Bookkeeping
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Bank Reconciliation Books of Prime Entry Cash Book & Petty Cash Computerized Bookkeeping Control Accounts Correcting Errors Sales & Purchase Ledgers Trial Balance VAT Records
Bookkeeping

Correcting Errors

25 question(s)

How are bookkeeping errors corrected?

Beginner
Errors are corrected using journal entries (with a narrative), not by erasing. The correcting entry reverses the wrong effect and records the right one. If the error caused the trial balance to disagree, the correction also involves the suspense account; if it didn't, the correction is a pure reclassification between accounts.
Real-world example The bookkeeper journals a correction reversing a mis-posting and putting the amount in the right account.

Common follow-ups: Why not erase errors? | When is the suspense account involved?

Trial Balance Books of Prime Entry Correcting Errors

What is an error of omission?

Beginner
An error of omission is when a transaction is completely left out of the books—neither the debit nor the credit is recorded. Because both sides are missing, the trial balance still balances. It's corrected by recording the whole transaction as if for the first time.
Correct an omitted 500 credit sale:
  Dr Debtors 500
      Cr Sales 500
Real-world example An invoice never entered is an error of omission, corrected by posting the full double entry.

Common follow-ups: Does omission unbalance the TB? | How is it corrected?

Trial Balance Books of Prime Entry Correcting Errors

What is an error of commission?

Beginner
An error of commission is posting a correct amount to the wrong account of the same class—e.g., debiting the wrong customer, or the wrong expense account. The trial balance still balances. It's corrected by transferring the amount from the wrong account to the correct one.
Rent 200 posted to Rates by mistake:
  Dr Rent 200
      Cr Rates 200
Real-world example A payment posted to the wrong customer's account is an error of commission, fixed by a transfer entry.

Common follow-ups: Does it affect the TB totals? | How is it corrected?

Trial Balance Sales & Purchase Ledgers Correcting Errors

What is an error of principle?

Beginner
An error of principle is posting an amount to a fundamentally wrong type of account—e.g., recording the purchase of a non-current asset as an expense (revenue expenditure). The trial balance still balances. It's corrected by moving the amount to the correct class of account.
Machine repair capitalized wrongly; or asset expensed:
  e.g., van 10,000 posted to Motor Expenses:
  Dr Motor Vehicles 10,000
      Cr Motor Expenses 10,000
Real-world example Treating a capital purchase as an expense is an error of principle, corrected by capitalizing it.

Common follow-ups: How does it differ from commission? | Why doesn't it unbalance the TB?

Trial Balance Books of Prime Entry Correcting Errors

What is an error of original entry?

Intermediate
An error of original entry is recording the wrong amount in the book of prime entry, so both the debit and credit are wrong by the same amount (e.g., a transposition applied to both sides). The trial balance still balances. It's corrected by adjusting both entries to the right amount.
Sale of 540 entered as 450 on both sides:
  Dr Debtors 90
      Cr Sales 90  (to increase both to 540)
Real-world example An invoice for 540 keyed as 450 in the day book flows wrong to both accounts and is corrected by the 90 difference.

Common follow-ups: Why does the TB still balance? | How is a transposition on both sides fixed?

Trial Balance Books of Prime Entry Correcting Errors

What is a complete reversal of entries?

Intermediate
A complete reversal of entries is debiting the account that should be credited and crediting the one that should be debited. The trial balance still balances because equal debits and credits were posted, just on the wrong sides. Correction requires reversing the wrong entry (double the amount) and posting the correct one.
Received cash 300 from a customer wrongly posted
  Dr Debtor / Cr Bank. Correct with double entry:
  Dr Bank 600, Cr Debtor 600 (reverse 300 + correct 300).
Real-world example Recording a receipt with the debit and credit swapped is a reversal, corrected by an entry for twice the amount.

Common follow-ups: Why must the correction be double the amount? | Does the TB detect it?

Trial Balance Cash Book & Petty Cash Correcting Errors

What is a compensating error and how is it corrected?

Intermediate
A compensating error is two errors that cancel out on the trial balance totals (e.g., a debit overstated and a credit overstated by the same amount). Because they offset, the trial balance balances. Correction requires identifying and fixing each error separately with its own journal entry.
Sales account overcast 100 and Rent account overcast 100:
  Dr Sales 100 (reduce), Cr Rent 100 (reduce) -- separately.
Real-world example Two offsetting overcasts are each corrected individually once discovered, despite the TB having balanced.

Common follow-ups: Why do they hide each other? | How are they corrected?

Trial Balance Control Accounts Correcting Errors

How does the suspense account feature in error correction?

Advanced
When errors cause the trial balance to disagree, the difference is put in a suspense account so the books balance temporarily. As each error affecting only one side is found, a journal entry corrects the account and clears part of the suspense balance. Once all such errors are corrected, the suspense account nets to zero.
Suspense opened with 90 credit (TB diff).
  Error: discount allowed 90 omitted from the ledger:
  Dr Discounts Allowed 90 / Cr Suspense 90 -> suspense cleared.
Real-world example A trial-balance difference sits in suspense until a one-sided posting error is found and journalized to clear it.

Common follow-ups: Which errors involve the suspense account? | When is suspense cleared?

Trial Balance Control Accounts Correcting Errors

How do error corrections affect profit, and what is a statement of corrected profit?

Advanced
Errors touching income or expense accounts change reported profit; correcting them adjusts profit up or down. A statement of corrected net profit starts with the draft profit and adds back or deducts the effect of each correction (only those affecting the income statement) to arrive at the corrected profit. Balance-sheet-only corrections don't change profit.
Draft profit 20,000
  + expense overstated 300
  - income overstated 500
  = Corrected profit 19,800
Real-world example After finding an overstated expense and an overstated sale, the bookkeeper restates profit accordingly.

Common follow-ups: Which corrections affect profit? | How is corrected profit computed?

Trial Balance Control Accounts Correcting Errors

What is a transposition error?

Beginner
A transposition error is reversing the order of digits in a figure—for example, writing 54 as 45 or 1,230 as 1,320. If it occurs on only one side, it unbalances the trial balance, and the difference is divisible by 9. If applied to both sides equally (original entry), the trial balance still balances.
54 written as 45: difference 9 (divisible by 9).
Real-world example A £72 amount keyed as £27 creates a difference divisible by 9, pointing to a transposition.

Common follow-ups: Why is the difference divisible by 9? | Does it always unbalance the TB?

Trial Balance Correcting Errors Correcting Errors