Identify and correct errors
Contents
Key to resources
Introduction
Types of error
Revised summary of errors, effects and correcting entries
Reversing the incorrect entry
Errors in an extracted trial balance
Errors in an income statement
Errors in a balance sheet
Sales returns and purchases returns
Discounts allowed
Discounts received
Feedback to activities
This learning guide is based on the following resource:Textbook
DuncanA (2006) Introductory Accounting, National Core Accounting Publications, Bondi
Note
A new edition of this textbook was being published at the same time as this resource.
Where possible, we have provided a second Key to resources to this new edition.
Key to resources
Resource / Textbook (2006 edition)1 / Chapter 19 ‘Correction of errors’, sections 19.1 and 19.2
Resource / Textbook (2007 edition)
1 / Chapter 17 ‘Correction of errors’, sections 17.1 and 17.2
Introduction
How are errors categorised? Do errors affect the trial balance?
Types of error
/ Go to Resource 1Note that some but not all errors will affect the trial balance (check the information in section 19.2.)
Incorrect account used
If the cash purchase of a motor vehicle for $22000 including GST has been recorded as:
Inventory / 20000GST clearing / 2000
Bank / 22000
then the totals of the trial balance will still agree. However, two accounts in the trial balance—inventory and motor vehicles—will be incorrect. The following general journal entry needs to be made tocorrect this entry.
Motor vehicle / 20000Inventory / 20000
The general journal entry was necessary as two accounts were affected—motor vehicles and inventory.
Note that the correcting entry does not affect the goods and services tax (GST) clearing account or the bank account, as both of these accounts were correct.
/ Activity 1Note: The answers to all activities are located at the end of this guide.
What is the general journal entry required to correct the posting to insurance account of an amount of $350 for wages?
Omission of an account entry
The trial balance totals will agree if an entry is omitted completely. If the entry for the purchase of the above motor vehicle had not been made then the trial balance totals will still agree. To correct this omission the entry needs to be recorded.
One accountonly with an incorrect entry
If only one account is affected, however, the trial balance totals will not agree. If the purchase of the motor vehicle for $22000 including GST had been recorded as:
Motor vehicle / 2000GST clearing account / 2000
Bank / 22000
then the trial balance will not balance. This type of error, involving one account only, cannot be corrected by a general journal entry. To correct this error the posting to the motor vehicle account for $2000 should be crossed out and the correct amount, $20000, is written above the original entry.
Motor vehicle / $20000$2000
Check the example involving the incorrect posting to Don King’s account. Ignore the reference to the credit sales journal as the incorrect posting will have been made from the general journal. Note that the correcting entry again does not affect GST.
The example involving Office Supplies Ltd assumes periodic inventory. Assuming perpetual inventory, the original incorrectentry could have been:
Inventory / 1000GST clearing account / 100
Accounts payable – Office Supplies Ltd / 1100
The correcting entry here would be:
Stationery / 1000Inventory / 1000
Errors involving GST
Errors can affect the GST account. If the stationery purchased on credit from Office Supplies Ltd for $1100 including GST had been incorrectlyrecorded as:
Inventory / 1100Accounts payable – Office supplies / 1100
then the correcting entry would be:
Stationery / 1000GST clearing account / 100
Inventory / 1100
Check the example involving the sale of office furniture for $2750. Ignore the reference to the cash receipt journal as the incorrect posting will have been made from the general journal. The adjusting entry is correct.
The example involving R Wood requires a correction to the GST account (now called GST clearing account). Again ignore the reference to the sales journal as the incorrect posting will have been made from the general journal.
The final example (e) showing an error in the cash receipts journal should be ignored as the error would not occur if all original postings are made from the general journal.
The summary of errors, effects and correcting entries also contains a number of transactions that will no longer occur. A revised summary is set out in the following table.
