Textbook

1. The context and purpose of financial reporting

2. Accounting principles, concepts and qualitative characteristics

3. Double-entry bookkeeping and accounting systems

4. Recording transactions and events

5. Reconciliations

6. Preparing trial balance

6.1 The trial balance

6.2 Correction of errors

6.3 Suspense accounts

6.4 Errors and the financial statement

7. Preparing financial statements

8. Preparing basic consolidated financial statements

9. Interpretation of financial statements

Wrapping up

6.2 Correction of errors

Achievable ACCA Financial Accounting

6. Preparing trial balance

Our ACCA course is currently in development and is a work-in-progress.

Correction of errors

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This chapter explains how to identify and correct accounting errors that occur when transactions are recorded and posted to the general ledger. You’ll see two broad groups of errors:

errors detected by the trial balance (because debits and credits don’t agree)
errors not detected by the trial balance (because debits and credits still agree, even though something is wrong)

To get the most from this chapter, you need to be comfortable with double-entry bookkeeping and posting transactions to the correct general ledger accounts. That foundation is what lets you spot what went wrong and choose the right correction.

Learning objectives

By the end of this chapter, you should be able to:

identify the types of error which may occur in accounting systems.
identify errors that would be highlighted by the extraction of a trial balance and those that would not.
prepare manual journal entries to correct errors.

Errors in trial balance

When people record and post transactions to the general ledger, mistakes can happen. In practice, we often classify accounting errors into two categories:

those detected by the trial balance (causing imbalance)
those not detected by the trial balance (keeping it balanced despite being incorrect).

Errors detected by the trial balance

These errors break the double-entry principle. Because the debit and credit sides don’t match, the trial balance won’t balance.

Definitions

Single-entry error: Only one side of a transaction is recorded while the other is completely omitted. For example, a $3,000 supplies purchase debits office supplies expense with no credit posted, so debits exceed credits by $3,000.
Unequal posting error: A transaction is recorded correctly but posted with different amounts in the two ledger accounts. For example, a $2,500 credit sale posts $5,200 to trade receivables instead of $2,500, creating a $2,700 imbalance.
Transposition error (single side): Digits are reversed, or a decimal point is misplaced, in only one account. For example, a $5,640 purchase debits purchases correctly but credits trade payables as $5,460, a $180 difference.
Mathematical errors in account balances: Calculation mistakes occur when totalling or balancing ledger accounts. For example, entries of $450, $580, and $620 in a utilities expense account are totalled as $1,750 instead of $1,650, a $100 error.
Posting to the wrong side of an account: An amount is posted to the correct account but on the wrong side. For example, a $3,400 cash receipt should debit cash and credit trade receivables, but debiting trade receivables instead doubles the imbalance to $6,800.

Errors not detected by the trial balance

These errors do not break the equality of total debits and total credits. The trial balance still balances, even though the accounting records are wrong. That’s why the trial balance can’t detect these errors.

Definitions

Error of complete omission: An entire transaction is left unrecorded in the accounting books. For example, a $5,000 credit sale is never recorded, so the trial balance stays balanced despite the missing transaction.
Error of principle: A transaction is recorded in the wrong type of account, violating accounting principles, even though the debit and credit amounts are correct. For example, a $10,000 equipment purchase is debited to repairs expense instead of equipment; both are debit entries, so the trial balance still balances.
Error of original entry: A transaction is recorded with an incorrect amount from the source document, with the same wrong amount on both sides. For example, a $7,500 purchase invoice is recorded as $5,000 in both purchases and trade payables, so the trial balance still balances.
Error of commission: A transaction is posted to the correct type of account, but the wrong specific account within that category. For example, a $2,000 receipt from customer A is credited to customer B’s account instead; both are receivable accounts, so the trial balance still balances.
Error of complete reversal: The debit and credit aspects of a transaction are completely reversed. For example, a $4,000 credit sale is debited to sales revenue and credited to trade receivables, the opposite of the correct entry, but the trial balance still balances.
Transposition error (both sides): Digits are accidentally reversed when recording an entry on both sides of a transaction. For example, a payment of $839 is recorded as $893 on both the debit and credit sides, so the trial balance still balances. It’s a form of error of original entry.
Error of duplication: A transaction is recorded twice in the books. For example, a $3,500 inventory purchase is posted twice, duplicating both the debit to purchases and the credit to trade payables.
Compensating errors: Multiple errors offset each other, maintaining the balance. For example, trade receivables is understated by $3,000 while equipment is overstated by $3,000, so total debits still equal total credits.

Passing journal entries to correct errors

Once you’ve identified an error, you correct it by passing a journal entry that follows double-entry bookkeeping. To prepare the correct journal entry, identify:

the nature of error
the general ledger accounts affected by the error (where one of the general ledger accounts is unknown, suspense accounts become applicable).
the amounts involved
the direction of the error (overstatement or understatement).

