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!