Topic 8 - Errors Flashcards
When do we date the correction of an error and why?
The day we locate the error so that a complete record is available?
What are all the errors that do not affect the trial balance? (mnemonic)
- Commission
- Omission
- Principle
- Reversal
- Original entry
- Compensating
What errors will affect the agreement on the trial balance?
- Incorrect additions
- Single entry
- Debit one account with the correct amount and credit the other with the wrong amount
- Doing 2 debits or 2 credits for a double entry
What is an error of omission?
When a transaction has been completely omitted from the books.
What is an error of commission?
We enter the correct amount in the wrong account of the same class.
What is an error of principle?
This error indicates failure to understand double entry properly and is when an item is entered in the wrong class of account.
What is a compensating error?
Where 2 separate and independent errors cancel each other by chance.
What is an error of original entry?
When we do the correct double entry but with the wrong number. This mistake is usually made in the day book and the full double entry is carried through to the ledger.
What is a transposition error?
We made the correct entry but used the wrong sequence of individual characters in a number.
NOTE: In a transposition error, difference is always divisible by 9.
What is a complete reversal of entries?
When the correct amount is used but the entry is done on the wrong side of each account (entire entry is reversed).
What is the suspense account?
A temporary account opened to make the trial balance agree until the errors are found and corrected through double entry. Used to finalise a set of books where the books cannot be finalised by normal means.
What is the purpose of the suspense account?
- To make the trial balance agree when there are errors in the books
- To be used in the correction of the errors in the journal, then transfer the corrections to the ledgers through the suspense account
What is the procedure for correcting errors to clear the suspense account?
- Search for bookkeeping errors
- Correct errors in the journal
- Enter corrections in the ledgers through the suspense account
- Redraft the trial balance
- Prepare statement to correct profit for the year
What happens if errors are not found before the preparation of the financial statements?
Suspense account balance (if material) must appear in SoFP. Financial statements will not be complete until the cause of the difference in the trial balance has been identified and the suspense account is cleared.
What happens if the suspense account balance is immaterial and considerable efforts have been made to locate the errors?
This insignificance suspense account balance may be written off against profits.
What is the purpose of the trial balance?
- Checks arithmetical accuracy of the bookkeeping entries as both sides must be equal
- Facilitates preparation of financial statements as balances are readily available
What are the limitations of the trial balance?
- Will not identify all types of errors
What happens when the correction of an error affects the income statement?
It affects the profit for the year. Correcting a debit entry will decrease profit for the year while correcting a credit entry will increase the profit for the year.