Let’s apply these steps to the illustrations below.

Illustration 1: correction of errors

A company purchased equipment for $75,000 on credit and recorded it as a debit to office supplies expense. Apply the procedures above to identify the error and prepare the journal entry to correct it.

(spoiler)

Analysis of the question:

The expenditure is a capital expenditure, hence, must be recorded in the asset general ledger with the corresponding entry in the payable general ledger. Though the payable general ledger was recorded correctly, the expenditure was wrongly debited to the expense general ledger.
The nature of the error is that an expense general ledger was wrongly debited instead of an asset general ledger. Both general ledgers (i.e., equipment and office supplies expense) are known, hence, no suspense account would be used in the error correction.
The amount involved is $75,000 where the office supplies general ledger is overstated and equipment general ledger understated.
Based on this analysis, the journal entry to be passed to correct the error will be to decrease the office supplies expense and increase the equipment general ledger account.

This is given as:

	Debit	Credit
Equipment	$75,000
Office supplies expense		$75,000
To reclassify equipment purchase incorrectly recorded as office supplies expense

For each of the transactions that follow, identify the type of error and prepare the journal entry to correct it.

Illustration 2a

During a review of the accounting records, it was discovered that a $12,500 credit sale was recorded as $21,500.

(spoiler)

The error committed is an error of original entry. The digits were transposed when the sale was first recorded, so the same wrong amount went to both accounts. That makes it a transposition on both sides, which is one form of error of original entry, and the trial balance still balances.

Sales revenue and trade receivables are both overstated by $21,500 - $12,500 = $9,000, so you correct only the difference: debit sales revenue and credit trade receivables with $9,000.

	Debit	Credit
Sales revenue	$9,000
Trade receivables		$9,000
To correct the overstatement of the credit sale recorded as $21,500 instead of $12,500

Illustration 2b

A company spent $9,000 improving a motor vehicle in a way that extended its useful life (a capital expenditure), but the entire amount was recorded as repairs expense.

(spoiler)

The error committed is an error of principle: capital expenditure was recorded as revenue expenditure. Motor vehicles is understated and repairs expense is overstated by $9,000.

	Debit	Credit
Motor vehicles	$9,000
Repairs expense		$9,000
To reclassify a capital improvement incorrectly recorded as repairs expense

Illustration 2c

The accountant discovered that a payment of $3,750 received from a customer, Johnson Inc., was credited to the account of a different customer, Smith Co.

(spoiler)

The error committed is an error of commission. Both Johnson Inc. and Smith Co. are trade receivables accounts, so posting to the wrong customer’s account doesn’t disturb the trade receivables control balance. Smith Co.'s balance is understated by $3,750, because it was credited by mistake, and Johnson Inc.'s is overstated by the same amount.

	Debit	Credit
Smith Co. (trade receivables)	$3,750
Johnson Inc. (trade receivables)		$3,750
To correct a customer payment incorrectly credited to Smith Co. instead of Johnson Inc.

Illustration 2d

A company’s bookkeeper failed to record accrued wages of $14,200 at the end of the reporting period.

(spoiler)

The error committed is an error of complete omission: the accrued wages of $14,200 weren’t recorded at all. Wages expense and accruals are both understated by $14,200.

	Debit	Credit
Wages expense	$14,200
Accruals		$14,200
To record accrued wages omitted at the year end

Illustration 2e

A company sold equipment with a cost of $45,000 and accumulated depreciation of $30,000 for $18,000 cash. The transaction was recorded as a debit to cash for $18,000 and a credit to gain on disposal for $18,000, with no entries for the removal of the equipment or its accumulated depreciation.

(spoiler)

This is an error of omission (partial omission). Only the cash received ($18,000) and the gain on disposal ($18,000) were recorded; the removal of the equipment cost ($45,000) and its accumulated depreciation ($30,000) were left out.

Both sides of the omitted part were left out together, so the trial balance still balances. If only one side had been left out, it would be a single-entry error and the trial balance wouldn’t balance.

The carrying amount of the equipment is $45,000 - $30,000 = $15,000, so the correct gain is $18,000 - $15,000 = $3,000.

	Debit	Credit
Accumulated depreciation	$30,000
Gain on disposal	$15,000
Equipment		$45,000
To complete the recording of the disposal by removing the equipment’s cost and accumulated depreciation and correcting the gain

Since an $18,000 gain was recorded but the correct gain is $3,000, debiting the gain on disposal account with $15,000 reduces it to the correct $3,000.

We cover suspense accounts - used when one side of a correcting entry is unknown - in the next chapter, Suspense accounts.

