Chapter 6 Correction of Errors (I): Errors Not

Affecting Trial Balance Agreement

Notes to teachers

1 Start with Chapters 5 and 6 of Frank Wood’s Introduction to Accounting and briefly explain to students
the purpose of preparing a trial balance and the uses of the general journal (i.e., the journal). Students
should know that some errors affect the agreement of a trial balance while others do not.

2 It is not difficult to understand the correction of errors mentioned in this chapter. But students may have
difficulty deciding whether a correcting entry affecting expenses/revenues should be made in the
nominal account or the profit and loss account. The marking schemes of public examinations were rather
confusing in the past. Teachers should remind students to check whether the question hints that the
profit and loss account has already been opened. If this is the case, all nominal accounts would have been
closed off and the correcting entry should be made in the profit and loss account.

3 Errors in year-end adjustments are included for the first time. Teachers should go through Chapters 1 − 3
with students before teaching this section.

4 Sale or return transactions are quite common in public examinations. Teachers are advised to teach the
materials on pages 178 − 179 (Learn More).

Q1 Control accounts can help test the arithmetical accuracy of entries in certain ledgers (usually the accounts
receivable ledger and the accounts payable ledger). The trial balance can help test the arithmetical
accuracy of double entries made in all ledgers.

Q2 Personal accounts are accounts of individuals and organisations trading with the firm.

Q3 The general journal records transactions that do not fit into any of the other books of original entry.

Q4 Capital expenditure is expenditure that generates long-term benefits for an entity. It usually refers to the
money spent on:
• purchase or production of non-current assets
• extension or improvement to existing non-current assets
Capital expenditure should not be wholly written off as an expense in the period in which it is incurred.
Instead, it should be expensed over a number of periods by way of depreciation.

Q5 Expenditures related to the running of motor vehicles; for example, petrol and motor repairs.

Q6 No. A casting error in a book of original entry, say, the purchases journal, would only affect its
corresponding account in the general ledger (i.e., purchases account). The creditors’ accounts in the
accounts payable ledger would be unaffected as long as the individual entries in the purchases journal
were correct. The same logic applies to the debtors’ accounts in the accounts receivable ledger.

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 Q7 Nominal accounts are accounts that will be closed off at the end of an accounting cycle and whose
balances will be transferred to the profit and loss account.

Q8 Example 3
Dr Profit and loss — Purchases $2,500
Cr T Hui $2,500
Example 4
Dr T Lo $200
Cr Profit and loss — Sales $200
Example 6
Dr Profit and loss — Sales $1,000
Cr Profit and loss — Purchases $1,000

A1 Error of principle — The sale of a non-current asset was wrongly treated as a sale of goods.
The required adjusting entries would be:
Dr Sales $6,000
Dr Accumulated depreciation: Cars $90,000
Dr Profit and loss — Loss on disposal $4,000
Cr Cars $100,000

A2 Dr Sales $300
Cr T Lo $300

A3 The correcting entry should be made in the capital account instead of the profit and loss account.

A4 If the overstated opening inventory had been transferred out of the inventory account to the profit and
loss account for the year, the required adjusting entries would be:
Dr Capital (for sole proprietorships) $500*
Cr Profit and loss — Opening inventory $500
If the overstated opening inventory had not been transferred out of the inventory account, the required
adjusting entries would be:
Dr Capital (for sole proprietorships) $500*
Cr Inventory $500
* The debit entry would be made in ‘partners’ capital/current accounts’ for partnerships or ‘retained
profits’ for limited companies. Refer to Chapter 8 for partnership accounts, and Chapter 13 of Frank
Wood’s Financial Accounting 2 for the accounts of limited companies.

A5 Dr Expense (or the profit and loss account if the expense account had been closed off) (with an amount
double the amount of the error)
Cr Prepaid expenses
Cr Accrued expenses

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 A6 Dr Depreciation
Cr Accumulated depreciation

A7 Dr Allowance for doubtful accounts $1,200

Cr Profit and loss $1,200

A8 No. The adjusting entries would be:

1 Correction of overstated purchases:
Dr Creditor’s account $12,000
Cr Purchases account $12,000
2 Correction of overstated closing inventory:
Dr Profit and loss — Closing inventory $12,000
Cr Inventory $12,000

A9 For ordinary sales, goods can only be returned by the customer if the supplier agrees to accept them. For
sale or return transactions, goods can be returned by the customer to the supplier unconditionally.

