Question

1. How would you find errors in recording transactions and what is the process to correct errors? Provide an example.

Answer 1

Error of Commission An accounting error of commission can occur when an item is entered to the correct type of account but the wrong account. For example is cash received of 3,000 from Customer A is credited to the account of Customer B the correcting entry would be. Accounting Errors - Error of Commission Account Debit Credit Accounts receivable – 3,000 Cust. B Accounts receivable – Cust. A 3,000 Total 3,000 3,000

Compensating Error A compensating error occurs when two or more errors cancel each other out. For example, if the fixed assets account is incorrectly totalled and understated by 600, and the rent account is incorrectly totalled and overstated by 600, then the posting to correct the error would be as follows: Accounting Errors – Compensating Error Account Debit Credit Fixed assets 600 Rent 600 Total 600 600

Error of Original Entry An error of original entry occurs when an incorrect amount is posted to the correct account. A particular example of an error of original entry is a transposition error where the numbers are not entered in the correct order. For example, if cash paid to a supplier of 2,140 was posted as 2,410 then the correcting entry of 270 would be. A good indicator for a transposition error is that the difference (in this case 270) is divisible by 9. Accounting Errors – Error of Original Entry Account Debit Credit Cash 270 Accounts payable 270 Total 270 270

Complete Reversal of Entries Complete reversal of entries errors occur when the correct amount is posted to the correct accounts but the debits and credits have been reversed. For example if a cash sale is made for 400 and posted incorrectly as follows:

Accounting Errors - Incorrect posting Account Debit Credit Sales 400 Cash 400 Total 400 400 Then to correct the accounting error the original entry must be reversed and the correct entry made, this can be achieved by doubling the original amounts as follows: Accounting Errors - Complete Reversal of Entries Account Debit Credit Sales 800 Cash 800 Total 800 800

Accounting Errors Description Error of Principle in Accounting Correct amount, wrong type of account Errors of Omission Entry missed from accounting in Accounting records Correct amount and type of Error of Commission account but wrong account Compensating Error Two or more errors balance each other out Correct accounts, wrong Error of Original Entry amounts Complete Reversal Correct amount and account, of Entries entries reversed

Error of Principle in Accounting An error of principle in accounting occurs when the bookkeeping entry is made to the wrong type of account. For example, if a 1,000 sale is credited to the sundry expenses account instead of the sales account, the correcting entry would be as follows: Accounting Errors – Error of Principle in Accounting Example Account Debit Credit Sundry expenses 1,000 Sales 1,000 Total 1,000 1,000

Error of Omission in Accounting Errors of omission in accounting occur when a bookkeeping entry has been completely omitted from the accounting records. If the payment 2,000 to a supplier has been omitted then the correcting entry would be as follows: Accounting Errors – Errors of Omission in Accounting Example Account Debit Credit Accounts payable 2,000 Cash 2,000 Total 2,000 2,000