Trial balance errors: two categories

Errors detected: break double-entry, debits ≠ credits
Errors not detected: debits still equal credits despite mistake
Correcting an error requires: identify error type, affected accounts (suspense account if one side unknown), amounts involved, direction (over/understatement)

Errors detected by trial balance

Single-entry error: one side of transaction omitted entirely
Unequal posting error: correct transaction, different amounts posted to each account
Transposition error (single side): digits reversed/decimal misplaced in only one account
Mathematical errors: miscalculation when totalling/balancing an account
Posting to wrong side: amount posted to correct account but wrong column (debit/credit), doubles the imbalance

Errors not detected by trial balance

Complete omission: entire transaction never recorded
Error of principle: correct amount, wrong type of account (e.g., capital expenditure recorded as expense)
Error of original entry: wrong amount from source document, but same wrong amount on both sides
Error of commission: posted to correct account type but wrong specific account (e.g., wrong customer)
Complete reversal: debit and credit sides swapped
Transposition error (both sides): digits reversed identically on both debit and credit
Duplication: transaction recorded twice
Compensating errors: two unrelated errors offset each other’s effect on balance

Correcting journal entries — key principles

Only correct the difference when an error involves an amount already partly recorded correctly (e.g., transposition: correct only the overstated/understated portion)
Error of principle correction: move amount from wrong account type to correct one (e.g., debit asset, credit expense)
Error of commission correction: debit/credit the two specific accounts within the same category to fix misallocation
Complete omission correction: record the full missing entry (e.g., debit expense, credit accrual)
Partial omission (e.g., disposal entries): reconstruct missing debits/credits using known figures (cost, accumulated depreciation) and recalculate correct gain/loss
Suspense accounts used only when one side of the correcting entry is unknown (covered in next chapter)

Next | 6.3 Suspense accounts

Correction of errors

This chapter explains how to identify and correct accounting errors that occur when transactions are recorded and posted to the general ledger. You’ll see two broad groups of errors:

errors detected by the trial balance (because debits and credits don’t agree)
errors not detected by the trial balance (because debits and credits still agree, even though something is wrong)

Learning objectives

By the end of this chapter, you should be able to:

identify the types of error which may occur in accounting systems.
identify errors that would be highlighted by the extraction of a trial balance and those that would not.
prepare manual journal entries to correct errors.

Errors in trial balance

When people record and post transactions to the general ledger, mistakes can happen. In practice, we often classify accounting errors into two categories:

those detected by the trial balance (causing imbalance)
those not detected by the trial balance (keeping it balanced despite being incorrect).

Errors detected by the trial balance

These errors break the double-entry principle. Because the debit and credit sides don’t match, the trial balance won’t balance.

Definitions

Single-entry error: Only one side of a transaction is recorded while the other is completely omitted. For example, a $3,000 supplies purchase debits office supplies expense with no credit posted, so debits exceed credits by $3,000.
Unequal posting error: A transaction is recorded correctly but posted with different amounts in the two ledger accounts. For example, a $2,500 credit sale posts $5,200 to trade receivables instead of $2,500, creating a $2,700 imbalance.
Transposition error (single side): Digits are reversed, or a decimal point is misplaced, in only one account. For example, a $5,640 purchase debits purchases correctly but credits trade payables as $5,460, a $180 difference.
Mathematical errors in account balances: Calculation mistakes occur when totalling or balancing ledger accounts. For example, entries of $450, $580, and $620 in a utilities expense account are totalled as $1,750 instead of $1,650, a $100 error.
Posting to the wrong side of an account: An amount is posted to the correct account but on the wrong side. For example, a $3,400 cash receipt should debit cash and credit trade receivables, but debiting trade receivables instead doubles the imbalance to $6,800.

Errors not detected by the trial balance

Definitions

Error of complete omission: An entire transaction is left unrecorded in the accounting books. For example, a $5,000 credit sale is never recorded, so the trial balance stays balanced despite the missing transaction.
Error of principle: A transaction is recorded in the wrong type of account, violating accounting principles, even though the debit and credit amounts are correct. For example, a $10,000 equipment purchase is debited to repairs expense instead of equipment; both are debit entries, so the trial balance still balances.
Error of original entry: A transaction is recorded with an incorrect amount from the source document, with the same wrong amount on both sides. For example, a $7,500 purchase invoice is recorded as $5,000 in both purchases and trade payables, so the trial balance still balances.
Error of commission: A transaction is posted to the correct type of account, but the wrong specific account within that category. For example, a $2,000 receipt from customer A is credited to customer B’s account instead; both are receivable accounts, so the trial balance still balances.
Error of complete reversal: The debit and credit aspects of a transaction are completely reversed. For example, a $4,000 credit sale is debited to sales revenue and credited to trade receivables, the opposite of the correct entry, but the trial balance still balances.
Transposition error (both sides): Digits are accidentally reversed when recording an entry on both sides of a transaction. For example, a payment of $839 is recorded as $893 on both the debit and credit sides, so the trial balance still balances. It’s a form of error of original entry.
Error of duplication: A transaction is recorded twice in the books. For example, a $3,500 inventory purchase is posted twice, duplicating both the debit to purchases and the credit to trade payables.
Compensating errors: Multiple errors offset each other, maintaining the balance. For example, trade receivables is understated by $3,000 while equipment is overstated by $3,000, so total debits still equal total credits.

