Correction Of Errors in Accounting

   Errors can be defined simply as mistakes made in the preparation of accounts. Errors can be categorized into two, namely:

• Errors that will affect the totals of the trial balance.
• Errors that do not affect the totals of the trial balance.

For the purpose of simplicity, we shall treat the two categories differently.


 ERRORS THAT DO NOT AFFECT THE AGREEMENT OF THE TRIAL BALANCE  
 Since the trial balance is used to test the arithmetical accuracy of the ledger, it must be balanced i.e the debit side must be equal to the credit side. However,  the trial balance may be balanced but there may be some undisclosed errors. The undisclosed errors include the following:

1. Errors of omission of transactions.
2. Errors of original entry.
3. Compensating errors.
4. Errors of principle.
5. Complete reversal of entries.
6. Errors of commission.
7. Errors of transposition. 

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ERRORS OF OMISSION OF TRANSACTIONS
Error of omission of transaction occurs when transactions are completely omitted from the debit and credit side of the books. It is absorbing to note that the error will not affect the balance of the trial balance. This is corrected by entering the omitted amount in the journal and posting in the ordinary and normal way e.g payment of rent $100 cash has been omitted from books.
The correction is as follows:
    Journal                                                     Dr.                            Cr.         

Rent Cash Correction of omission of rent

$                  100

$                       100

ERRORS OF ORIGINAL ENTRY
Error of original entry is committed when a wrong amount has been entered on the debit and credit sides. Since wrong amount has been entered on both sides, the trial balance will still agree. The difference of the amount should be posted to the accounts e.g purchase of goods $3301 from John has been recorded as $3103...
The correction is as follows:
    Journal                                                   Dr.                         Cr.            

Purchases John Correction of undercast of purchases

$                 198

$                      198

  
The difference, i.e $3301 - $3103 = $198, must be posted into the two accounts.

COMPENSATION ERRORS 
Both the debit and credit sides may be overcast or undercast by the same amount. The errors will cancel each other out e.g purchase is undercast by $300 and commission received is also undercast by the same amount.
The correction is as follows: 
    Journal                                                     Dr.                       Cr. 

Purchases Commission received correction of purchases and commission received undercast

$                 50

$                      50

ERRORS OF PRINCIPLE  
Error of principle occurs when wrong classes of accounts are involved. A real account item is entered in a nominal account or vice-versa such as motor van bought entered in motor expenses account e.g motor van $50 purchased has been entered in motor expenses account.
The correction is as follows:
   Journal                                                    Dr.                           Cr.    

Motor van Motor expenses Purchase of motor van entered in motor expenses now corrected

$                  50

$                               50

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COMPLETE REVERSAL OF ENTRIES
This occurs when an item is posted to the wrong side of the accounts. An account to be debited is credited ans vice versa. When this error occurs, the figure will be corrected ny multiplying it by two. The amount must be able to cancel the error and the come the actual entries e.g receipt of cheque $5000 from Adams has been debited to and credited to bank account.
The correction is as follows:
                   

    Journal                                                      Dr.                         Cr.        

Adams Bank Correction of complete reversal of entry.

$               10,000

$                          10,000

ERRORS OF COMMISSION
This occurs when an item of transaction is recorded in a wrong person`s account. It will only affect the names of the individuals and not the figure in the trial balance e.g sales of goods $30 to L.Suarez entered in M.Suarez`s account.
It is corrected as follows:
      Journal                                                    Dr.                           Cr.       

L.Suarez M.Suarez Sales entered in wrong account now corrected.

$                  100

$                       100

TRANSPOSITION ERRORS
A credit purchase from Donald costing $560 has been entered in the book as $650. The $90 error needs to be removed.
It is calculated as follows:

Date     Particular	F	Debit	Credit
Donald...................... Purchases..................		$          90	$       90

PROCEDURES FOR CORRECTION OF ERRORS

1. Identify the type of error committed.
2. The two accounts involved must be identified.
3. Familiarity with whether an account has debit or credit balance: e.g all assets must have debit balance, all liabilities must have credit balance, all income accounts must have credit balance, all expenses accounts must have debit balance, sales account must have credit balance and all purchases account must have debit balance.
4. Interprete the errors in the ledgers. 
5. Correct the ledgers first before posting to the journal.