Correction of errors

To score well for Correction of errors (COE) questions, there are 3 main parts that will be test for exams:

1. Identify the errors committed in recording
2. Record the errors through the General journal
3. Prepare statement to adjust profit/loss for the period

Identifying of errors

1              Type of errors

Students are required to identify the type of errors committed in a transaction. They will be tested on the application of errors rather than its definition. The six errors are listed below:

 Error of Omission

This error is committed when a transaction was totally not recorded in the business’s books at all.

Example: The purchase of furniture $2,500 on credit from Beats Enterprise was not recorded in the books of the business. Hence, should the question, in one way or the other, state that the transaction was omitted, we will classify this error as an Error of Omission.

Errors of Commission

This error is committed when an entry in a transaction was recorded in the wrong account but in the same category.

Example: A payment of $800 for Insurance expense was wrongly recorded to Rent expense. Note: We now understand that Insurance expense was wrongly recorded into rent expense. However, the wrong account recorded happens to fall in the same category as the correct account – Expense.

Error of Principle

This error is committed when an entry in a transaction was recorded in the wrong account and in the wrong category.

Example: A purchase of Motor vehicle $2,000 by cheque was wrongly recorded to Motor vehicle repairs expense. Note: The purchase of a Motor vehicle should increase an asset account. However, it was wrongly posted to Motor vehicle repairs account which is an expense. Therefore, an Error of Principle was committed as the wrong account was recorded in the wrong category.

Error of Original Entry

This error is committed when a transaction was correctly recorded into the accounts but the amount was posted wrongly.

Example: A payment of $2,000 by cheque to Trade payables, Tommy was recorded in the books as $2,200. Note: The transaction was posted correctly into the Trade payables, Tommy and Cash at bank. However, the amount was incorrect.

Complete reversal of entries

This error is committed when an account that needs to be debited has been credited and an account that needs to be credited has been debited.

Example: A purchase of inventory by cash $1,500 has been posted as a debit in Cash in hand and a credit in inventory. Note: The double entry of this transaction has been reversed. As in a case of a purchase of inventory where it should have been a debit to inventory and credit to cash in hand.

Compensating error

This error is committed when two independent accounts have been overstated (over-added)/understated (Under-added) such that the trial balance still balances.

Example: Discount allowed and discount received were both overstated by $230. Note: Discount allowed and discount received are accounts that will not happen in a double entry, hence being independent of one another. Therefore, an overstatement between these two accounts will still have a balanced trial balance.

Want to know the trick to correct the errors? You may contact me at 91172152 to arrange for classes! Never lose marks in this topic again!

Prepayments and Accruals

I will start off on a topic that is familiar to existing students and not touch on the basics too often. This topic on prepayments and accruals teaches us how to prepare the ledger accounts for Income and Expense item. For example, a typical business will have common expenses such as rent, insurance and utilities. Therefore, the very first step you need to do in exams is to be able to identify the type of topic the question is asking.

For example, if the question requires you to prepare an income/expense account, you will be able to identify that they are testing on your prepayments and accruals concepts.

How to tackle a question on prepayments and accruals?

Commonly, there can only be FOUR components in an expense account.

Expense a/c
Date	Particulars	DR(+)	CR(-)	Bal
First day	Prepaid expense/Accrued expense	PE	AE
Payment day	Cash at bank	CAB
Last day	Prepaid expense/Accrued expense	AE	PE
Last day	Profit and loss		P&L	-

1. On the first day of the accounting period, an expense can either be paid in advance(Asset) or it can still be owing(Liabilities).

For example, if your Utilities bill for the month of January amounts to $100 and you paid $130, we will then have a prepaid utilities of $30 on the first day of January. Likewise, if you had only paid $65, we will then start off with an accrued utilities of $35.

Essentially, PREPAID means TOO MUCH and ACCRUED means NOT ENOUGH.

2. Cash at bank component tells us how much has been paid for the expense. Therefore, it will be indicated in the question the amount that had been paid for the expense. Plug the figures and input into this account.

3. On the last day, we have to identify if the expense has been prepaid or accrued. Notice the numbers will be placed on the opposite side compared to the first day.

4. Profit and loss indicates how much expense we are SUPPOSE to pay. This is definitely different from the amount that you had paid because paying $100 for expenses does not mean that you are suppose to pay $100. You may be paying too much or inadequately.

Key pointers

1. There will only be 3 components given to you and you must be able to identify the last component. for example, they may provide information on component 1,2,3 and you need to find 4 yourself. Alternatively, they may provide 1,2,4 and you need to identify component 3.

2. The account must be zero-rised at the end of the year. (Indicated in the last row of the Balance column)

Practice question

Answer

Note:
This is a typical expense ledger and it will cost you approximately 4 marks. Want to know the preparation of an Income a/c? Call me at 91172152 to join my class! 

Double entry rule

Before we embark on our accounting journey, it is important to know why it is important to study accounting! Accounting is basically a mathematical way to record events that had taken place. For example, when a business engaged a buyer to purchase a vehicle costing $80,000 by cheque, it will be a hassle to record this in the books:

Example: On 30 June 2016, business bought a vehicle $80,000 by cheque.

Therefore, it will be easier to record the transaction in their respective accounts.

Example: Motor vehicle +$80,000
                Cash at bank    -$80,000

These two accounts that were adjusted reduces the complexity of recording events that had happened. (+) to the Motor vehicle indicates that there are more vehicles and the only situation that causes a motor vehicle account to increase would be the buying of one unit.
(-) in cash at bank would indicate that this purchase was made through the bank account.

Hence, it is important to note that when an event had taken place in the business. It is a must to identify TWO accounts that you want to (+)/(-).

Topics for Principles of Accounts

Hello students!

I hope this blog will serve as an educational platform whereby you can get POA help instantaneously. I will be conducting mini classes in each blog post so stay tune for lessons and exclusive assignments that can help you achieve a distinction easily!

Summary of Principles of Accounts topics

1. Double entry rule
2. Classification of items in Assets, Liabilities, Equity, Income and Expense
3. Source document and books of original entries
4. Inventory
5. Bank reconciliation
6. Prepayments and Accruals
7. Allowance for impairment loss on Trade receivables
8. Sale of non-current assets
9. Correction of errors
10. Individual Trade receivables/Trade payables and Control Accounts
11. Limited company
12. Income statement and balance sheet (with adjustments)
13. Accounting concepts
14. Incomplete record
15. Financial analysis
16. Cash book
17. Trial balance

Essentially, these are all the topics that will be tested for GCE O Levels. I will be tackling each topic separately in different blog post and if you have any queries, do comment directly onto the blog post and I will revert back as soon as possible.