The types of errors that are not revealed by the trial balance

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6. Briefly describe the types of errors that NOT revealed by the trial balance. For each type of error, show the effect of correcting the error in expanded accounting equation. Please provide example in explaining your answers.

Trial balance is a list of all the ledger account balances. It is normally prepared at the end of the accounting period to enable us to prepare the financial statements of the business. The balances of all ledgers are put into debit and credit columns. The general reason of preparing a trial balance is to test the accuracy of the ledger by showing whether total debits equal to credits. In order to confirm that double entry has taken place for each transaction, the total debit entries must be equal to total credit entries. Example of trial balance are shown at below:

Company ABC

Trial Balance as at 31 December 2014

Particulars

Debit

(RM)

Credit

(RM)

Cash

12000

Office equipment

5000

Debtor

550

Creditor

2700

Purchase

4000

Drawings

400

Rental

1200

Wages

2400

General expenses

375

Bank

7500

Sales

9000

Sales returns

100

Van

4500

Purchases returns

500

Capital

25825

Total

38025

38025

There are two type of errors commonly found in the process of preparing financial statement, which are errors that revealed by the trial balance and errors that are not revealed by the trial balance. In this assignment, we only discuss the errors that are not revealed by the trial balance.

  1. Error of omission- a transaction that is totally not entered in the books at all.

Example: Purchase a motor van by cash for RM 70000 business use. This transaction was not recorded in the books.

Cash

RM

Motor van (Correction) 70000

Motor Van

RM

Cash (Correction) 70000

Since the transaction was completely omitted from the books, the only way to make the correction is by recording the transaction in the books using the double entry rules. Hence, the asset, motor van is increase RM 70000 and another asset cash decrease RM 70000.

  1. Error of principle- a transaction that is entered in wrong category of account.

Example: A sum of RM 700 paid for repairs of machinery was wrongly debited into the machinery account.

Machinery Account

RM RM

Cash (Wrong entry) 700 Repairs (Correction) 700

Repairs Account

RM

Machinery (Correction) 700

Machinery is an asset to the business whereas repairs of machinery categorize as expenses. Even though the double entry for an increase in both account is debited to the respective accounts, but they are different categories. The errors is corrected by crediting the machinery account. The effect of this error is to cancel the error and the repairs account is debited to show the correct entry.

  1. Error of commission- the entries are made at the correct amount and appropriate side but to the wrong account of the correct category. Under this type of error, the double entry rule is followed correctly.

Example: A sale of goods worth RM 5000 to Mr Rex was wrongly entered into Mr Tex account due to a mistake.

Mr Rex Account

RM

Mr Tex (Correction) 5000

Mr Tex Account

RM RM

Sale (Wrong entry) 5000 Mr Rex (Correction) 5000

Mr Rex and Mr Tex are both personal accounts of the same category. Mr Tex account is credited RM 5000 to cancel off the error and Mr Rex account is debited RM 5000 to show the correct entry.

  1. Error of original entry- the original amount was wrongly entered in the books of original entry (or book prime entry) and the wrong amount was correctly posted to the ledger using the double-entry system.

Example: Purchase of goods cost RM 920 from Mei Mei Enterprise were wrongly recorded in the Purchases Journal as RM 902. The wrong amount was posted to the ledger.

Purchases

RM

Mei Mei Enterprise 902

Mei Mei Enterprise (Correction) 18

920

Mei Mei Enterprise

RM

Purchases 902

Purchases (Correction) 18

920

Initially, the two accounts were recorded using an incorrect figure where both accounts were understate by RM 18. This error is corrected by adding back the understate amount.

  1. Error of reversal of entries- transaction are entered in the accounts using the double-entry system but they are entered in complete reversal. An account that should be debited is credited and vice versa.

Example: A cheque received from a debtor, Sin Keat, total amount of RM 3000 was wrongly credited to the bank account and debited to Sin Keat’s account.

Sin Keat

RM RM

Bank (Wrong entry) 3000 Bank (Correction) 6000

Bank

RM RM

Sin Keat (Correction) 6000 Sin Keat (Wrong entry) 3000

In correcting this type of error, the amount involved should be doubled, that is RM 3000 x 2. The first RM 3000 is to cancel the error and the second RM 3000 is to indicate the correct entry. Therefore, the asset, bank increase RM 3000 while another asset, debtor decrease RM 3000.

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