Passing journal entries to correct errors

Once you’ve identified an error, you correct it by passing a journal entry that follows double-entry bookkeeping. To prepare the correct journal entry, identify:

the nature of error
the general ledger accounts affected by the error (where one of the general ledger accounts is unknown, suspense accounts become applicable).
the amounts involved
the direction of the error (overstatement or understatement).

Let’s apply these steps to the illustrations below.

Illustration 1: correction of errors

A company purchased equipment for $75,000 on credit and recorded it as a debit to office supplies expense. Apply the procedures above to identify the error and prepare the journal entry to correct it.

(spoiler)

Analysis of the question:

The expenditure is a capital expenditure, hence, must be recorded in the asset general ledger with the corresponding entry in the payable general ledger. Though the payable general ledger was recorded correctly, the expenditure was wrongly debited to the expense general ledger.
The nature of the error is that an expense general ledger was wrongly debited instead of an asset general ledger. Both general ledgers (i.e., equipment and office supplies expense) are known, hence, no suspense account would be used in the error correction.
The amount involved is $75,000 where the office supplies general ledger is overstated and equipment general ledger understated.
Based on this analysis, the journal entry to be passed to correct the error will be to decrease the office supplies expense and increase the equipment general ledger account.

This is given as:

	Debit	Credit
Equipment	$75,000
Office supplies expense		$75,000
To reclassify equipment purchase incorrectly recorded as office supplies expense

For each of the transactions that follow, identify the type of error and prepare the journal entry to correct it.

Illustration 2a

During a review of the accounting records, it was discovered that a $12,500 credit sale was recorded as $21,500.

(spoiler)

Sales revenue and trade receivables are both overstated by $21,500 - $12,500 = $9,000, so you correct only the difference: debit sales revenue and credit trade receivables with $9,000.

	Debit	Credit
Sales revenue	$9,000
Trade receivables		$9,000
To correct the overstatement of the credit sale recorded as $21,500 instead of $12,500

Illustration 2b

A company spent $9,000 improving a motor vehicle in a way that extended its useful life (a capital expenditure), but the entire amount was recorded as repairs expense.

(spoiler)

The error committed is an error of principle: capital expenditure was recorded as revenue expenditure. Motor vehicles is understated and repairs expense is overstated by $9,000.

	Debit	Credit
Motor vehicles	$9,000
Repairs expense		$9,000
To reclassify a capital improvement incorrectly recorded as repairs expense

Illustration 2c

The accountant discovered that a payment of $3,750 received from a customer, Johnson Inc., was credited to the account of a different customer, Smith Co.

(spoiler)

	Debit	Credit
Smith Co. (trade receivables)	$3,750
Johnson Inc. (trade receivables)		$3,750
To correct a customer payment incorrectly credited to Smith Co. instead of Johnson Inc.

Illustration 2d

A company’s bookkeeper failed to record accrued wages of $14,200 at the end of the reporting period.

(spoiler)

The error committed is an error of complete omission: the accrued wages of $14,200 weren’t recorded at all. Wages expense and accruals are both understated by $14,200.

	Debit	Credit
Wages expense	$14,200
Accruals		$14,200
To record accrued wages omitted at the year end

Illustration 2e

A company sold equipment with a cost of $45,000 and accumulated depreciation of $30,000 for $18,000 cash. The transaction was recorded as a debit to cash for $18,000 and a credit to gain on disposal for $18,000, with no entries for the removal of the equipment or its accumulated depreciation.

(spoiler)

The carrying amount of the equipment is $45,000 - $30,000 = $15,000, so the correct gain is $18,000 - $15,000 = $3,000.

	Debit	Credit
Accumulated depreciation	$30,000
Gain on disposal	$15,000
Equipment		$45,000
To complete the recording of the disposal by removing the equipment’s cost and accumulated depreciation and correcting the gain

Since an $18,000 gain was recorded but the correct gain is $3,000, debiting the gain on disposal account with $15,000 reduces it to the correct $3,000.

We cover suspense accounts - used when one side of a correcting entry is unknown - in the next chapter, Suspense accounts.

Achievable ACCA Financial Accounting

6. Preparing trial balance

Our ACCA course is currently in development and is a work-in-progress.

