{m}.{s}.1We will now go back to the trial balance of Mr Allen. We have seen the profit and loss account and balance sheet produced from these figures.

AccountDebitCredit
Sales 2,725
Cost of sales1,500 
Wages50 
Rent400 
Heat and light340 
Post,tel,stat25 
Fittings1,000 
Stock 3,375 
Debtors2,050 
Bank3,185 
Loan 2,000
Creditors 840
Capital 6,360
 11,92511,925
   
[{m}.{s}a]
PROFIT AND LOSS ACCOUNT
Sales   2725
Less: Cost of sales   1500
Gross profit   1225
     
Less: Expenses    
    Wages 50  
    Rent 400  
    Heat and light 340  
    Post, tel, stat 25  
     
    815
NET PROFIT   410
 
BALANCE SHEET  
   
ASSETS  
Fittings 1,000
Stock 3,375
Debtors 2,050
Bank 3,185
Total Assets 9,610
   
LIABILITIES  
Loan 2,000
Creditors 840
Total Liabilities 2,840
   
Net assets 6,770
   
CAPITAL  
At start of period 6,360
Net pofit 410
At the end of period 6,770

















[{m}.{s}b]





If anything is wrong with any of the figures in the trial balance, then, correspondingly, something must be wrong with the profit and loss account and/or the balance sheet.

We will take a look at the various types of errors that could affect the trial balance.

{m}.{s}.2Errors

Errors broadly fall into the following categories:

Errors of transposition

Where two adjacent figures in an amount are reversed.

For example, where 243 is recorded as 423. (Note that the difference between such amounts is always divisible by 9: 423 - 243 = 180).

Errors of omission

Where an entry or part of an entry has been left out.

For example, where an invoice is recorded in the Creditors account, but not the appropriate expense account or an invoice has been left out altogether.

Errors of principle

Where some fundamental accounting principle has been contravened, often the wrong class of account has been used.

For exmaple, a purchase invoice received has been recorded in Debtors instead of Creditors, or the Bank account has been debited with a payment instead of credited.

Errors of commission

Where the correct amount is entered in the wrong account, but it is the right class of account.

For example, where an invoice for petrol has been posted to Heat & light instead of Motor expenses (both expense accounts). (An error of principle would occur if the posting was to the motor asset account instead of the expense account.)

Errors can combine in such a way that they are:

Compensating errors

Here, by coincidence, errors are equal and opposite and the effect of one cancels out the effect of the other.

For example,an invoice for 230 included as 320; and An invoice for 870 included as 780. Totals correct 1,100.

 

{m}.{s}.3Examples of errors

We will look at various errors that might have been made, and consider, in particular:

  • The type of error
  • If it affects the balancing of the trial balance
  • If it affects reported profit

For each error that we look at we will see:

  • The correct journal entry to record the transaction
  • The incorrect entry made
  • The trial balance before the entry was made.
  • The trial balance as it should have been
  • The trial balance after the incorrect entry

We can therefore see clearly the effect of the error on the trial balance.

{m}.{s}.4Receipt of electricity bill

We will look at most of the errors in the context of the receipt of an electricity bill for £340.

Electricity
Your name
Your address
Your street
Your town
Post code
 
 Customer Reference No 1234567890
Electricity Bill  
Standing charges @ 0.50p per day for 80 days
40.00
Kilowatt hours 937.5 @ 0.32 per kilowatt hour
300.00
Total 
340.00
   
Please pay within the next 2 weeks.
[{m}.{s}c]
Open/Close{m}.{s}.Q1

{m}.{s}.5We will now see the various possible mistakes that could be made in recording this transaction. For each of the following errors, you are to say what type it is.

Open/Close{m}.{s}.Q2
Open/Close{m}.{s}.Q3
Open/Close{m}.{s}.Q4
Open/Close{m}.{s}.Q5
Open/Close{m}.{s}.Q6
Open/Close{m}.{s}.Q7

{m}.{s}.6Other trial balance errors

Other errors that will affect the trial balance, and its balancing, are:

  • the incorrect calculation or listing of an account balance. For example: Bank account. Correct balance = 3185, listed as 3815 (Orange columns).
  • the incorrect addition of one of the trial balance columns. This again gives an out of balance trial balance (Grey columns).

