Cambridge IGCSE Accounting · 0452
Chapter 3: Verification of Accounting Records — Part 2
Section 3.2 · Correction of Errors
The General Journal and Narratives
All errors must be corrected using the General Journal. Each journal entry for a correction must include a narrative—a brief written explanation of why the entry is being made and the nature of the error being corrected.
Correcting Errors NOT Affecting the Trial Balance
These errors are corrected by making a journal entry that reverses the incorrect effect and records the correct transaction. No Suspense Account is used.
Worked Example 1: Commission, Principle and Reversal
| Error | Journal Correction (with narrative) |
|---|---|
| Commission: $500 received from D. Short entered in D. Small’s account | Dr D. Small $500 Cr D. Short $500 Narrative: Correct error of commission — receipt credited to wrong debtor. |
| Principle: $55,500 motor vehicle debited to Motor Expenses | Dr Motor Vehicle $55,500 Cr Motor Expenses $55,500 Narrative: Correct error of principle — asset cost wrongly classified as expense. Effect: Profit for the Year increases by $55,500; non-current assets increase by $55,500. |
| Complete Reversal: $2,000 received from D. Charles credited to Bank, debited to Charles | Dr Bank $4,000 Cr D. Charles $4,000 Narrative: Correct error of complete reversal — amount doubled. Rule: Always double the amount when correcting a complete reversal. |
Worked Example 2: Original Entry and Omission
- Original Entry — wages $850 entered as $580 in both accounts
- Dr Wages $270 Cr Bank $270
Narrative: Correct error of original entry — wages understated by $270.
Effect: Profit for the Year decreases by $270 (extra expense). - Omission — $1,200 credit sale to P. Wong never recorded
- Dr P. Wong $1,200 Cr Sales $1,200
Narrative: Correct error of omission — credit sale not recorded.
Effect: Profit for the Year increases by $1,200; trade receivables increase by $1,200.
Exam Traps
- Reversal Errors: The most common mistake is forgetting to double the amount when correcting a complete reversal.
The Suspense Account (Errors Which Affect the Trial Balance)
If the Trial Balance totals do not agree, it indicates errors that cause the debit total to differ from the credit total. These include single entry errors, entering different amounts on different sides, or overcasting/undercasting day books.
Procedure for Suspense Accounts
- Opening the Account: The difference between the Trial Balance totals is put into a Suspense Account on the smaller side to temporarily balance the books.
- Correcting Errors: As errors are located, they are corrected via the journal. Every journal entry for these specific errors must use the Suspense Account as the contra entry.
- Closing the Account: Once all errors are corrected, the Suspense Account balance should be zero.
Worked Example 3: Full Suspense Account Correction
A Trial Balance shows debits $62,800 and credits $62,500. Debits exceed credits by $300, so Suspense is credited $300. Errors discovered:
- Credit purchases of $400 debited to Purchases but not credited to Trade Payable (single entry).
- Sales Day Book overcast by $100 (Sales credited $100 too much).
Correction journals:
- Error 1: Dr Suspense $400, Cr Trade Payable $400
- Error 2: Dr Sales $100, Cr Suspense $100
Suspense Account
| Details | $ | Details | $ |
|---|---|---|---|
| Trade Payable (1) | 400 | Difference on TB (opening) | 300 |
| Sales overcast (2) | 100 | ||
| 400 | 400 |
Suspense balance is now $0. Error 1 increased debit excess by $400; error 2 reduced it by $100 — net $300, matching the opening Suspense credit.
Statement of Financial Position presentation: If Suspense still has a balance at year-end:
- Debit balance in Suspense → shown as a current asset.
- Credit balance in Suspense → shown as a current liability.
Adjusting Profit for the Year after Correction
Errors involving revenue or expenses will impact the Profit for the Year. You must adjust the draft profit figure before preparing the Income Statement.
| Error Type | Impact on Profit |
|---|---|
| Revenue (Sales) Overcast | Profit is overstated (must be reduced) |
| Revenue (Sales) Undercast | Profit is understated (must be increased) |
| Expenses Overcast | Profit is understated (must be increased) |
| Expenses Undercast | Profit is overstated (must be reduced) |
| Principle — expense instead of asset | Profit understated; non-current assets understated |
| Omission of credit sale | Profit understated; trade receivables understated |
Worked Example 4: Adjusting Draft Profit
Draft Profit for the Year = $18,400. Errors discovered and corrected:
| Error | Adjustment ($) |
|---|---|
| Sales undercast by $2,500 | +2,500 |
| Rent overcast by $600 | +600 |
| Motor expenses include $4,000 vehicle purchase (principle) | +4,000 |
| Wages undercast by $350 | −350 |
| Corrected Profit for the Year | $25,150 |
Calculation: $18,400 + $2,500 + $600 + $4,000 − $350 = $25,150.
0/15