Revised summary of errors, effects and correcting entries
Transaction / Error / Resultant general ledgerentries / Effect on trial balance figures / CorrectionDebit / Credit
Salaries paid $35000 / Posted to salaries as $38000 / Salaries $38000 / Bank
$35000 / Debits overstated by $3000 / Cross out $38000 in salaries and write in $35000
Credit sale $26400 including GST / Posted to accounts receivable as $26200 / Accounts receivable $26200 / Sales $24000
GST clearing $2400 / Debits understated by $200 / Cross out $26200 in accounts receivable and write in $26400
Computer bought for cash $5500 including GST / Entry to office equipment account not posted / GST clearing $500 / Bank
$5500 / Debits understated by $5000 / Complete posting by debiting office equipment $5000
Interest received $140 / Posted to interest received as $40;bank entry correct / Bank
$140 / Interest received
$40 / Credits understated by $100 / Cross out $40 in interest received account and write in $140
Paid cartage outwards $660 including GST / Posted to general expenses as $660 / General expenses
$660 / Bank
$660 / Nil / General journal entry
Dr Cartage outwards $600
Dr GST clearing $60
Cr General expenses $660
Purchase of goods on credit – DSmith $880 including GST / B Smith’s account credited / Inventory $800
GST clearing $80 / Accounts payable-BSmith $880 / Nil / General journal entry
Dr B Smith $880
CrDSmith $880
Accounts receivable Peter Smith paid amount owing $460 / Recorded as $640 and credited to Paul Smith / Bank
$640 / Accounts receivable Paul Smith $640 / Nil (two asset accounts affected by $180—one debit, the other credit) / General journal entry Dr Accts recPaul Smith $640
Cr Accts recPeter Smith $460
Cr Bank $180
Reversing the incorrect entry
In some cases it may be easier to reverse the original incorrect entry and reinstate the correct entry.
If a sales invoice for A Noal $110 including GST has been incorrectly processed as:
Accounts receivable – A Noal / 1100Sales / 1000
GST clearing / 100
then it may be easier to reverse the above incorrect entry and reinstate the correct entry. This can be important when dealing with subsidiary ledgers for accounts receivable or accounts payable to ensure the account affected shows the withdrawal of the incorrect entry and the reinstating of the correct entry. In the above case the withdrawal of the incorrect entry would be shown as:
Sales / 1000GST clearing / 100
Accounts receivable – A Noal / 1100
and the correct entry restated as:
Accounts receivable – A Noal / 110Sales / 100
GST clearing / 10
/ Activity 2
The following errors have been detected in the books of K Pond. Control accounts for accounts receivable and accounts payable are in use.
(a)A credit purchase invoice from M Alice $500 including GST was incorrectly credited to another creditor A Malice.
(b)A credit sale invoice for goods supplied to G Thomas has been incorrectly processed as $1122 including GST. The correct amount is $1012 including GST.
(c)The telephone account for $374 including GST has been paid and recorded as:
Electricity / $374Bank / $374
(d)Discount allowed $33 (including GST) to an accounts receivable PGrant was not recorded and should have been allowed.
(e)Salaries paid $1862 were correctly shown in the bank account but recorded in the salaries account as $1682.
(f)A credit note received from a supplier D Eather for the return of trading stock, $165 including GST, has been incorrectly recorded as a purchase invoice.
Required
Show the necessary correction for each of these errors.
Errors in an extracted trial balance
If a trial balance is extracted and does not balance, it needs to be corrected. Consider the following situation for J Russell.
Trial balance of J Russell as at 30 June 20x8Unadjustedtrial balance / Adjustedtrial balance
$ / $ / $ / $
Capital / 295960
Drawings / 18000
Inventory / 32000
Accounts receivable / 18500
Land and buildings / 361000
Accum depc’n – Buildings / 2900
Motor vehicle / 30700
Accum depc’n –Motor vehicle / 6140
Loan to brother / 5000
Accounts payable / 15700
GST clearing / 5000
Provision longservice leave / 9600
Sales / 320000
Cost of goods sold / 185000
Rates and taxes / 3900
General expenses / 3300
653040 / 659660
The trial balance for J Russell does not balance. After looking at the business records you find:
(a)some items in the trial balance are on the wrong side
(b)the discount allowed account with a balance of $600 has been omitted
(c)the balance of accounts receivable should be $15800
(d)GST clearing account is correctly recorded in the trial balance.
