Errors & Journal Entries

Table of Contents
1. Errors Which Do Not Affect a Trial Balance
2. How do I correct errors using journal entries?
3. Error of Omission
4. Error of Original Entry
5. Error of Complete Reversal
6. Error of Commission
7. Error of Principle
8. Compensating Errors
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Errors Which Do Not Affect a Trial Balance

Which errors do not affect the trial balance?

• Errors may exist even if trial balance totals match.
• Such errors could be identified through alternate methods like control accounts or bank reconciliation statements.
• Control accounts play a crucial role in error identification.
• Bank reconciliation statements aid in error detection.
• These errors carry significance as they could impact reported profits, asset and liability valuations, as well as inter-business balances.
• The six kinds of errors that do not influence a trial balance include:
  • Error of omission
  • Error of original entry
  • Error of complete reversal
  • Error of commission
  • Error of principle
  • Compensating errors

How do I correct errors using journal entries?

When it comes to correcting errors in accounting, journal entries play a crucial role. Here's how you can rectify mistakes:

• Identify the accounts involved: Determine which accounts are affected by the error.
• Debit and credit entries: Make the appropriate entries by debiting the affected account first and then crediting the corresponding account.
• Recording in the journal: Use the journal as the book of prime entry to document the correction.
• Providing a narrative: Include a brief description such as "Correction of error" to explain the purpose of the entry.

Error of Omission

What is an error of omission?

• An error of omission happens when a transaction isn't recorded in any ledger account. This means the transaction is left out and might not have been included in the initial bookkeeping steps.
• It results in the transaction not being part of the total debits and credits. Despite this, the final balances will still match.

How to Correct an Error of Omission?

• Enter the transaction correctly into the ledger accounts. You essentially just need to make the entries as normal.
• Make the journal entries.

Error of Original Entry

What is an error of original entry?

• An error of original entry arises when a transaction is mistakenly recorded in both ledger accounts with an inaccurate amount, which is consistently entered in both the debit and credit accounts. 
  • This discrepancy may stem from an erroneous entry in the books of prime entry. 
• Despite the error, the incorrect amount contributes to both the debit and credit totals, resulting in balanced totals.

How do I correct an error of original entry?

• Calculate the variance between the incorrect and correct amounts, then input this variance into both affected accounts.
• When augmenting an amount, place the variance on the side corresponding to the original entry.
• When diminishing an amount, position the variance on the opposite side from the original entry.

Error of Complete Reversal

What is an error of complete reversal?

• Error of complete reversal occurs when a transaction is mistakenly recorded on the wrong sides of the correct ledger accounts.
• This error involves debiting an account that should have been credited and crediting an account that should have been debited.
• Despite the mistake, the total debits and credits will include the correct amount, leading to balanced totals.

How do I correct an error of complete reversal?

• When rectifying a complete reversal error, double the value of the transaction.
• Apply the transaction twice: once to undo the error and once to make the correct entries.
• Ensure the entries are made on the correct side, which is the opposite side to where the error occurred.

Error of Commission

What is an error of commission?

An error of commission is a mistake that occurs when a transaction is recorded correctly in terms of its type, but it is posted to the wrong account. This type of error can take various forms:

• A debit entry might be logged in the wrong expense account.
• A transaction could be recorded under the name of the incorrect customer.
• A transaction could be assigned to the wrong supplier's account.

Despite these errors, the total debits and credits in the accounts will still balance, as the correct amounts are included in the totals.

How do I correct an error of commission?

• To correct an error of commission, start by reversing the entry in the incorrect account.
• This involves making an equal and opposite entry to nullify the error.
• Subsequently, record the correct entry in the appropriate account to rectify the mistake.

Error of Principle

What is an error of principle?

• An error of principle arises when a transaction is recorded in an improper account, and the account type is also incorrect. 
• For instance, an expense transaction might erroneously be recorded in an asset account. 
• Despite this error, the accurate amount is included in both the debit and credit totals, thus maintaining balanced totals.

How do I correct an error of principle?

To rectify an error of principle, the correction process mirrors that of an error of commission:

• Reverse the entry made in the incorrect account by creating an equal and opposite entry on the opposite side of the account.
• Simultaneously, record the appropriate entry in the correct account.

Compensating Errors

What are compensating errors?

Compensating errors arise when unrelated errors offset each other during the process of totaling debits and credits. For instance:

• A business sells $100 worth of goods to Steve and $200 worth of goods to Tony.
• The transactions are accurately recorded in the sales account.
• However, both Steve and Tony's accounts are debited $150 erroneously.
• Despite this, the overall assets still show an increase of $300.

How do I correct compensating errors?

Address each error individually:

• Rectify each error to ensure accuracy.
• Verify that the sum of the debits equals the sum of the credits.