year's profit is misstated and the current year's opening capital is also wrong, so the figures brought forward must be adjusted to show the true position.
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