Form 1 Accounting Notes – Errors in Accounting
1. Introduction
In accounting, an error is a mistake made during the recording, posting, or balancing of financial
transactions. Errors can occur even when the trial balance agrees. Understanding accounting errors is
essential because: - They can distort financial statements. - They may hide fraud. - They affect management
decisions.
2. Classification of Errors
Errors are classified into two main categories:
A. Errors that Affect the Trial Balance
These errors make the trial balance not balance. 1. Error of Omission (One-Sided): Only one side of the
transaction is recorded. - Example: Cash of $100 received from a debtor is recorded in the cash account but
not credited to the debtor. 2. Error in Casting: Incorrect addition in books of original entry or ledger. -
Example: Adding $800 as $880 in the sales journal. 3. Error in Balancing: Wrong balance brought down in
an account. - Example: Balance should be $120, recorded as $210. 4. Error in Posting: Wrong amount
posted to the ledger. - Example: $250 posted instead of $205 in purchases account.
B. Errors that Do Not Affect the Trial Balance
These errors do not disturb the agreement of the trial balance. 1. Error of Complete Omission: Transaction
completely left out. - Example: Cash sale of $100 not recorded at all. 2. Error of Commission: Correct
amount posted to the wrong personal account. - Example: Payment of $150 to John posted in James’
account. 3. Error of Principle: Correct amount posted in the wrong type of account. - Example: Machinery
purchase recorded in purchases account instead of machinery account. 4. Error of Original Entry: Wrong
amount recorded in the original book and posted equally wrong. - Example: Sale of $500 recorded as $50 in
both sales journal and ledger. 5. Reversal of Entries: Amounts posted to wrong sides (debit/credit
reversed). - Example: Debit cash and credit purchases instead of debit purchases and credit cash. 6.
Compensating Error: Two or more errors cancel each other out. - Example: Rent undercast by $50, and
commission income undercast by $50.
3. Effects of Errors
• Misleading financial statements.
• Misstated profits or losses.
• Incorrect accounts of individuals or businesses.
• Poor decision-making due to unreliable information.
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4. Detection of Errors
• Trial Balance discrepancies.
• Checking source documents (receipts, invoices, bank statements).
• Cross-checking ledger accounts.
• Analytical review of accounts (looking for unusual balances or trends).
5. Correction of Errors
A. Errors that Affect Trial Balance
• Use a Suspense Account to temporarily hold the difference.
• Correct wrong postings with journal entries.
• Close the suspense account after corrections.
B. Errors that Do Not Affect Trial Balance
• Corrected using rectification journal entries.
• Examples:
• Error of principle: Transfer amount from wrong account to correct account.
• Error of commission: Post amount to correct personal account.
6. Summary Table
Effect on Trial
Error Type Example Correction Method
Balance
Error of Omission Debit cash, credit debtor Enter the missing
Imbalance
(one-sided) omitted entry
Balance Posted to wrong personal Transfer to correct
Error of Commission
maintained account account
Balance Machinery recorded in Transfer to correct
Error of Principle
maintained purchases account account
Balance Adjust with journal
Error of Original Entry $500 recorded as $50
maintained entry
Balance Correct debit/credit
Reversal of Entries Debit/credit reversed
maintained sides
Balance Rent undercast $50, Adjust each account
Compensating Error
maintained commission undercast $50 individually
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7. Practice Exercises
1. A cash sale of $200 was completely left out. Identify the error type.
2. Payment of $150 to John was recorded in James’ account. Identify the error type.
3. Equipment worth $1,000 recorded as purchase expense. Identify the error type.
4. Sales of $500 recorded as $50 in both journal and ledger. Identify the error type.
5. Rent undercast $50, commission undercast $50. Identify the error type.