The first debit and credit columns have no errors.

ACCOUNT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Sales   2,725   2,725   2,725
Cost of sales 1,500   1,500   1,500  
Wages 50   50   50  
Rent 400   400   400  
Heat and light 340   340   340  
Post, tel, stat 25   25   25  
Fittings 1,000   1,000   1,000  
Stock 3,375   3,375   3,375  
Debtors 2,050   2,050   2,050  
Bank 3,185   3,815   3,185  
Loan   2,000   2,000   2,000
Creditors   840   840   840
Capital   6,360   6,360   6,360
  11,925 11,925 12,555 11,925 12,925 11,925
             
[{m}.{s}d]

 

{m}.{s}.7Summary of errors

TB out of balance

We have seen that certain errors will result in a trial balance that does not balance.

  • Omission of one part of an entry
  • Error in the entry of one figure in an account
  • Account balance incorrect
  • Incorrect addition of column(s)

TB balances

A balancing trial balance, however, does not mean that the figures are correct. The following errors could have been made:

  • Reversal of debits and credits
  • Entry in the wrong account (mistake or error in principle)
  • Omission of entry
  • Incorrect figure used for both debit and credit
  • Compensating errors

 

{m}.{s}.8Suspense accounts

We have seen that certain errors cause the trial balance to be out of balance[{m}.{s}e]. It sometimes happens that we need to prepare draft accounts before the cause of the imbalance can be established and corrected.

 
Correct entry
Incorrect entry
  Dr Cr Dr Cr
Heat and light 340   340  
Creditors   340   --
[{m}.{s}e]

It is unsatisfactory to prepare accounts from an out-of-balance trial balance, so as a temporary measure, a Suspense account is added [{m}.{s}f, highlighted row]. The appropriate balance is inserted to make the trial balance square.

Accounts can now be prepared but where does the balance in the Suspense account go?

To prepare accounts prudently, we should never overstate assets or income and we must make sure that all expenses and liabilities are included.

Thus if the Suspense account:

  • Has a debit balance - it goes to the profit and loss as an expense.
  • Has a credit balance - it goes to the balance sheet as a liability.

The use of the Suspense account should only be temporary and the cause of the error should be established as soon as possible. In this case we would find that the credit entry to Creditors had not been made.

 

ACCOUNT DEBIT CREDIT DEBIT CREDIT
Sales   2,725   2,725
Cost of sales 1,500   4,875  
Wages 50   50  
Rent 400   400  
Heat and light 340   340  
Post, tel, stat 25   25  
Fittings 1,000   1,000  
Stock 3,375   0  
Debtors 2,050   2,050  
Bank 3,185   3,185  
Loan   2,000   2,000
Creditors   500   840
Capital   6,360   6,360
Suspense   340   0
  11,925 11,925 11,925 11,925
         

[{m}.{s}f]

Our journal entry to make the correction[{m}.{s}f, orange columns] must involve a posting to the Suspense account. Here we must make the entry previously omitted:

  • credit Creditors 340
  • The debit will be to Suspense - debit Suspense 340

As we only had one error in this case, the Suspense account is now cleared. It may be that the balance was caused by several errors, in which case the Suspense account will not be cleared until they are all corrected.

{m}.{s}.9Computer systems

Certain errors can be made in manual systems that cannot be made in computer systems. Computers are particularly good at things like addition and will keep a check on entries being made so that the trial balance remains in balance.

A computer system will not let you make an entry where debits do not equal credits. This eliminates some possible errors.

A computer system will also correctly calculate the balance in an account and add the trial balance correctly. This eliminates further possible errors.

Errors in a computer system are still possible but rather fewer than in manual systems. The one that is particularly easy in a computer system is to make an entry in the wrong account (error of commission).

 

Using a computer