FAR110 Financial Accounting 1 Topic 5: Accounting Errors PDF

FAR110 FINANCIAL ACCOUNTING 1 TOPIC 5: ACCOUNTING ERRORS ERRORS NOT AFFECTING TRIAL BALANCE/ NOT SHOWN ON TRIAL BALANCE ⮚ Once error detected, it must be corrected ⮚ error affect BOTH debit and CREDIT side entries > Need journal entry ⮚ error only affect one side ONLY...

FAR110 FINANCIAL ACCOUNTING 1 TOPIC 5: ACCOUNTING ERRORS ERRORS NOT AFFECTING TRIAL BALANCE/ NOT SHOWN ON TRIAL BALANCE ⮚ Once error detected, it must be corrected ⮚ error affect BOTH debit and CREDIT side entries > Need journal entry ⮚ error only affect one side ONLY (debit side OR credit) > No journal entry 1. Error of original entry – amount in the source document contains error Eg:sales invoice has been unintentionally stated as RM10,000 instead of RM100,000. To make correction, RM90,000 should be increased in both account receivable and sales account. General Journal Date Particular Folio Dr(RM) Cr(RM) Account receivable 90,000 Sales 90,000 Being correction of error  2. Error of principles- transaction is recorded in a wrong class of account Eg: maintenance expense RM2,130 was wrongly recorded debited to motor vehicle account but correctly recorded in cash account Dr Maintenance Cr Cash Cash Date Particular Dr(RM) Cr(RM) Bal (RM) Dr Motor vehicle Motor vehicle 2130 Cr Cash The company incurred maintenance cost for Motor vehicle motor vehicle, not Date Particular Dr(RM) Cr(RM) Bal (RM)new vehicle purchase Cash 2130 Cash account is correct, thus, no need correction. Corrections needed: General Journal Date Particular Folio Dr(RM) Cr(RM) Maintenance Expense 2,130 Motor vehicle 2,130 Correction of error: debited wrong accounts  3. Error of commission – errors in recording in account receivable/account payable class of account Dr AR Idha Eg: sales RM760 to Idham was wrongly recorded to Adham Cr Sales account. Dr AR Adh AR Adham Cr Sales Date Particular Dr(RM) Cr(RM) Bal The(RM) sale was Sales 760 made to Idham Sales Date Particular Dr(RM) Cr(RM) Bal (RM) AR Adham 760 Sales account is correct, thus, no need correction. To correct the error: General Journal Date Particular Folio Dr(RM) Cr(RM) AR- Idham 760 AR- Adham 760 Correction of error: debited wrong AR  4. Complete reversal of entries- Debit and credit entry are completely reversed Dr Wages Cr Bank Eg: payment of wages by cheque RM4500 was wrongly debited to bank account and credited to wages account Dr Bank Cr Wages Bank Date Particular Dr(RM) Cr(RM) Bal (RM) Wages 4500 This figure should be credited Wages Date Particular Dr(RM) Cr(RM) Bal (RM) Bank 4500 This figure should be debited To correct the error, records the correction in general journal with doubled amount General Journal Date Particular Folio Dr(RM) Cr(RM) Wages 9000 Bank 9000 Correction of error: wrongly debited and credited account  5. Compensating Errors-errors that cancelled off the figure Eg: sales account has a balance of RM60,000. However, the figure is understated by RM600. In addition, salaries account is understated by RM400 and return outwards overstated by RM200. Trial balance as at 31 December 20xx Debit (RM) Credit (RM) Understated Sales 60,000 Understated by by RM400 RM600 Salaries XXX Return Outward / YYY Overstated by Purchase Return RM200 TOTAL DDDD DDDD To correct the error, records the correction in general journal General Journal Date Particular Folio Dr(RM) Cr(RM) Salaries (to increase salaries) 400 Return outward (to reduce return 200 outward) Sales (to increase sales) 600 Correction of error: compensating error 6. Error of omission – the transaction is omitted/ignored/forgotten from the recording because the documents are non-exist, misplaced, stolen, destroyed or forgotten Eg: the owner use his personal car for daily operation of the business. However, the car is not recorded in the business book General Journal Date Particular Folio Dr(RM) Cr(RM) Motor vehicle 68,000 Capital 68,000 Being additional capital