Required
Correct all errors and redraft the correct trial balance in the space provided.
Solution
Trial balance of J Russell as at 30 June 20x8Unadjusted trial balance / Adjusted trial balance
$ / $ / $ / $
Capital / 295960 / 295960
Drawings / 18000 / 18000
Inventory / 32000 / 32000
Accounts receivable / 18500 / 15800
Land and buildings / 361000 / 361000
Accum depc’n–Buildings / 2900 / 2900
Motor vehicle / 30700 / 30700
Accum Depc’n – Motor vehicle / 6140 / 6140
Loan to brother / 5000 / 5000
Accounts payable / 15700 / 15700
GST clearing / 5000 / 5000
Provision long service leave / 9600 / 9600
Sales / 320000 / 320000
Cost of goods sold / 185000 / 185000
Rates and taxes / 3900 / 3900
General expenses / 3300 / 3300
Discount allowed / 600
653040 / 659660 / 655300 / 655300
/ Activity 3
The trial balance of SLow does not balance. You look at the business records and find:
(a)some items in the trial balance are on the wrong side
(b)the balance of plant and machinery should be $154 700
(c)the accounts receivable records have been destroyed—the amount owing is the balancing figure.
Trial balance of SLow as at 30 June 20x7Unadjusted trial balance / Adjusted trial balance
$ / $ / $ / $
Capital / 251300
Drawings / 15000
Inventory / 9000
Cash at bank / 26400
Allowance for doubtful debts / 800
Plant andmachinery / 157400
Accumdepc’n – Plant andmach / 30300
Motor vehicle / 30700
Accum depc’n – motor vehicle / 6140
Goodwill / 44000
Accounts payable / 38700
GST clearing (cr balance) / 1100
Expenses accrued / 2800
Sales / 268 000
Commission income / 2700
Bad debts recovered / 1200
Cost of goods sold / 133000
Salaries / 96000
Superannuation – employees / 2 400
Bank charges / 700
Doubtful debts / 500
533040 / 585100
Required: Correct all the errors and redraft the correct trial balance in the space provided.
Errors in an income statement
Errors in an income statement can occur for a number of reasons, including:
- expenses incorrectly classified
- income or expense accounts omitted from the statement
- accounts included in the statement that should appear in the balance sheet
- addition or subtraction errors.
Consider the following income statement for A Ruby.
A RubyIncome statement for period ended 30 June 20x7
$ / $ / $
Sales / 116605
Less: Cost of goods sold / 43700
Gross profit / 72905
Add: Other operating income / 8500
Rent income / 7100
GST clearing account / 1400
Total operating income / 64405
Less: Operating expenses / 46170
Selling and distribution / 3280
Cartage outwards / 1200
Advertising / 1700
Bad debts / 380
General and administrative / 42780
Office salaries / 26400
Insurance / 780
Depreciation – Buildings / 5600
Long service leave / 1500
Drawings / 5000
Mortgage interest / 3500
Financial expenses / 110
Doubtful debts / 110
Net operating profit / 18235
Noting that the income statement contains at least one error, ARuby has asked for the income statement to be redrafted. All income and expense accounts have been included and for the correct amount.
