topic 12 errors + suspense

• The usefulness of a trial balance:

  • to prepare the the income statement and SOFP
  • to check the arithmetical accuracy of the ledger accounts, if it does not balance errors have been made
• The limitations of a trial balance:

  • even if it balances there still could be errors
  • if the error on the DR side cancels out the error on the CR side the trial balance will balance even though an error has been made
  • there are 6 types of errors which do not effect the trial balance
• Errors not revealed in the trial balance:

  • commission
  • reversal
  • omission
  • principle
  • original entry
  • compensating
• Commission - where an amount is posted to an incorrect account of the correct type (has no effect on the gross profit, PFTY, or SOFP)
• Reversal - where the account that should have been debited is credited and vice versa
• Omission - where a transaction is completely omitted from the books of account
• Principle - where an amount is posted to an incorrect class of account (will affect PFTY and SOFP)
• Original entry - where an error is made transferring an amount from the source document into the original books of entry
• Compensating - where equal and opposite errors cancel each other out namely errors which cancel each other out and do not fall into the other five categories
• Casting - arithmetical totalling of accounts
• The journal is the book of original entry used to correct errors. The journal entry will show:

  DR The name of account to be debited with the details (amount to be debited)

  CR The name of account to be credited with the details (amount to be credited)
• Errors revealed by a trial balance:

  • posting
  • unequal posting
  • partial omission
  • addition
  • transposition
• Posting - where one side of a transaction is posted to the wrong side of an account - the entry is made on the same side for both accounts
• Unequal posting - where the debit side of the transaction does not equal the credit side
• Partial omission - where one side of the transaction is not posted
• Addition - overcasting/undercasting in totalling a day book/account or incorrect calculation of bal bd/cd on an account
• Transposition - where the figures of an amount are transposed - the correct numbers but in the wrong order eg. 750 -> 570
• Explain the difference between a commission and principle error - Error of commission refers to an entry made on an incorrect account which is the correct class of account (give an example). Error of principle refers to an entry made on an incorrect account which is also the incorrect class of account (give an example)
• Explain why certain errors may not be revealed in a trial balance

  1. The trial balance is limited to only highlighting errors where double entry procedure is not followed

  2. In theory as there isn't a corresponding credit entry for every debit entry the total debit and credit balances will not agree and the trial balance will reveal this error

  3. However a trial balance will not highlight errors where the double entry procedure is followed albeit the entries were made in the wrong accounts

  4. In theory there is a corresponding credit entry for every debit entry the total debit and credit balances will agree although the trial balance will not reveal this error
• Explain the difference between posting and unequal posting - A posting error is where one side of a transaction is posted to the wrong side of an account - the entry is made on the same side for both accounts and therefore there is not a credit entry for every debit entry. Unequal posting is where the debit side of the transaction does not equal the credit side and therefore the amount entered on the debit side does not correspond with the amount on the credit side. Therefore double entry procedure has not been followed
• Explain the role of a suspense account when resolving errors:

  • where an error cannot be rectified through simple double entry into the respective accounts a temporary account (suspense account) is made to make two sides of a trial balance, balance
  • they enable the correction of errors to take place while allowing the key concept of dual aspect to be continuously followed
  • this only relevant for PUPAT errors and be a useful record to look back at errors made previously