CIMA BA4 Syllabus B. CORPORATE GOVERNANCE - Nature of accounting errors - Notes 1 / 6
Types of error which may occur in bookkeeping systems
In the trial balance, the sum of the debit balances should be equal to the sum of the credit balances, this provides some security that the postings to the accounts has been correct and are error free. If the trial balance does not balance, this means that an error has occurred.
However, even if the trial balance does balance, this does not mean that no errors exist.
The most frequent types of errors are:
Errors of transposition
When two digits in an amount are accidentally recorded the wrong way round.
Errors of omission
There are two types of errors of omission, the first is failing to record a transaction at all, this will not result in any change/difference between debits and credits in the trial balance.
Recording a transaction twice would also result in the trial balance - balancing, because debits and credits will still be equal.
The second type is making a debit or credit entry, but not the corresponding double entry, this will result in the trial balance not balancing.
Errors of principle
An error of principle is where one side of an entry has been recorded in the wrong account, and where that account is classified differently to the correct account.
Example are:
1) The purchase of raw materials, being debited to the non current asset account, instead of the purchases account.
2) The purchases of non current assets being debited to the maintenance/purchases account, instead of the non current asset account.
As the debits and credits will still be equal in this case, if an error of principle is made, the trial balance will still balance.
Errors of commission
This occurs where one side of an entry has been recorded in the wrong account, and where that account is classified in the same way as the the correct account.
Examples are:
1) Debiting the payment of rent - to the repairs expense account.
2) Debiting office stationery expense to the telephone expense account.
Compensating errors
Errors which are, coincidentally, equal and opposite to one another.
Errors of original entry
When the wrong amount is used for both the debit and the credit entries, it is an error of original entry. For example, if the amount of the entry was $600, then $660 may have been used for the debit and credit entry.
Reversal Entry
A debit entry is made instead of a credit entry and vice versa.
For example, goods taken by the proprietor of the business being debited to the purchases account and credited to the drawings account, whereas the correct double entry is the opposite way round.
This will not affect the trial balance balancing, as debits and credits will still be equal.
Errors corrected by journal entry
Some of these errors can be corrected by journal entry; some require the use of a suspense account.
If the correction involves a double entry in the ledger accounts, then it is done by using a journal entry in the journal.
When the error breaks the rule of double entry (single entry or error on one side only), then it is corrected by the use of a suspense account as well as a journal entry.