Intermediate Worked Examples: Correction of Errors

Example 1: Error of Omission

Question

Solution plan

An error of omission does not affect the balancing of the Trial Balance because both the debit and credit entries are missing. Record both transactions in full: the credit purchase (Debit Purchases, Credit Pembekal Aman) and the credit sale (Debit En. Zaki, Credit Sales).

Answer

Both omission errors are corrected with total debits of RM3,800 equal to total credits of RM3,800. Purchases rise by RM1,500, Pembekal Aman (creditor) by RM1,500, En. Zaki (debtor) by RM2,300 and Sales by RM2,300.

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Example 2: Error of Commission

Question

Solution plan

Error of commission: the amount is correct but posted to the wrong account within the same class. The Trial Balance still balances. Transfer the effect from the wrong account to the correct one. (i) Cancel the credit in Salwa's account (Debit Salwa) and credit Salmah instead. (ii) Cancel the debit in Kedai Besi Raya's account (Credit Kedai Besi Raya) and debit Kedai Besi Jaya instead.

Answer

Total debits of RM2,050 equal total credits of RM2,050. After correction, the accounts of Puan Salmah and Kedai Besi Jaya show correct balances, while the accounts of Puan Salwa and Kedai Besi Raya are restored. Overall debtor and creditor balances are unchanged.

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Example 3: Error of Principle

Question

Solution plan

Error of principle: an entry posted to the wrong TYPE of account (an asset confused with an expense/purchase). The Trial Balance still balances. (i) The computer is a non-current asset, so transfer it from Purchases to Office Equipment: Debit Office Equipment, Credit Purchases. (ii) The repair is a revenue expense, not an asset: Debit Vehicle Repairs Expense, Credit Motor Vehicle.

Answer

Total debits of RM3,800 equal total credits of RM3,800. Purchases fall by RM3,200 (so cost of sales is now accurate), Office Equipment (asset) rises by RM3,200, Motor Vehicle falls by RM600 and Vehicle Repairs Expense rises by RM600. Net profit and asset values are now reported correctly.

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Example 4: Complete Reversal and Error of Original Entry

Question

Solution plan

(i) Reversal error: the correct entry should be Debit Pembekal Segar, Credit Cash RM720. To correct it, record DOUBLE the amount (RM1,440), because RM720 cancels the wrong entry and another RM720 records the correct one: Debit Pembekal Segar RM1,440, Credit Cash RM1,440.

(ii) Amount error (understated by RM90): record only the difference, i.e. Debit En. Farid RM90, Credit Sales RM90.

Answer

Total debits of RM1,530 equal total credits of RM1,530. After correction, Pembekal Segar's account is reduced by a net RM720 (correct balance), Cash by a net RM720, while En. Farid and Sales each rise by RM90 so the sale is recorded at the correct RM650.

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Example 5: Compensating Error and Corrected Trial Balance

Question

Solution plan

Compensating error: two separate errors whose effects cancel out, so the Trial Balance still balances. Purchases is over-debited by RM300, so reduce it with a Credit to Purchases of RM300. Sales is over-credited by RM300, so reduce it with a Debit to Sales of RM300. One journal entry: Debit Sales RM300, Credit Purchases RM300. Then reduce Purchases to RM12,500 and Sales to RM18,000 in the Corrected Trial Balance.

Answer

The correcting entry balances (RM300 = RM300). In the Corrected Trial Balance, Purchases becomes RM12,500 and Sales becomes RM18,000. Both debit and credit totals are now RM40,500 and still balance (down RM300 from the original RM40,800).

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Example 6: Effect of Corrections on Net Profit

Question

Solution plan

Work out the effect of each item on profit: (i) Discount received is omitted income, so ADD RM250. (ii) Overstated insurance means the expense was reported too high, so ADD back RM300. (iii) Understated salaries means the real expense is higher, so DEDUCT RM600. (iv) Overstated sales means income was reported too high, so DEDUCT RM500. Corrected profit = 15,000 + 250 + 300 − 600 − 500.

Answer

The corrected net profit is RM14,450 (15,000 + 250 + 300 − 600 − 500). The omitted discount received and overstated insurance raise profit by RM550; the understated salaries and overstated sales lower profit by RM1,100, giving a net reduction of RM550 from the draft profit.

Where marks are usually lost