The Trial Balance & Correction of Errors (Cambridge (CIE) IGCSE Accounting): Flashcards

It can misstate the profit, the value of assets and liabilities, or the balances owed to and from other businesses. An error that hides from the trial balance is still an error in the accounts.

A posting error is where both entries for a transaction are made on the same side, either both debits or both credits. Paying rent and debiting both the rent account and the bank account is an example.

They are:

• addition errors

• posting errors

• unequal posting errors

• partial omission errors

An unequal posting error is where a transaction is entered into the two accounts using different amounts. Only one of the two figures can be right, so the trial balance will not agree.

An addition error is a numerical mistake made when balancing an account, or when totalling the debit or credit column of the trial balance. Totalling $550 and $450 as $910 is an example.

The completed sentence is:

An error where the digits of an amount are entered in the wrong order, such as $52 entered as $25, is called a transposition error.

A partial omission error is where a transaction is entered only once, so either the debit or the credit is missing. Debiting drawings for goods taken but forgetting to credit purchases is an example.

The unrecorded rent is an error of omission. The office expenses debited to an asset account instead of an expense account is an error of principle.

How the accounts currently look with the error in them, and how they should look if the transaction had been entered correctly. The correcting entry is whatever turns the first into the second.

The completed sentence is:

The book of prime entry used for the correction of errors is the journal.

It states Correction of error, followed by a brief description of what actually went wrong. That is what lets someone reading the accounts later understand why the entry is there.

True.

A correction is a journal entry like any other, so the debit total must equal the credit total. If it does not, the correction has introduced an error of its own.

Every error, whatever it is called, is simply a difference between those two pictures. Finding that difference gives the correcting entry without having to remember a separate rule for each type of error.

A suspense account is a temporary account opened when the trial balance totals do not agree. It holds the difference until the errors that caused it have been found and corrected.

The side matching the lower total on the trial balance, labelled Difference on trial balance. That is what makes the suspense account's own two sides equal to begin with.

False.

Only errors that made the trial balance disagree go through it. The six errors that leave the totals agreeing are corrected without the suspense account being touched at all.

There are still unidentified errors somewhere in the accounts. A suspense account that closes to zero is the signal that every error affecting the trial balance has been found.

The completed sentence is:

Entries made in the ledger accounts to correct an error are labelled suspense account.

Correct all the errors through the suspense account, then balance it. The balancing figure is the original difference, and the side it falls on is the side that was smaller.

Credit the supplier a further $270, the difference between $850 and $580. Debit the suspense account $270, because the original error left the credit total too low.

An error of omission is where a transaction is not entered into any ledger account at all. The transaction is simply missing from the records.

The transaction is missing from the debit total and from the credit total alike. Since neither side has it, the two totals still match.

The completed sentence is:

An error of omission may have begun with the transaction never being entered into the books of prime entry.

Simply enter the transaction correctly, exactly as it should have been recorded in the first place. Nothing has to be undone, because nothing was ever entered.

Debit Kiha $200 and credit sales $200. That is just the normal entry for a credit sale, made late.

An error of original entry is where a transaction is entered into both ledger accounts using the same wrong amount. The accounts and the sides are right; only the figure is wrong.

The same wrong figure has gone into the debit total and the credit total. Both sides are wrong by the same amount, so they still match each other.

Find the difference between the wrong amount and the right one, and enter that difference in both accounts. Put it on the same side as the original entry to increase the figure, or on the opposite side to decrease it.

False.

Only the difference between the wrong figure and the right one is entered. Entering the full amount again would record the transaction twice over.

Debit sales $50 and credit Kiha $50. The figure was $50 too high, so the difference goes on the opposite side from the original entries to bring both accounts down.

An error of complete reversal is where a transaction is entered on the wrong sides of the ledger accounts. The account that should have been debited was credited, and the one that should have been credited was debited.

Debit Kiha $400 and credit sales $400. The $400 is double the $200 sale, because the entry must both undo the error and record the sale properly.

There is still one debit and one credit of the right amount. They are simply on the wrong sides, which the trial balance cannot detect.

The entry has to work twice over: once to undo the wrong entries, and once to make the right ones. A single entry would only cancel the error out and leave the transaction unrecorded.

False.

The correct accounts were used, and only the sides are wrong. That is what separates it from an error of commission, where the entry went into the wrong account altogether.

An error of commission is where one entry goes into the wrong account, but into an account of the right type. A credit sale posted to the wrong customer's account is the standard example.

Undo the entry in the wrong account by making an equal entry on the opposite side. Then make the entry in the correct account.

The right amount is still in the debit total and in the credit total. Only which account holds it is wrong, and a trial balance does not check that.

False.

It can involve any two accounts of the same type, including two expense accounts. Posting petrol to the insurance account is an error of commission just as much as posting a sale to the wrong customer.

Debit Kiha $200 and credit Dinah $200. Crediting Dinah undoes the wrong debit, and debiting Kiha puts the entry where it belongs.

An error of principle is where one entry goes into the wrong account and into an account of the wrong type. Recording an expense in an asset account is the standard example.

In an error of commission the wrong account was used but it was the right type, such as the wrong customer's account. In an error of principle the type of account is wrong too, such as an expense posted to an asset account.

The same way as an error of commission: undo the entry in the wrong account with an equal entry on the opposite side. Then make the entry in the correct account.

The correct amount is still in the debit total and in the credit total. A trial balance checks that the two totals match, not that the right kind of account was used.

Debit vehicle expenses $50 and credit vehicles $50. Petrol is an expense, not part of the cost of the vehicle, so it must come out of the asset account.

False.

Both accounts are trade payables, so the type is right and this is an error of commission. An error of principle needs the wrong type of account, not just the wrong account.

Compensating errors are two or more unrelated errors whose effects cancel each other out when the debits and credits are totalled. Each error is real, but together they leave the totals agreeing.

Correct each error separately, as though the other had not happened. Once both are put right, the total debits and total credits will still be equal.

The errors work in opposite directions and are the same size, so one makes up for the other. The debit and credit totals are unaffected even though individual accounts are wrong.

False.

The totals happen to come out right, but the individual accounts are both wrong. Each customer concerned would be sent a statement of account showing the wrong balance.

Debit Tony $50 and credit Steve $50. Tony's account was $50 too low and Steve's $50 too high, so each is put right on its own.

Sales, purchases returns and closing inventory increase gross profit. Sales returns, purchases, opening inventory and carriage inwards decrease it.

The completed formula is:

Gross profit = net revenue − cost of sales.

Other incomes and other expenses, and all assets, liabilities, capital and drawings. Gross profit comes only from trading, so anything outside revenue and cost of sales leaves it untouched.

False.

Carriage outwards is an expense, so it affects only the profit for the year. Carriage inwards is treated as part of purchases, and that one does reduce gross profit.

When an account that increases gross profit has been overstated, or one that decreases it has been understated. Understatement is simply the mirror of that.

For any account that affects profit, a debit entry decreases it and a credit entry increases it. Accounts that do not affect profit leave it unchanged whichever side is used.

The completed formula is:

Profit for the year = gross profit + other incomes − other expenses.

When the profit for the year has been overstated, or the drawings account has been understated. Capital is understated when either of those runs the other way.

When it moves value from one asset to another. A payment received from a trade receivable but omitted altogether leaves trade receivables too high and the bank too low by the same amount.

There is no effect on capital. The purchases account is understated, which overstates the profit, but the drawings account is understated by the same amount and the two cancel out.

Capital is understated. Purchases are overstated, which understates the profit, and a lower profit means lower capital.