Correction of errors

9 min read

Font

Discuss

Feedback

This chapter explains how to identify and correct accounting errors that occur when transactions are recorded and posted to the general ledger. You’ll see two broad groups of errors:

errors detected by the trial balance (because debits and credits don’t agree)
errors not detected by the trial balance (because debits and credits still agree, even though something is wrong)

Learning objectives

By the end of this chapter, you should be able to:

identify the types of error which may occur in accounting systems.
identify errors that would be highlighted by the extraction of a trial balance and those that would not.
prepare manual journal entries to correct errors.

Errors in trial balance

When people record and post transactions to the general ledger, mistakes can happen. In practice, we often classify accounting errors into two categories:

those detected by the trial balance (causing imbalance)
those not detected by the trial balance (keeping it balanced despite being incorrect).

Errors detected by the trial balance

These errors break the double-entry principle. Because the debit and credit sides don’t match, the trial balance won’t balance.

Definitions

Single-entry error: Only one side of a transaction is recorded while the other is completely omitted. For example, a $3,000 supplies purchase debits office supplies expense with no credit posted, so debits exceed credits by $3,000.
Unequal posting error: A transaction is recorded correctly but posted with different amounts in the two ledger accounts. For example, a $2,500 credit sale posts $5,200 to trade receivables instead of $2,500, creating a $2,700 imbalance.
Transposition error (single side): Digits are reversed, or a decimal point is misplaced, in only one account. For example, a $5,640 purchase debits purchases correctly but credits trade payables as $5,460, a $180 difference.
Mathematical errors in account balances: Calculation mistakes occur when totalling or balancing ledger accounts. For example, entries of $450, $580, and $620 in a utilities expense account are totalled as $1,750 instead of $1,650, a $100 error.
Posting to the wrong side of an account: An amount is posted to the correct account but on the wrong side. For example, a $3,400 cash receipt should debit cash and credit trade receivables, but debiting trade receivables instead doubles the imbalance to $6,800.

Errors not detected by the trial balance

Definitions

Error of complete omission: An entire transaction is left unrecorded in the accounting books. For example, a $5,000 credit sale is never recorded, so the trial balance stays balanced despite the missing transaction.
Error of principle: A transaction is recorded in the wrong type of account, violating accounting principles, even though the debit and credit amounts are correct. For example, a $10,000 equipment purchase is debited to repairs expense instead of equipment; both are debit entries, so the trial balance still balances.
Error of original entry: A transaction is recorded with an incorrect amount from the source document, with the same wrong amount on both sides. For example, a $7,500 purchase invoice is recorded as $5,000 in both purchases and trade payables, so the trial balance still balances.
Error of commission: A transaction is posted to the correct type of account, but the wrong specific account within that category. For example, a $2,000 receipt from customer A is credited to customer B’s account instead; both are receivable accounts, so the trial balance still balances.
Error of complete reversal: The debit and credit aspects of a transaction are completely reversed. For example, a $4,000 credit sale is debited to sales revenue and credited to trade receivables, the opposite of the correct entry, but the trial balance still balances.
Transposition error (both sides): Digits are accidentally reversed when recording an entry on both sides of a transaction. For example, a payment of $839 is recorded as $893 on both the debit and credit sides, so the trial balance still balances. It’s a form of error of original entry.
Error of duplication: A transaction is recorded twice in the books. For example, a $3,500 inventory purchase is posted twice, duplicating both the debit to purchases and the credit to trade payables.
Compensating errors: Multiple errors offset each other, maintaining the balance. For example, trade receivables is understated by $3,000 while equipment is overstated by $3,000, so total debits still equal total credits.

Passing journal entries to correct errors

Once you’ve identified an error, you correct it by passing a journal entry that follows double-entry bookkeeping. To prepare the correct journal entry, identify:

the nature of error
the general ledger accounts affected by the error (where one of the general ledger accounts is unknown, suspense accounts become applicable).
the amounts involved
the direction of the error (overstatement or understatement).

Let’s apply these steps to the illustrations below.

Illustration 1: correction of errors

A company purchased equipment for $75,000 on credit and recorded it as a debit to office supplies expense. Apply the procedures above to identify the error and prepare the journal entry to correct it.

(spoiler)

Analysis of the question:

The expenditure is a capital expenditure, hence, must be recorded in the asset general ledger with the corresponding entry in the payable general ledger. Though the payable general ledger was recorded correctly, the expenditure was wrongly debited to the expense general ledger.
The nature of the error is that an expense general ledger was wrongly debited instead of an asset general ledger. Both general ledgers (i.e., equipment and office supplies expense) are known, hence, no suspense account would be used in the error correction.
The amount involved is $75,000 where the office supplies general ledger is overstated and equipment general ledger understated.
Based on this analysis, the journal entry to be passed to correct the error will be to decrease the office supplies expense and increase the equipment general ledger account.

