HEXCO · Polytechnic · NC Accountancy
Business Accounting 2: Correction of Errors
Learning Outcome 1 of 6
Free HEXCO NC Accountancy notes on Correction of Errors, learning outcome 1 of 6 in Business Accounting 2. Correction of errors, control accounts, partnerships, incomplete records, manufacturing accounts and ratio analysis. Semester 2, module 310/22/M06.
Here we learn what accounting errors are, which errors affect the trial balance and which do not, how to correct them through the journal, how to open and clear a suspense account, and how corrections change the profit.
Even careful bookkeepers make mistakes, and some of them still leave the trial balance agreeing, so an assistant accountant must know how to find each type of error and put it right properly.
1.1 Accounting Errors
An accounting error is an unintentional mistake in recording, posting, adding or extracting transactions in the books of account.
Errors are grouped by whether or not they cause the trial balance to disagree, because that decides how they are found and corrected.
Errors that Do Not Affect the Trial Balance
These errors leave the debit and credit totals equal, so the trial balance still agrees and the errors are found only by checking, such as through statements from suppliers, bank reconciliations or audits. The table explains each one with an example.
| Error | Explanation and example |
|---|---|
| Error of omission The transaction is left out completely. | Neither the debit nor the credit is recorded, such as a credit sale of $300 to Moyo never entered in the books. |
| Error of commission Posted to the wrong person's account of the correct type. | A sale to J. Banda is debited to J. Bande's account. Both are debtors, so the totals are unaffected. |
| Error of principle Posted to the wrong class of account. | Equipment bought for $1,200 is debited to purchases, treating a non-current asset as an expense. |
| Error of original entry The wrong amount is used on both sides. | An invoice for $560 is entered as $650 in the day book, so both the debit and the credit are $650. |
| Complete reversal of entries The right accounts, but debit and credit swapped. | Cash of $200 paid to a supplier is debited to bank and credited to the supplier. |
| Compensating errors Two errors cancel each other out. | The sales account is overcast by $100 and the wages account is also overcast by $100. |
Errors that Affect the Trial Balance
These errors make the debit and credit totals differ, so the trial balance does not agree. The table explains each one.
| Error | Explanation and example |
|---|---|
| Single entry (partial omission) Only one side is recorded. | Stationery of $60 paid in cash is entered in the cash book but not posted to the stationery account. |
| Casting error A total is added wrongly. | The sales day book is undercast by $100, so sales are credited $100 too little. |
| Wrong amount on one side The two sides show different amounts. | Rent of $350 is credited in the cash book correctly but debited in the rent account as $530 (a transposition). |
| Both entries on the same side Two debits or two credits. | Discount received of $40 is debited to the discount received account instead of credited. |
| Error in extracting balances A balance is copied wrongly into the trial balance. | A debtor's balance of $750 is listed as $570, or a balance is left out of the trial balance. |
1.2 Correcting Errors through the Journal
Errors are never corrected by crossing out or overwriting ledger entries, because that destroys the audit trail.
Instead, a journal entry is made for each correction, with a narration explaining it, and then posted to the ledger.
Correcting Errors that Do Not Affect the Trial Balance
For these errors, the correcting entry has a debit and a credit of the same amount between the accounts involved. A good method is to write down what was done, what should have been done, and then make the entry that turns one into the other.
The Suspense Account
When the trial balance does not agree and the error cannot be found at once, the difference is entered in a suspense account, so that draft financial statements can still be prepared. If the debit total is larger, the suspense account is credited with the difference; if the credit total is larger, it is debited.
As each error affecting the trial balance is found, it is corrected with a journal entry in which one side is the suspense account. When all such errors are corrected, the suspense account has no balance left.
1.3 Writing Up a Suspense Account
The worked example below shows the whole process: opening the suspense account, journalising the corrections, posting them, and finding the corrected profit.
Follow each error carefully to see why the suspense account is debited or credited.
The Errors Found
The trial balance of Nyasha Traders at 31 December 2025 totalled Dr $50,300 and Cr $50,000, so the difference of 50,300 - 50,000 = $300 was credited to a suspense account. The draft profit was $8,000. These errors were later found:
Sales day book undercast by $100
Sales were credited $100 too little, so the credit side of the trial balance was short by $100. Correction: debit suspense, credit sales $100.
Rent of $350 debited in the rent account as $530
The rent account was debited $530 - $350 = $180 too much. Correction: debit suspense, credit rent $180.
Discount received of $40 debited to the discount received account
It should have been credited, so the debit side was $40 too high and the credit side $40 too low, a total effect of $80. Correction: debit suspense, credit discount received $80.
Stationery of $60 entered in the cash book only
The debit to the stationery account was missing. Correction: debit stationery, credit suspense $60.
Equipment of $1,200 debited to purchases
An error of principle, which does not affect the trial balance. Correction: debit equipment, credit purchases $1,200.
Journal Entries
Each correction is journalised with a narration. Only the first four involve the suspense account.
The Suspense Account
Posting the journal entries clears the suspense account: the debits total 100 + 180 + 80 = $360, which equals the opening credit of $300 plus the $60 credit for stationery.
Statement of Corrected Profit
Corrections to income and expense accounts change the profit, while corrections between assets, liabilities and capital do not. An increase in income or decrease in an expense raises profit, and the opposite lowers it.
All Business Accounting 2 learning outcomes
- Learning Outcome 1: Correction of Errors
- Learning Outcome 2: Control Accounts
- Learning Outcome 3: Partnership Financial Statements
- Learning Outcome 4: Incomplete Records
- Learning Outcome 5: Manufacturing Accounts
- Learning Outcome 6: Accounting Ratios