Errors not Revealed by the Trial Balance

Introduction:

Usually, it is assumed that a trial balance with equal debit and credit columns is evidence of accurate entries in the ledger accounts. This assumption is not always true, as there are several errors that may exist in a ledger account but will not be revealed by a trial balance. These errors are sometimes described as errors that do not affect the trial balance and are discussed in this note.

1. Errors of Omission:

A. Meaning:

This error occurs when a transaction is completely omitted or not recorded in the relevant ledger accounts. So, there is neither a debit nor a credit entry in two separate accounts. It is almost as if the transaction never occurred.

B. How to Correct the Error:

Debit and credit the accounts that would have been affected if the transaction was initially recorded, then adjust the balances of those accounts to take into consideration the new entries.

2. Errors of Original Entry:

A. Meaning:

Here, the transaction is recorded on both the debit and credit side of two accounts, but with an amount different from what the amount should have been. For example, a transfer of 1, 200 from bank account to cash account is recorded in both bank and cash account as 2, 100. Here, the balances of both accounts are respectively increased and decreased by the same amount, and will therefore have no effect on the trial balance.

B. How to Correct the Error:

The difference between the original amount that should have been recorded and the amount that was actually recorded is adjusted in the original accounts.

For example, if 1,200 was mistakenly recorded as 2,100, the bank balance has been understated (decreased) by:

2,100 - 1,200 = 900, while the cash balance has been overstated (increased) by the same amount (900).

To correct this error, we must credit cash with 900 and debit bank with 900. This adjustment reduces the cash balance, which was mistakenly increased, and restores the bank balance, which was mistakenly reduced.

3. Errors of Commission:

A. Meaning:

This type of error occurs when a transaction is recorded in the wrong account but within the same category as the correct account. It often arises due to similarities in names.

For example, if goods are sold on credit to Ziyaad, he becomes a debtor, and his account should be debited with the value of the goods while the sales account is credited. However, if the amount is mistakenly debited to Zayan’s account instead, the sales account remains correctly credited. As a result, although the balance intended for Ziyaad's account is incorrectly reflected in Zayan's account, the trial balance remains unaffected despite the error.

B. How to Correct the Error:

To correct this error, we credit the account that was wrongfully debited and debit the account that should have been debited in the original transaction.

Using the previous example, the sales account remains unchanged since it was correctly credited. We then:

i. Credit Zayan’s account with the amount that was mistakenly debited to it.

ii. Debit Ziyaad’s account with the same amount.

4. Errors of Principle:

A. Meaning:

This type of error occurs when a transaction is recorded in the wrong class of account.

For example, if a fixed asset is purchased, it should be recorded in the appropriate fixed asset account. However, if it is mistakenly recorded in the purchases account—which is meant for goods bought for resale—this misclassification leads to an incorrect increase in the purchases account instead of the fixed asset account.

B. How to Correct the Error:

This is corrected in a manner similar to an error of commission. With the illustration above, the purchases account will be credited in respect of the fixed asset account.

5. Compensating Errors:

Here, two errors “compensate” or cancel out each other. Essentially, the accounts are such that they have opposite balances. For example, the sales account has a credit closing balance and the purchases account has a debit closing balance. If at some point the balance of the sales account is overstated by an amount, and at some other point the balance of the purchases account is overstated by the same amount, those two amounts will cancel out each other and the balances of the debit and credit columns of the trial balance will still be equal.

6. Complete Reversal of Entries:

A. Meaning:

This error occurs when what is supposed to be debited is credited, and what is what to be credited is debited. For example, a transfer from bank to cash ought to be recorded by crediting cash and debiting bank. However, with this error, bank is instead debited and cash is credited.

B. How to Correct the Error:

To correct this, the amount involved is doubled and entered at the opposing side of the account. For example, if the bank account is wrongly debited with 1000 cedis and the cash account is wrongly credited with the same amount, we correct the error by crediting bank account with 2000 and debiting cash account with the same 2000. The effect of doubling the amount is that half of it will be cancelled out by the wrong entry leaving us with the correct amount. Thus, 1000 cedis of the 2000 cedis credit entry on the bank account will be cancelled by the wrong debit entry of 1000 cedis that was recorded in the bank account. Also, 1000 cedis of the 2000 cedis that was debited to the cash account will be cancelled out by credit entry 1000 cedis that was recorded in the cash account.

7. Error of Transposition:

This occurs when the sequence of characters in a number is changed. For example, an amount of 123 is recorded as 132 in both accounts. These errors are corrected in a manner similar to how errors of original entry are corrected.

8. Errors of Duplication:

Here, a single transaction is recorded twice (using the double entry). For example, a transfer of Ghc 1000 from bank to cash is recorded twice in bank account and twice in cash account. Thus, the bank is credited twice, and the cash is debited twice.

To correct, record an opposite transaction with the same amount to enable the amounts cancel out. So here, bank is debited with the amount of Ghc 1000 and cash is credited with the same amount.

Exercise (From Course Manual):

Show the journal entries necessary to correct the following errors.

1. Both purchase and returns outwards account were under-cast by ¢150

2. Payment of cash to Seidu ¢30 was completely omitted from the books.

3. Cash paid to Sammy ¢1000 entered on the credit side of his account and debited to the cash book

4. Returns inwards ¢300 from Ako was entered in Akosua’s account.

5. Sales to Ayi ¢107 were entered in books as ¢701