This is given as:

	Debit	Credit
Equipment	$75,000
Office supplies expense		$75,000
To reclassify equipment purchase incorrectly recorded as office supplies expense

For each of the transactions that follow, identify the type of error and prepare the journal entry to correct it.

Illustration 2a

During a review of the accounting records, it was discovered that a $12,500 credit sale was recorded as $21,500.

(spoiler)

Sales revenue and trade receivables are both overstated by $21,500 - $12,500 = $9,000, so you correct only the difference: debit sales revenue and credit trade receivables with $9,000.

	Debit	Credit
Sales revenue	$9,000
Trade receivables		$9,000
To correct the overstatement of the credit sale recorded as $21,500 instead of $12,500

Illustration 2b

A company spent $9,000 improving a motor vehicle in a way that extended its useful life (a capital expenditure), but the entire amount was recorded as repairs expense.

(spoiler)

The error committed is an error of principle: capital expenditure was recorded as revenue expenditure. Motor vehicles is understated and repairs expense is overstated by $9,000.

	Debit	Credit
Motor vehicles	$9,000
Repairs expense		$9,000
To reclassify a capital improvement incorrectly recorded as repairs expense

Illustration 2c

The accountant discovered that a payment of $3,750 received from a customer, Johnson Inc., was credited to the account of a different customer, Smith Co.

(spoiler)

	Debit	Credit
Smith Co. (trade receivables)	$3,750
Johnson Inc. (trade receivables)		$3,750
To correct a customer payment incorrectly credited to Smith Co. instead of Johnson Inc.

Illustration 2d

A company’s bookkeeper failed to record accrued wages of $14,200 at the end of the reporting period.

(spoiler)

The error committed is an error of complete omission: the accrued wages of $14,200 weren’t recorded at all. Wages expense and accruals are both understated by $14,200.

	Debit	Credit
Wages expense	$14,200
Accruals		$14,200
To record accrued wages omitted at the year end

Illustration 2e

A company sold equipment with a cost of $45,000 and accumulated depreciation of $30,000 for $18,000 cash. The transaction was recorded as a debit to cash for $18,000 and a credit to gain on disposal for $18,000, with no entries for the removal of the equipment or its accumulated depreciation.

(spoiler)

The carrying amount of the equipment is $45,000 - $30,000 = $15,000, so the correct gain is $18,000 - $15,000 = $3,000.

	Debit	Credit
Accumulated depreciation	$30,000
Gain on disposal	$15,000
Equipment		$45,000
To complete the recording of the disposal by removing the equipment’s cost and accumulated depreciation and correcting the gain

Since an $18,000 gain was recorded but the correct gain is $3,000, debiting the gain on disposal account with $15,000 reduces it to the correct $3,000.

We cover suspense accounts - used when one side of a correcting entry is unknown - in the next chapter, Suspense accounts.

Trial balance errors: two categories

Errors detected: break double-entry, debits ≠ credits
Errors not detected: debits still equal credits despite mistake
Correcting an error requires: identify error type, affected accounts (suspense account if one side unknown), amounts involved, direction (over/understatement)

Errors detected by trial balance

Single-entry error: one side of transaction omitted entirely
Unequal posting error: correct transaction, different amounts posted to each account
Transposition error (single side): digits reversed/decimal misplaced in only one account
Mathematical errors: miscalculation when totalling/balancing an account
Posting to wrong side: amount posted to correct account but wrong column (debit/credit), doubles the imbalance

Errors not detected by trial balance

Complete omission: entire transaction never recorded
Error of principle: correct amount, wrong type of account (e.g., capital expenditure recorded as expense)
Error of original entry: wrong amount from source document, but same wrong amount on both sides
Error of commission: posted to correct account type but wrong specific account (e.g., wrong customer)
Complete reversal: debit and credit sides swapped
Transposition error (both sides): digits reversed identically on both debit and credit
Duplication: transaction recorded twice
Compensating errors: two unrelated errors offset each other’s effect on balance

Correcting journal entries — key principles

Only correct the difference when an error involves an amount already partly recorded correctly (e.g., transposition: correct only the overstated/understated portion)
Error of principle correction: move amount from wrong account type to correct one (e.g., debit asset, credit expense)
Error of commission correction: debit/credit the two specific accounts within the same category to fix misallocation
Complete omission correction: record the full missing entry (e.g., debit expense, credit accrual)
Partial omission (e.g., disposal entries): reconstruct missing debits/credits using known figures (cost, accumulated depreciation) and recalculate correct gain/loss
Suspense accounts used only when one side of the correcting entry is unknown (covered in next chapter)

Next | 6.3 Suspense accounts

Correction of errors

This chapter explains how to identify and correct accounting errors that occur when transactions are recorded and posted to the general ledger. You’ll see two broad groups of errors:

errors detected by the trial balance (because debits and credits don’t agree)
errors not detected by the trial balance (because debits and credits still agree, even though something is wrong)

Learning objectives

By the end of this chapter, you should be able to:

identify the types of error which may occur in accounting systems.
identify errors that would be highlighted by the extraction of a trial balance and those that would not.
prepare manual journal entries to correct errors.

