Errors in the double entry accounting system
Errors can occur in a book-keeping system,
because individuals make mistakes.
The types of error that will appear in the
accounting records can be classified into four broad categories:
Errors of transposition (transposition errors)
This involves getting the digits in a number
the wrong way round, for example recording Rs. 9,700 as Rs. 7,900.
Sometimes the error will be made in both the
debit and the credit entries in the ledger. For example a purchase invoice
might be recorded as Rs. 1,650 instead of Rs. 1,560 in both the purchases
account and the payables ledger control account. The trial balance will not
reveal this sort of error. Sometimes the error of transposition will be made in
one account but not the other. For example, a payment of Rs. 1,980 from a
customer might be recorded correctly in the cash book but posted incorrectly as
Rs. 1,890 in the receivables ledger control account.
Errors of omission.
This is where a transaction or entry is
missed out. Sometimes a transaction is missed out of the ledger entirely
because the bookkeeper forgets about it or is not informed about it.
A transaction may be omitted from one location
only.
Errors of commission.
This means putting an entry in the wrong
account, for example recording a telephone expense in the electricity expenses
account. Similarly, discounts received might be recorded incorrectly in the
discounts allowed account.
Errors of principle.
This is where an entry is recorded in the
wrong type of account, e.g. recording capital expenditure as revenue
expenditure. For example the purchase of a machine might be entered in the
machinery repairs and maintenance account. Unless corrected, this error will
result in an incorrect computation of depreciation charges, running costs and
profit for the period.
Errors highlighted by the extraction of a trial balance
As stated earlier, one way of finding some
errors in the accounting records is to extract a trial balance from the general
ledger. If the total of the debit balances does not equal the total of the
credit balances on the general ledger accounts then an error or several errors
have been made.
If the trial balance does not balance then
this will be due to an error where the debits and credits are not the same, so
that the error results in the debit entry in one account in the general ledger
not being equal to the matching credit entry in another account.
Types of error which affect the balancing of
the trial balance are as follows:
- A transaction might be recorded with a debit entry in one account, but the corresponding credit entry is omitted. Similarly, a transaction might be recorded with a credit entry in one account, but the corresponding debit entry is omitted. For example a payment might be recorded as a credit entry in the cash book but omitted from the payables ledger control account.
- There could be a transposition error in one account. For example, the debit entry might be Rs. 1,234 and the corresponding credit entry might be Rs. 1,324. One of the entries must be incorrect.
- A transaction might be recorded as a debit entry in two accounts, instead of as a debit entry in one account and a credit entry in the other account. For example, rental income might be recorded as a debit entry in the cash book and, in error, as a debit entry in the rental expense account.
- Similarly, a transaction might be recorded as a credit entry in two accounts, instead of being a debit entry in one account and a credit entry in the other.
- For example, discounts allowed might be recorded as a credit entry in the receivables ledger control account and, in error, as a credit entry in the discounts received account.
- There might be a mistake in casting one or another side of an account. This would lead to the extraction of an incorrect balance.
You need to be able to:
identify errors in a
double entry accounting system, and
know how to correct them.
Corrections to errors in an accounting system
are recorded as journal entries and then posted from the journal to the
relevant accounts in the general ledger.
Errors not highlighted by the extraction of a trial balance
A trial balance is only useful in helping to
identify errors where the debit and credit entries in the general ledger
accounts do not match. It does not help with the identification of errors where
there has not been a mismatch between debit and credit entries.
There are some types of error that do not
result in a difference between total debit and total credit entries and
therefore do not affect the balancing of the trial balance. For example:
- q A transaction might have been omitted entirely from the general ledger, with no debit entry and no credit entry.
- The wrong figure might be double entered.
- Transactions might be recorded in the wrong account. For example, the cost of repairing a machine might be recorded incorrectly as a debit in the machinery at cost account instead of recording it as a debit in the machine repairs account. The amount of the debit entry is correct; the error is to post the transaction to the wrong account.
- There might be compensating errors. For example one error might result in debits exceeding credits by Rs. 2,000 but anther error might result in credits exceeding debits by Rs. 2,000. If this happens, the errors will ‘cancel each other out’ and will not be apparent from a check on the trial balance totals for debits and credits.