ASSESSMENT

Short Questions
1 (a) Error of commission
(b) Error of omission
(c) Error of principle
(d) Error of original entry

The Journal

Details Dr Cr
$ $
(a) H Lin 6,780
H Lui 6,780
(b) Machinery 43,900
L Po 43,900
(c) Vans 38,000
Motor expenses 38,000
(d) C Fung ($2,210 – $2,120) 90
Sales 90

2X (a) Error of commission

(b) Error of principle
(c) Error of original entry
(d) Complete reversal of entries

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 The Journal

Details Dr Cr
$ $
(a) H Wong 6,990
K Wong 6,990
(b) Cash 1,890
Bank 1,890
(c) K Li ($9,900 – $8,900) 1,000
Purchases 1,000
(d) H Kwong 16,000*
Cash 16,000

* The adjustment for item (d) is double the amount ($8,000 × 2) — first to cancel out the error and then
replace it with the correct amount.

3 (a) Dr Inventory $800

Cr Profit and loss — Closing inventory $800

(b) Dr Accumulated depreciation: Office furniture $2,000

Cr Profit and loss — Depreciation $2,000

(c) Dr Profit and loss — Allowance for doubtful accounts $1,800

Cr Allowance for doubtful accounts $1,800

(d) Dr Profit and loss — Expenses $1,400

Cr Prepaid expense $700
Cr Accrued expense $700

4X (a) Dr Profit and loss $3,600

Cr Inventory $3,600

(b) Dr Computers $10,000

Cr Profit and loss — Purchases $10,000
Dr Profit and loss — Depreciation $2,000
Cr Accumulated depreciation: Computers $2,000

(c) Dr Profit and loss — Bad debts $4,000

Cr Accounts receivable $4,000
Dr Profit and loss $1,125
Cr Allowance for doubtful accounts $1,125

(d) Dr Profit and loss $1,600

Cr Accrued revenue $800
Cr Accrued expense $800

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 5 (a) No entry is required.

(b) Dr Drawings $1,600

Cr Capital $800
Cr Profit and loss — Purchases $800

(c) Dr Profit and loss — Returns inwards $780

Cr Debtor’s account $780

(d) Dr Profit and loss — Sales $12,000

Cr Debtor’s account $12,000
Dr Inventory $10,000
Cr Profit and loss — Closing inventory $10,000

(e) Dr Profit and loss — Sales $32,000

Cr Disposal $32,000
Dr Disposal $80,000
Cr Vans $80,000
Dr Accumulated depreciation: Vans $32,000
Cr Disposal $32,000
Dr Profit and loss — Loss on disposal $16,000
Cr Disposal $16,000

or simply as:
Dr Profit and loss — Sales $32,000
Dr Accumulated depreciation: Vans $32,000
Dr Profit and loss — Loss on disposal $16,000
Cr Vans $80,000

Application Problems
6X (a)
The Journal

Details Dr Cr
$ $
(i) Office expenses 500
Office equipment 500
Correction of error: Repairs of office equipment wrongly entered in the
office equipment account.
(ii) Sales 200
Purchases 200
Correction of error: Purchases and sales both overcast by $200.
(iii) Sundry expenses 100
Accrued expenses 100
Correction of error: Sundry expenses of $100 not accrued.

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 (b) F Mok
Corrected Trial Balance as at 31 December 2009
Dr Cr
$ $
Inventory as at 1 January 2009 3,000
Purchases ($10,000 – $200) 9,800
Sales ($22,000 – $200) 21,800
Office equipment (net) ($10,000 – $500) 9,500
Furniture and fittings (net) 20,000
Bank 6,000
Accounts receivable 3,600
Accounts payable 2,400
Accrued expenses 100
Office expenses ($4,000 + $500) 4,500
Sundry expenses ($2,500 + $100) 2,600
Capital 34,700
59,000 59,000

7 (a) See text, Sections 6.2 – 6.7.

(b) When any of the above errors are made, the same amount is entered on the debit side and the credit
side. Therefore, the totals of all debit and credit balances will equal and the trial balance will agree.