Errors in trial balance

When people record and post transactions to the general ledger, mistakes can happen. In practice, we often classify accounting errors into two categories:

those detected by the trial balance (causing imbalance)
those not detected by the trial balance (keeping it balanced despite being incorrect).

Errors detected by the trial balance

These errors break the double-entry principle. Because the debit and credit sides don’t match, the trial balance won’t balance.

Definitions

Single-entry error: Only one side of a transaction is recorded while the other is completely omitted. For example, a $3,000 supplies purchase debits office supplies expense with no credit posted, so debits exceed credits by $3,000.
Unequal posting error: A transaction is recorded correctly but posted with different amounts in the two ledger accounts. For example, a $2,500 credit sale posts $5,200 to trade receivables instead of $2,500, creating a $2,700 imbalance.
Transposition error (single side): Digits are reversed, or a decimal point is misplaced, in only one account. For example, a $5,640 purchase debits purchases correctly but credits trade payables as $5,460, a $180 difference.
Mathematical errors in account balances: Calculation mistakes occur when totalling or balancing ledger accounts. For example, entries of $450, $580, and $620 in a utilities expense account are totalled as $1,750 instead of $1,650, a $100 error.
Posting to the wrong side of an account: An amount is posted to the correct account but on the wrong side. For example, a $3,400 cash receipt should debit cash and credit trade receivables, but debiting trade receivables instead doubles the imbalance to $6,800.

Errors not detected by the trial balance

Definitions

Error of complete omission: An entire transaction is left unrecorded in the accounting books. For example, a $5,000 credit sale is never recorded, so the trial balance stays balanced despite the missing transaction.
Error of principle: A transaction is recorded in the wrong type of account, violating accounting principles, even though the debit and credit amounts are correct. For example, a $10,000 equipment purchase is debited to repairs expense instead of equipment; both are debit entries, so the trial balance still balances.
Error of original entry: A transaction is recorded with an incorrect amount from the source document, with the same wrong amount on both sides. For example, a $7,500 purchase invoice is recorded as $5,000 in both purchases and trade payables, so the trial balance still balances.
Error of commission: A transaction is posted to the correct type of account, but the wrong specific account within that category. For example, a $2,000 receipt from customer A is credited to customer B’s account instead; both are receivable accounts, so the trial balance still balances.
Error of complete reversal: The debit and credit aspects of a transaction are completely reversed. For example, a $4,000 credit sale is debited to sales revenue and credited to trade receivables, the opposite of the correct entry, but the trial balance still balances.
Transposition error (both sides): Digits are accidentally reversed when recording an entry on both sides of a transaction. For example, a payment of $839 is recorded as $893 on both the debit and credit sides, so the trial balance still balances. It’s a form of error of original entry.
Error of duplication: A transaction is recorded twice in the books. For example, a $3,500 inventory purchase is posted twice, duplicating both the debit to purchases and the credit to trade payables.
Compensating errors: Multiple errors offset each other, maintaining the balance. For example, trade receivables is understated by $3,000 while equipment is overstated by $3,000, so total debits still equal total credits.

Passing journal entries to correct errors

Once you’ve identified an error, you correct it by passing a journal entry that follows double-entry bookkeeping. To prepare the correct journal entry, identify:

the nature of error
the general ledger accounts affected by the error (where one of the general ledger accounts is unknown, suspense accounts become applicable).
the amounts involved
the direction of the error (overstatement or understatement).

Let’s apply these steps to the illustrations below.

Illustration 1: correction of errors

A company purchased equipment for $75,000 on credit and recorded it as a debit to office supplies expense. Apply the procedures above to identify the error and prepare the journal entry to correct it.

(spoiler)

Analysis of the question:

The expenditure is a capital expenditure, hence, must be recorded in the asset general ledger with the corresponding entry in the payable general ledger. Though the payable general ledger was recorded correctly, the expenditure was wrongly debited to the expense general ledger.
The nature of the error is that an expense general ledger was wrongly debited instead of an asset general ledger. Both general ledgers (i.e., equipment and office supplies expense) are known, hence, no suspense account would be used in the error correction.
The amount involved is $75,000 where the office supplies general ledger is overstated and equipment general ledger understated.
Based on this analysis, the journal entry to be passed to correct the error will be to decrease the office supplies expense and increase the equipment general ledger account.