Solution
A RubyIncome statement for period ended 30 June 20x7
$ / $ / $
Sales / 116605
Less: Cost of goods sold / 43700
Gross profit / 72905
Add: Other operating income / 7100
Rent income / 7100
Total operating income / 80005
Less: Operating expenses / 41170
Selling and distribution / 2900
Cartage outwards / 1200
Advertising / 1700
General and administrative / 34280
Office salaries / 26400
Insurance / 780
Depreciation buildings / 5600
Long service leave / 1500
Financial expenses / 3990
Bad debts / 380
Doubtful debts / 110
Mortgage interest / 3500
Net operating profit / 38835
/ Activity 4
R Ahearne
Income statement for period ended 30 June 20x8
$ / $ / $
Sales / 200000
Less: Cost of goods sold / 67180
Gross profit / 132820
Add: Other operating income / 14700
Rent income / 12800
Income accrued / 1900
Allowance for doubtful debts / 500
Total operating income / 147520
Less: Operating expenses / 125410
Selling and distribution / 52240
Sales salaries / 28000
Inventory / 23700
General expenses / 540
General and administrative / 67600
Office salaries / 47400
Commission income / 6100
Depreciation – Plant / 9600
Holiday pay / 2500
Bad debts / 2000
Financial expenses / 5570
Doubtful debts / 670
Drawings / 4900
Net operating profit / 22110
RAhearne has asked that the income statement be checked and redrafted. All income and expense accounts are included for the correct amounts.
Errors in a balance sheet
Errors have been made in the classification of the accounts if a balance sheet does not balance. Consider the following balance sheet for TPatty.
TPattyBalance sheet as at 30 June 20x9
$ / $ / $
Current assets / 1057568
Inventory / 89404
Accounts receivable / 14600
Bank / 102728
Land and buildings / 814376
Drawings / 34302
Expenses accrued / 2158
Non-current assets / 236200
Plant / 188000
Accum depreciation – Plant / 48200
Total assets / 1293768
Current liabilities / 183816
Allowance for doubtful debts / 292
Accum depreciation – Buildings / 13280
Expenses prepaid / 4140
Accounts payable / 29110
GST clearing / 136994
Total liabilities / 183816
Net assets / 1109952
Owner’sequity / 1017516
Capital / 621320
Add: Profit / 396196
TPatty notes that the balance sheet does not balance and asks you to redraft the document. Note that the balance of the GST clearing account is correct.
Solution
TPattyBalance sheet as at 30 June 20x9
$ / $ / $
Current assets / 210580
Inventory / 89404
Accounts receivable / 14600
Less: Allowance doubtful debts / 292 / 14308
Bank / 102728
Expenses prepaid / 4140
Non-current assets / 940896
Plant / 188000
Accum depreciation – Plant / 48200 / 139800
Land and buildings / 814376
Accum depreciation – Buildings / 13280 / 801096
Total assets / 1151476
Current liabilities / 168262
Expenses accrued / 2,158
Accounts payable / 29110
GST clearing (credit balance) / 136994
Total liabilities / 168262
Net assets / 983214
Owner’s equity / 983214
Capital / 621320
Add: Profit / 396196
1017516
Less: Drawings / 34302
/ Activity 5
Consider the following balance sheet for CBower as at 30 June 20x8.
$ / $ / $Current assets / 346366
Inventory / 182460
Accounts receivable / 59900
Income received in advance / 2400
Cash at bank / 37006
Goodwill / 36000
Bills payable / 28600
Non-current assets / 701016
Land and buildings / 558548
Less:Accum depreciation–Bldgs / 19560 / 578108
Furniture and equipment / 132730
Less:Accum depreciation / 36662 / 96068
Drawings / 26840
Total assets / 1047382
Current liabilities / 89146
Accounts payable / 23972
GST clearing / 27726
Cash on deposit at bank / 34000
Provision long service leave / 2250
Allowance for doubtful debts / 1198
Total liabilities / 89146
Net assets / 958236
Owner’s equity / 926946
Capital / 900000
Add: Profit for period / 25986
Income accrued / 960
C Bower notes that there are a few errors and asks you to redraft the balance sheet and present it in an acceptable format.
/ Activity 6J Dobell submits to you his trading account, profit and loss account and balance sheet. He is concerned that his profit for the year is less than expected and that the balance sheet does not balance.
