Correction of errors: worked examples

Method and where the marks are

Correcting errors uses two linked skills. The first is writing the journal entry that puts each error right. The second is adjusting the suspense account and the profit to reflect those corrections.

The examiner marks the double entry and the follow-through separately, so treat them as separate stages. For each error, ask one question first: does it affect the balancing of the trial balance?

Errors that do not affect the trial balance never involve the suspense account. These are errors of omission, commission, principle and complete reversal. Errors that unbalance the trial balance, such as a one-sided entry or a transposition in one account only, are corrected through suspense.

For each correction, picture what was done and what should have been done. Then write the journal that moves you from one to the other. Suppose a non-current asset costing RM3,000 was wrongly debited to purchases.

The wrong entry debited purchases. The right entry should have debited the asset account.

So debit the asset account and credit purchases with RM3,000. This is an error of principle, so there is no suspense. Show the debit line first, the credit line indented beneath, and a short narrative. The narrative can earn a mark and forces you to say what the error was.

The suspense account is where students lose the most marks. When the trial balance does not agree, the difference is parked in a suspense account so the books can be closed. Each correcting journal for an error that caused the imbalance includes the suspense account.

When all such errors are corrected, suspense clears to zero. Open the account with the original difference on the correct side. Post each correcting entry that touches suspense.

Then check that it balances. If it does not clear, you have missed an error or put an entry on the wrong side.

For example, sales were credited RM500 but the customer was never debited. Debit the customer and credit suspense.

The second stage is the statement of corrected profit. Only errors that affect the income statement change profit. A mistake between two statement of financial position accounts, or between two accounts of the same type, leaves profit untouched even though it needs a journal.

For each error that does affect profit, decide whether the correction increases or decreases it. Overstated expenses or understated income mean profit was too low, so increase it. Understated expenses or overstated income mean profit was too high, so decrease it.

Start with the draft profit and add or subtract each item with a brief reason. End with the corrected profit. In the example above, purchases were overstated by RM3,000, so expenses were too high and profit rises by RM3,000.

Marks are mostly lost on three points. The first is using suspense for an error that never affected the trial balance. An error of commission, such as a payment posted to the wrong customer, needs no suspense because the totals still agreed.

The second is the direction of the profit adjustment, especially with income errors. Reducing an overstated income figure reduces profit, which feels backwards.

The third is transposition. If RM540 is recorded as RM450, work out the difference of RM90 and correct only that difference on the affected side.

Keep the journals, the suspense account and the corrected profit statement visually separate. Number each error and use the same number in all three parts. Do the journals before the profit statement, because the journal gives you the amount and direction.

A suspense balance that remains after you have corrected every error is a signal to check your work. It is not a figure to carry into the statement of financial position.

If you find suspense accounts and corrected profit confusing, one of our teachers can work through a mixed set of errors with you, one stage at a time. Book a trial class