Topic 7 - Correction Of Errors

TOPIC

7

Correction of errors 100 Shares

Errors??? $1 par value

Reference: Chapter 2 of the textbook Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Learning Learning Objectives Objectives  Identify types of errors in a Trial Balance  Explain ways to correct the errors  Explain ways to correct errors that require more than two entries

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Recap: Recap: Analyzing Analyzing and and Recording Recording Process Process

Analyze each transaction and event form source documents

Record relevant transactions and events in a journal

DISCOVER ERROR!!!

Prepare and analyze the trial balance Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Post journal information to ledger accounts © The McGraw-Hill Companies, Inc., 2007

ERRORS ERRORS

• Are omissions and misstatements for one or more periods. • Errors include: 1. result from mathematical mistakes 2. mistakes in applying accounting principles and policies 3. oversights or misinterpretations of facts 4. fraud. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Types Types of of Errors Errors 1. 2. 3. 4. 5.

Errors of omission Errors of commission Errors of principles Errors of original entry Complete reversal of entries

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Types Types of of Errors Errors A trial balance may be unequal because:  Errors in account balances • Incorrect addition of total balances in account, • debit entry mistakenly recorded in credit column, or vice versa

 Errors in posting from journal to ledger • Omit a debit or credit posting

 Errors in trial balance preparation • Incorrect addition of the trial balance column • Omit a debit or credit item Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Error Error of of Omission Omission  Where a transaction completely omitted from the books (record).  There is no effect on balance for the trial balance because none debit and credit items are recorded.  Example: Ahmad sold an item by cash to Mila at the price of RM 2000. If Ahmad did not enter the transaction either the sales or cash account, the trial balance will be remain the same.  Correction needed: Enter the sale transaction in the accounting record.

Dt Cash Ct

Sales

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

2000 2000

© The McGraw-Hill Companies, Inc., 2007

Error Error of of Commission Commission - Correct amount is entered but in the wrong person’s account. - Example: A sale of RM1,500 to Ahmad is erroneously entered in the account of Ahmed. Ahmad and Ahmed are your debtors. Error: Suppose to be: Dt Ahmed (a/r) 1,500 Dt Ahmad (a/r) 1,500 Ct Sales 1,500 Ct Sales 1,500 - Correction needed: Cancel out Ahmed’s account and entered to Ahmad’s account.

DtAhmad

1,500

Ct Ahmed

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

(correct account)

1,500

(cancellation)

© The McGraw-Hill Companies, Inc., 2007

Error Error of of Principle Principle  Happens when an item is entered in the wrong class of account • E.g. if a fixed asset such as vehicle is debited to an expenses account such as vehicle repair expense account.

 Example: Farid purchased a machine RM 10,000. His account’s clerk incorrectly debited to Purchases account instead of being debited to Machinery account.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Error Error of of Principle…cont Principle…cont  Calculation example: Farid purchased a machine RM 10,000. His account’s clerk incorrectly debited the purchase to purchases account instead of being debited to Machinery account.  Error: Suppose to be: Dt Purchases 10K Dt Machinery 10K Ct A/P / Cash 10K Ct A/P / Cash 10K -Purchases overstatedMachinery understated

Correction needed: Dt Machinery 10,000 Ct Purchases 10,000 (cancellation of purchases account)

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Errors Errors of of Original Original Entry Entry  Happens when the original figure is incorrect.  For instance, sales of RM2,020 were done but the calculation of sales invoice were wrong. If it were calculated as RM2,000 and RM2,000 were credited as sales and RM2,000 were debited to account receivables, the trial balance would still be ‘balance’ but wrong.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Errors Errors of of Original Original Entry…cont Entry…cont  Correction needed:  Calculate the different: RM2,020 – RM 2,000 = RM20 of sales understated. This also means that the account receivables value is also understated. Journal entry to correct: Dt Account receivables 20 Ct Sales 20 Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Complete Complete Reversal Reversal of of Entries Entries  Happens where the correct accounts are used but each items is shown on the wrong side of the account.  Example: A payment of cash RM 1000 to Mr.Asraf (account payable) was entered on the debit side of cash account and credited to Mr.Asraf account.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Complete Complete Reversal Reversal of of Entries… Entries…  Error: Suppose to be: Dt Cash 1000 Dt A/Payable 1000 Ct A/Payable 1000 Ct Cash

1000

This means that the cash debit side is overstated to RM2,000 and account payable is overstated to RM2,000.  Correction: Dt A/Payable 2,000 Ct Cash

2,000

-to cancel both overstatements in order to reverse the effect of errors.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Steps Steps to to detect detect errors errors If the trial balance does not balance, the error(s) must be found and corrected. Make sure the trial balance columns are correctly added.

Recompute each account balance in the ledger.

Make sure account balances are correctly entered into the ledger.

Verify that each journal entry is posted correctly.

See if debit or credit accounts are mistakenly placed on the trial balance.

Verify that each original journal entry has equal debits and credits.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Correcting Correcting the the errors errors  If an error was discovered during journalizing (before posting to ledger) replace with correct account or amount at previous journal entry.  Eg. A purchase of RM1,000 supplies by cash was wrongly recorded as RM100 in journal entry. The error was discovered before posting. Replace previous entry with correct amount: Dr. Supplies 100 1,000 Cr. Cash 100 1,000 Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Correcting Correcting the the errors errors  If an error was discovered after posting to ledger  write down correcting journal entry to remove the amount from the wrong account and records it in correct account. • E.g. A purchase of RM1,000 supplies by cash was wrongly recorded as RM100 in journal entry. This error was discovered after posting to ledger. Incorrect journal entry: Dr. Supplies 100 Cr. Cash 100 Incorrect posting to ledger: ___Supplies a/c ___ Cash a/c_____ Cash 100 Supplies 100 Effect: Understate Supplies and Overstate Cash a/c by RM900. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Correcting Correcting the the errors errors (cont…) (cont…) Correcting journal entry: Dr. Supplies 900 Cr. Cash

900

Correct posting to ledger respectively: ___Supplies a/c ___ Cash a/c_____ Cash 100 Supplies 100 Cash 900 Supplies 900 1,000 1,000 Now, correct balance of Supplies RM1,000 (Debit balance) and Cash RM1,000 (credit balance) Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Errors Errors requiring requiring more more than than two two entries entries  Imbalanced trial balance sometimes can be caused by more than one error at one time.  E.g. Owner invested RM50,000 motor vehicle and RM100,000 cash into business. Incorrect journal entry: Dr. Motor vehicle 50,000 Dr. Capital 100,000 Cr. Cash 150,000 Error 1: Wrongly debited Capital a/c with wrong amount. Error 2: Wrongly credited Cash a/c. Correct journal entry: Dr. Motor vehicle Dr. Cash Cr. Capital

50,000 100,000 150,000

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

 Correction: Dr. Cash Cr. Capital

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

250,000 250,000

© The McGraw-Hill Companies, Inc., 2007

End of Topic 7

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007