CORRECTING ERRORSLearning Objectives1. Identify types of errors2. Detect the errors and do the

correcting journal entry3. Function of Suspense Account4. Prepare Statement of Adjusted

Net Profit and Adjusted Balance Sheet

Why A Balanced Trial Balance maybe not free from errors ?

Errors

Tangible Errors Intangible Errors

Intangible Errors

Errors of OmissionErrors of PostingErrors of Original EntryCompensating ErrorsErrors of Reversal

Errors of Omission – Transaction not yet recorded in any

recordEg: A payment of RM1,000 was made to

creditor Ar Ltd by cheque. This transaction was not recorded yet.Correcting Journal Entry :

Dr Creditor – Ar Ltd 1,000 CR Bank 1,000

Errors of Posting-amount debited or credited is correct, but

recorded in the wrong a/cEg : Credit sales of RM500 to Pollin was

posted to PollyCorrecting Journal Entry :

Dr Pollin 500 CR Polly 500

Errors of Original EntryWrong amount was recorded, causing

posting entry also incorrectEg : Credit purchase of RM353 from Bestari

Ltd was recorded in purchase journal as RM335Correcting Journal Entry :Dr Purchase 18

CR Creditor-Bestari 18

Compensating ErrorsErrors in debit entry was balanced by

errros in credit entryEg : Commission received RM650 was

posted as RM560 and renatl for RM1,190 was debited as RM1,100Correcting Journal Entry :Dr Rental expenses 90

CR Commission received 90

Errors of ReversalCorrect accounts were used, but was

recorded on the opposite side.Eg : Cash purchase RM1,500 was debited to

Cash A/c and credited to Purchase A/cCorrecting Journal Entry :

Dr Purchase 3,000 CR Cash 3,000

Tangible Errors* When does tangible errors happened ?* A suspense a/c will be createdtemporarily * Suspense A/c – debit side( Balance Sheet – Asset)* Suspense A/c – credit side( Balance Sheet – Liab.)

Types of Tangible Errors* Incomplete Double Entry*Wrong Posting*Different amount were debited and credited*

Transaction recorded by two debit entries or vice versa

Incomplete Double EntryOnly one entry recordedEg : Cash sales RM200 was only debited to

Cash A/c

Correcting Journal Entry :Dr Suspense 200 CR Sales 200

Wrong PostingEg : Sales journal of RM690 was wrongly

calculated as RM960 and this wrong amount was posted to sales a/c. Debtors a/c was correctly recorded.

Correcting Journal Entry :Dr Sales 270 CR Suspense 270

Different amount were debited and creditedEg : Wages of RM1,130 was correctly

recorded in Cash Book but wrongly recorded in Wages a/c as RM1,100

Correcting Journal Entry :Dr Wages 30 CR Suspense 30

Transaction recorded by two debit entries or vice versaEg : Purchase of RM1,380 was credited to

Purchase a/c and Creditors a/c

Correcting Journal Entry :

Dr Purchase (1,380+1,380)

2,760

CR Suspense 2,760How this

happen?

Effect of Errors On Profit Or Loss

Errors

In Trading A/c

Effects to Gross

Profit/Net Profit

In P&L* Revenue* Expenses

Effects Net Profit

In Balance Sheet

No effects to Gross/Net

Profit

REFER TO EXAMPLE 9.12PAGE 248

Trading account: Sales - Cost of good sold = Gross Profit

Sales - (Opening stock + Purchases – Closing stock) = Gross Profit

Sales - Opening stock - Purchases + Closing stock = Gross Profit

Let’s recall…Background knowledge

Example of errors Action required on

the profit

Action required on the balance

sheetPurchases undercast Subtract -

Purchases overcast Add -

Sales undercast Add -

Sales overcast Subtract -

Income undercast Add -

Income overcast Subtract -

Expenses undercast Subtract -

Expenses overcast Add -

Example of errors Action required on

the profit

Action required on the balance

sheetOpening stock undervalued

Subtract -

Opening stock overvalued

Add -

Closing stock undervalued

Add Increase closing stock

Closing stock overvalued

Subtract Decrease closing stock

Example of errors Action required on

the profit

Action required on the balance

sheetPrepayments of

expenses omittedAdd Increase

prepayments (current assets)

Accruals of expenses omitted

Subtract Increase accruals (current

liabilities)Fixed/current assets

undervalued- Increase fixed/

current assetLiabilities understated - Increase

liabilities