Trading account
Cost of goods sold / 377 400 / Sales / 738 800Rates and taxes / 27 000 / Discount received / 5 000
Profit and loss (gross profit) / 345 800 / Doubtful debts / 4 800
Income accrued / 1 600
750 200 / 750 200
Profit and loss account
Expenses prepaid / 2 800 / Trading account / 345 800Patents / 100 000 / Commission income / 7 600
Salaries and wages / 128 400 / Expenses accrued / 1 000
Depreciation – Buildings / 5 800 / Allowance doubtful debts / 7 400
General expenses / 37 600 / GST clearing account (credit balance) / 1 000
Discount allowed / 1 400
Capital (net profit) / 86 800
362 800 / 362 800
JDobell
Balance sheet (statement of financial position) as at 30.6.20x4
Inventory / 44 600 / Capital / 251 600
Land and buildings / 274 400 / Less: Profit / 86 800
Accumulated Depc’n / 11 600 / 286 000 / 164 800
Current assets / 38 200 / Add: Drawings / 45 800
Accounts receivable / 38 200
Current liabilities / 65 800
Bank overdraft / 31 200
Accounts payable / 34 600
368 800 / 276 400
Redraft the trading account, profit and loss account and balance sheet so that they conform with accounting principles.
/ Activity 7J Strong submits to you her trading account, profit and loss account and balance sheet. She is concerned that she has made a loss for the year and that her balance sheet does not balance.
Redraft the trading and profit and loss accounts together with the balance sheet so that they conform with accounting principles.
Trading account
Cost of goods sold / 98 080 / Sales / 208 640Drawings / 17 100 / Interest income / 420
Profit and loss (gross profit) / 99 880 / Allowance doubtful debts / 6 000
215 060 / 215 060
Profit and loss account
Trading account (gross profit) / 99 880 / Accounts payable / 42 900Wages / 29 780 / Discount received / 2 400
Rent, rates and taxes / 7 520 / Goodwill / 16 400
Salaries / 10 640 / Plant and machinery / 30 000
General expenses / 3 200 / Capital (net loss) / 34 190
Discount allowed / 1 480
Petty cash / 200
125 890 / 125 890
JStrong
Balance sheet as at 30-6-20x8
Accounts receivable / 90 480 / Bills payable / 20 000
Current assets / 33 480 / Motor vehicles / 14 000
Inventory / 27 000 / Plant andmachinery / 30 000
Cash at bank / 6 480 / GST clearing / 8 000
Proprietorship
Capital / 64 000 / 57 000
Less: Net loss / 7 000
123 960 / 129 000
Sales returns and purchases returns
Some businesses will use separate general ledger accounts to record when a business either receives goods back from a customer (sales returns) or returns goods to a supplier (purchase returns). If they do use separate general ledger accounts, these accounts will need to be offset against the original sales general ledger account or purchases general ledger account at the end of the reporting period for the business (usually each year).
The journal entry to offset the balance of the sales returns account to the sales account would be:
Debit SalesCredit Sales returns
Alternative treatment
You do not need to use separate general ledger accounts for returns. You can simply record them directly in the same general ledger accounts used when goods were sold or purchased (as a reduction to theaccount). So sales returns they can be recorded in the sales account. For purchase returns, it will depend on what inventory method is being used, ie the perpetual or the periodic method. If you are using the periodic method, the original purchase would have been recorded as a debit entry in the purchases account so the purchase return will be recorded as a credit entry in the purchases account.
However, if you are using the perpetual method, the original purchase would have been recorded as a debit entry in the inventory account. Therefore the return would be recorded as a credit entry in the inventory account.
To record these returns in the journals, they should be shown as a negative entry under the sales column in the sales journal or the inventory column in the purchases journal.
Example
SDJDate / Invoice no / Particulars / Fol / Accounts receivable / Sales / GST clearing / General
20xx / $ / $ / $ / $
Mar 17 / 100024 / North East Wholesalers / 550.00 / 500.00 / 50.00
Mar 18 / C00895 / North East Wholesalers / (55.00) / (50.00) / (5.00)
Discounts allowed
When goods are sold on credit, the customer will pay their account at a later date. In some cases, we may offer a discount to encourage an earlier payment. It is important to record these discounts as part of the receipt transaction. As a result, you will see cash receipt transactions that also include the discount allowed. The cash receipts journal may use a separate column (and general ledger account) to record the discount allowed.