This is given as:

	Debit	Credit
Equipment	$75,000
Office supplies expense		$75,000
To reclassify equipment purchase incorrectly recorded as office supplies expense

For each of the transactions that follow, identify the type of error and prepare the journal entry to correct it.

Illustration 2a

During a review of the accounting records, it was discovered that a $12,500 credit sale was recorded as $21,500.

(spoiler)

Sales revenue and trade receivables are both overstated by $21,500 - $12,500 = $9,000, so you correct only the difference: debit sales revenue and credit trade receivables with $9,000.

	Debit	Credit
Sales revenue	$9,000
Trade receivables		$9,000
To correct the overstatement of the credit sale recorded as $21,500 instead of $12,500

Illustration 2b

A company spent $9,000 improving a motor vehicle in a way that extended its useful life (a capital expenditure), but the entire amount was recorded as repairs expense.

(spoiler)

The error committed is an error of principle: capital expenditure was recorded as revenue expenditure. Motor vehicles is understated and repairs expense is overstated by $9,000.

	Debit	Credit
Motor vehicles	$9,000
Repairs expense		$9,000
To reclassify a capital improvement incorrectly recorded as repairs expense

Illustration 2c

The accountant discovered that a payment of $3,750 received from a customer, Johnson Inc., was credited to the account of a different customer, Smith Co.

(spoiler)

	Debit	Credit
Smith Co. (trade receivables)	$3,750
Johnson Inc. (trade receivables)		$3,750
To correct a customer payment incorrectly credited to Smith Co. instead of Johnson Inc.

Illustration 2d

A company’s bookkeeper failed to record accrued wages of $14,200 at the end of the reporting period.

(spoiler)

The error committed is an error of complete omission: the accrued wages of $14,200 weren’t recorded at all. Wages expense and accruals are both understated by $14,200.

	Debit	Credit
Wages expense	$14,200
Accruals		$14,200
To record accrued wages omitted at the year end

Illustration 2e

A company sold equipment with a cost of $45,000 and accumulated depreciation of $30,000 for $18,000 cash. The transaction was recorded as a debit to cash for $18,000 and a credit to gain on disposal for $18,000, with no entries for the removal of the equipment or its accumulated depreciation.

(spoiler)

The carrying amount of the equipment is $45,000 - $30,000 = $15,000, so the correct gain is $18,000 - $15,000 = $3,000.

	Debit	Credit
Accumulated depreciation	$30,000
Gain on disposal	$15,000
Equipment		$45,000
To complete the recording of the disposal by removing the equipment’s cost and accumulated depreciation and correcting the gain

Since an $18,000 gain was recorded but the correct gain is $3,000, debiting the gain on disposal account with $15,000 reduces it to the correct $3,000.

We cover suspense accounts - used when one side of a correcting entry is unknown - in the next chapter, Suspense accounts.

Key points

Trial balance errors: two categories

Errors detected: break double-entry, debits ≠ credits
Errors not detected: debits still equal credits despite mistake
Correcting an error requires: identify error type, affected accounts (suspense account if one side unknown), amounts involved, direction (over/understatement)

Errors detected by trial balance

Single-entry error: one side of transaction omitted entirely
Unequal posting error: correct transaction, different amounts posted to each account
Transposition error (single side): digits reversed/decimal misplaced in only one account
Mathematical errors: miscalculation when totalling/balancing an account
Posting to wrong side: amount posted to correct account but wrong column (debit/credit), doubles the imbalance

Errors not detected by trial balance

Complete omission: entire transaction never recorded
Error of principle: correct amount, wrong type of account (e.g., capital expenditure recorded as expense)
Error of original entry: wrong amount from source document, but same wrong amount on both sides
Error of commission: posted to correct account type but wrong specific account (e.g., wrong customer)
Complete reversal: debit and credit sides swapped
Transposition error (both sides): digits reversed identically on both debit and credit
Duplication: transaction recorded twice
Compensating errors: two unrelated errors offset each other’s effect on balance

Correcting journal entries — key principles

Only correct the difference when an error involves an amount already partly recorded correctly (e.g., transposition: correct only the overstated/understated portion)
Error of principle correction: move amount from wrong account type to correct one (e.g., debit asset, credit expense)
Error of commission correction: debit/credit the two specific accounts within the same category to fix misallocation
Complete omission correction: record the full missing entry (e.g., debit expense, credit accrual)
Partial omission (e.g., disposal entries): reconstruct missing debits/credits using known figures (cost, accumulated depreciation) and recalculate correct gain/loss
Suspense accounts used only when one side of the correcting entry is unknown (covered in next chapter)