8 (a) (Dates and narratives omitted)

The Journal

Details Dr Cr
$ $
(i) F H Ltd (creditor) 148
Returns outwards 148
(ii) Drawings 333
Purchases 333
(iii) T Hui 168
T Ho 168
(iv) Discounts allowed ($94 – $64) 30
K Young (debtor) 30

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 (b) T Sung
Corrected Trial Balance as at 31 March 2010
Dr Cr
$ $
Inventory as at 1 April 2009 21,400
Discounts allowed ($620 + $30) 650
Discounts received 900
Allowance for doubtful accounts 1,920
Purchases ($188,000 – $333) 187,667
Returns outwards ($2,800 + $148) 2,948
Sales 264,200
Returns inwards 2,200
Buildings at cost 140,000
Accumulated depreciation: Buildings 7,000
Motor vehicles at cost 30,000
Accumulated depreciation: Motor vehicles 9,000
Capital 169,200
Bank 14,200
Account receivable ($22,600 – $30) 22,570
Accounts payable ($15,200 – $148) 15,052
General expenses 33,200
Drawings ($18,000 + $333) 18,333
470,220 470,220

(c) The above errors did not affect the agreement of a trial balance. This is because either no entry had
been made in any account (i and ii), or the entries made on the debit side and credit side of thev
accounts were of the same amount (iii and iv). Whenever all the double entries in ledger accounts are
of equal amounts, the trial balance will agree.

9X (a)
The Journal

Details Dr Cr
$ $
(i) Furniture and fittings 1,400
Profit and loss — Purchases 1,400
Correction of error: Purchases of fittings wrongly entered in the purchases
account.
(ii) Profit and loss — Depreciation 2,800
Accumulated Depreciation: Motor vehicles 2,800
Correction of error: Depreciation on motor vehicles not provided.
(iii) Profit and loss — Bad debts 410
Accounts receivable 410
Correction of error: Bad debt not written off.
(iv) Profit and loss 1,240
Inventory 1,240
Correction of error: Closing inventory overvalued.

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 (b) R Tse
Balance Sheet as at 30 September 2009
$ $ $
Non-current assets Capital
Furniture and fittings Balance as at 1 October 2008 76,900
($15,400 + $1,400) 16,800 Add Net profit 27,350
Motor vehicles 29,800 104,250
Less Accumulated depreciation (2,800) 27,000 Less Drawings (28,600)
43,800 75,650
Current assets Current liabilities
Inventory ($27,240 – $1,240) 26,000 Accounts payable 18,500
Accounts receivable
($12,410 – $410) 12,000
Bank 12,350 50,350
94,150 94,150

(c) None of the above errors affected the agreement of a trial balance. This is because either the entries
made on the debit side and credit side were of the same amount (i and iv), or no entry had been made
in any account (ii and iii). Whenever all the double entries made in ledger accounts are of equal
amounts, the trial balance will agree.

10X (a)
The Journal

Details Dr Cr
$ $
(i) Inventory [($12 – $1.2) × 200] 2,160
Profit and loss 2,160
(ii) Profit and loss — Expenses 820
Prepayment 410
Accrual 410
(iii) Accumulated depreciation [$12,000 – ($120,000 – $34,800 + $12,000) × 10%] 2,280
Profit and loss — Depreciation 2,280
(iv) Profit and loss 580
Allowance for doubtful accounts ($8,400 × 5%) 420
Allowance for discounts allowed [($8,400 – $420) × 2%] 160
(v) Other receivables — Insurance company 5,500
Profit and loss — Insurance compensation 5,500

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 (b) Tiger Co
Corrected Balance Sheet as at 31 March 2010
$ $ $ $ $
Non-current assets Capital
Cost 120,000 Balance as at 1 April 2009 80,000
Less Accumulated depreciation (32,520) 87,480 Add Net profit 39,990
119,990
Current assets Less Drawings (12,000)
Inventory 11,780 107,990
Accounts receivable 8,400 Current liabilities
Less Allowance for Accounts payable 6,480
doubtful accounts (420) Accruals 1,830 8,310
Allowance for
discounts allowed (160) 7,820
Other receivables 5,500
Bank 3,720 28,820
116,300 116,300

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