An approach to correcting errors
Errors should be corrected when they are
found.
- Transactions that have been omitted from the general ledger entirely should be recorded in the accounts. The omitted item can be recorded in the journal, and posted from the journal to the relevant accounts in the general ledger and, if required, the receivables or payables ledger.
- Entries that have been made incorrectly in the accounts must be corrected
- by means of suitable debit and credit entries in the accounts. The correction of an error should be recorded in the journal and then posted from the journal to the relevant accounts.
- In order to correct errors properly, you need to be able to:
- identify an error;
- recognise what the correct entry in the accounts should have been; and
- work out how to make the correction by means of double entry adjustments.
One approach to correcting errors is to
compare the entry that has been processed to the entry that should have been
processed. This allows you to see what adjustment is needed. Memorandum T
accounts can be used to do this.
For each account affected by an error, you
can prepare two sets of memorandum
T accounts for:
- What accounting entries have been made in the accounts, and
- What the accounting entries should have been.
By comparing what has been recorded in the
accounts with what should have been recorded, you can then work out the double
entry adjustments that are needed to get from ‘where we are’ to ‘where we want
to be’.
Some
examples will help to illustrate the approach.
The effect of errors on profit
Unless they are corrected, accounting errors
will have an effect on the reported profit for the period.
A question might ask you to quantify this
effect for a given error. In a typical question of this sort, the error might
involve recording a capital expenditure item as a revenue expenditure item, or
a revenue expenditure item as capital expenditure.
Alternatively, a capital expenditure item
might be recorded at an incorrect amount.
Trial balance: differences in total debits and total credits
The examples of correcting errors in the
previous section involve errors where the amount of the debit entry and the
amount of the credit entry were the same.
These errors would not be identified by
extracting a trial balance.
When errors are made where the amount of the
debit entry differs from the amount of the credit entry, total debit balances
and total credit balances in the general ledger accounts will differ. A trial
balance will demonstrate the existence of such errors.
These errors must be discovered and
corrected. Until they are discovered, the first step should be to open a
suspense account.
- When errors have resulted in total debit entries and total credit entries being different, the errors are corrected using a suspense account.
- A suspense account is a short-term account that is required only until the errors have been identified and corrected.
Opening a suspense account
A suspense account is opened with either a
debit balance or a credit balance.
The balance entered into the suspense account
should be an amount that makes the total debit balances equal to total credit
balances on all the general ledger accounts (including the balance on the
suspense account).
Opening the suspense account in effect
completes the missing and incorrect double entries but to the wrong place (the
suspense account). The errors should be investigated and corrected. This
usually involves a double entry to the suspense account.
Once the errors have been fully corrected the
balance on the suspense account will be reduced to zero.
Correcting errors where a suspense account is opened
When it is clear that an error has occurred,
it is often helpful to decide the answer to two questions:
- Has the error resulted in different total amounts for debit and credit entries?
· If the answer is yes,
making the correction will involve the suspense account.
· If the answer is no, the
correction should be made, but will not involve the suspense account.
- If the error has resulted in different total amounts for debit and credit entries, think about the general ledger account or accounts containing the error, and decide what needs to be done to correct the balance on that account.
The same approach used in the previous
section for correcting errors can be used. For each account affected by an
error, you can prepare two sets of memorandum T accounts for:
- What accounting entries have been made in the accounts, and
- What the accounting entries should have been.
By comparing what has been recorded in the
accounts with what should have been recorded, you can then work out the double
entry adjustments that are needed to get from ‘where we are’ to ‘where we want
to be’.
However, when the error involves different
total amounts of debits and credits, a debit or credit entry in the suspense
account is needed as a ‘balancing figure’ to make the total debits and credits
equal.
Unknown entry
A suspense account is opened in order to make
a trial balance have equal debits and credits until the errors have been
discovered.
In some instances however a suspense account
will be opened deliberately by the bookkeeper if the bookkeeper is uncertain of
where to post one side of the double entry.
Example:
A bookkeeper has received a cheque for Rs. 1,000 but does not know
who the cheque is from or what it relates to.
Rather than putting the cheque to one side until it is known what
it is for the bookkeeper may decide to record the debit entry in the cash book/bank
account and then, not knowing where the credit entry should go, to credit the
suspense account instead.
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