Errors in a Trial Balance
Trial balance as defined earlier in the page on Trial Balance is described as the summary of all credit and debit balances in the ledgers including the cash book. Since ledger is prepared on the basis of double entry principle, it is expected that the total of each sides of the trial balance to be equal. If the total of the two sides are not equal, it means that some errors had been occurred in the account.
At times, the two sides may be equal, yet some errors might have occurred in the trial balance without knowing. This leads us to the types of errors that we have.
Types of Errors in the Trial Balance
The likely errors that may occur in the trial balance can be categorized into two as follow:
- Errors that do not affect the agreement of a trial balance and
- 2. Errors that affect the agreement of a trial balance
Errors that do not affect the Agreement of a Trial Balance
When the two sides of a trial balance agreed with each other i.e. the sum of all entries at the debit side of the trial balance is equal to the sum of all the entries at the credit side of the trial balance, this does not guaranteed that such trial balance is free from errors as there are some errors that may be made, yet the two sides of the trial balance will agreed with each other. Those errors are categorized under Errors that do not Affect the Agreement of a Trial Balance. These errors can be classified into six (6) as follow:
- Error of omission
- Error of commission
- Error of principle
- Error of originality
- Compensating error
- Complete reversal of entry
- Error of omission: This error occurs when entry is completely omitted from the book. This error mostly arise from source documents when the book-keeper mistakenly not recording some transactions Into the daybook i.e. loss of duplicate receipt or mistakenly opened two receipts together.
Illustration on Error of Omission
Cash sales of N 5,000 to Abiodun was completely omitted from the book.
Explanation
This means that the entries for the sales made to Abiodun was not recorded in the book at all which means that the transaction is captured in the book of account. Therefore, a ledger account is to be prepared to correct this. Since sales is a revenue which means cash is recieved, cash account will be debited while the coresponding credit entry will go to the Sales account.
Solution
Debit (Dr): Cash account
Credit (Cr): Sales accountSolution using Journal Proper Trial Balance Dr Cr N N Cash 5,000 Sales 5,000 Being Error of Omission Corrected - Error of commission:This error occurs when transaction is recorded in wrong person’s account. This type of error most time occurs when names of customers or suppliers look almost the same with slight difference. At times, same names with different initials or one or two letters difference.
- Error of principle:This error occurs when transaction is entered in a wrong class of account. That is, an entry that is supposed to be an asset is recorded as expenses.
- Error of originality: This is otherwise called Error of Originality. It occurs when wrong value is entered in the book of original entry, thereby passing through the ledger with that same value. That is, the might have been wrongly recorded in the source document (receipt, invoice, among others) and that wrong value is recorded in the day book from which the ledger accounts are prepared. In that case, such value will have no effect on the balances of a trial balance.
- Compensating error:These are errors that cancel out each other. This occurs when an error made in an account is cancelled out by an error made in another account.
- Complete reversal of entry: In this situation, the original amount is recorded but entered on the wrong side of the account and passes through the book like that. In that case, there is need to remove the amount recorded in the wrong side and reposted it to the actual side of the account, there by doubling the value to be recorded at the actual side of the account.
Illustration on Error of Commision
Credit sale of N 2,000 to Adeola was recorded to Adetola account.
Explanation
In the case of the illustration, both Adeola account and Adetola Account belong to the same class of account which is Debtors account (you can read more about this on classification of accounts). Therefore, the amount is to be removed from Adetola account by crediting his account with N2,000 while the corresponding debit entry is made to the Adeola account (the right buyer). These therefore, cancel the debt by error from Adetola account and increase the initial debt of Adeola.
Solution
Debit (Dr):Adeola account
Credit (Cr):Adetola account
| Trial Balance | Dr | Cr |
|---|---|---|
| N | N | |
| Adeola | 2,000 | |
| Adetola | 2,000 | |
| Being Errors on Personal Accounts Corrected |
Illustration on Error of Principle
Purchase of machinery for N 10,000 cash was entered into purchase account.
Explanation
Machinery is an asset because the purpose of buying it is for use and any item that is purchased with the intention of being used is classified as an asset to the business while an item can only be classified as purchases if the intention of purchasing such an item is to sell it.
Machinery purchased belongs to the account class of real account and therefore be treated as an asset while purchases account is meant for items bought for the intension of being sold. In that case, the amount is removed from purchases account by crediting it and posted back to the machinery account by debiting the account. For more understanding about real account and nominal account, check out my post on Classification of Account.
Solution
Debit (Dr):Machinery account
Credit (Cr):Purchases account
| Trial Balance | Dr | Cr |
|---|---|---|
| N | N | |
| Machinery | 5,000 | |
| Purchases | 5,000 | |
| Being Error of Principle Corrected |
Illustration on Error of Original Entry or Originality
Purchase of machinery for N55,800 was mistakenly entered in the cash book as N55,000 and passed through the ledger with the same amount.
Explanation
From the illustration, the amount of furniture was mistakenly understated by N800 and pass through the book like that. That means, there is need to add the missing amount back by charging N800 to cash book by crediting the account and debit machinery account with the same amount to update the value of the machinery to the actual value.
Solution
Debit (Dr):Machinery account
Credit (Cr):Cash account
| Trial Balance | Dr | Cr |
|---|---|---|
| N | N | |
| Machinery | 800 | |
| Cash | 800 | |
| Being Undercasting Error oon Original Entry Corrected |
Illustration on Compensating Error
In calculating the rent account, the balance was wrongly recorded as N2,500 instead of N2,050. Coincidentally, the account of furniture and fittings was wrongly calculated as N9,550 instead of N10,000.
Explanation
Looking at the balance recorded in the rent account, the amount had been over stated by N450 (higher than the actual value of N2,050) but this could not discrepancy in the totals of the two sides of the trial balance because furniture account has also been wrongly undercharged with the same amount (charged with N9,550 instead of N10,000).
The effect of this is that the discrepancy that would have occurred in the trial balance as a result of overcasting the rent which would have made the debit side of the trial balance to be higher than the credit side of the trial balance had been cancelled by the furniture and fittings which was undercharged with same amount (N450).
In this case, a suspense account will be raised to correct the two account. The overcharged amount in the rent account will be removed by crediting the account with N450 while the corresponding debit entry will be made to the raised suspense account. Same treatment applied to the furniture account that was understated, the account is debited with N450 to increase its total to the actual amount of N10,000 while the corresponding credit entry is made to the suspense account.
Solution
Credit (Cr):Rent account
Debit (Dr):Suspense account
Debit (Dr):Furniture account
Credit (Cr):Suspense account
| Trial Balance | Dr | Cr |
|---|---|---|
| N | N | |
| Rent | 450 | |
| Suspense | 450 | |
| Furniture | 450 | |
| Suspense | 450 | |
| Being Wrong values Corrected |
Illustration on Error of Commision
Payment of salaries in cash, N12,000 was debited to cash account and credited to salaries account.
Explanation
Payment of salary is an expenses which is to be credited to cash account and debited to salaries account but the reverse was the case as stated above. In that case, to correct the error, the amount has to be removed first from both account by crediting cash account with N12,000 and debiting the expenses with same amount. With this step, both cash account and rent account returned to their previous values before the transaction was made.
Now, make normal posting for the transaction by crediting the cash account with N12,000 and debiting the salaries account with N12,000.
If this is viewed thoroughly, we will realized that the amount is being doubled in each sides of the account i.e. Cash account is credited with N24,000 and Salaries account is debited with N24,000.
Solution
Debit (Dr):Salaries account
Credit (Cr):Cash account
| Trial Balance | Dr | Cr |
|---|---|---|
| N | N | |
| Salaries | 24,000 | |
| Cash | 24,000 | |
| Being Entries made in Wrong Side of Account Corrected |
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