Correction of Errors (Cambridge IGCSE Accounting 0452 – Section 3.2)
1. Why errors must be corrected
- Errors change the true amount of profit or loss for the period.
- Because profit (or loss) is transferred to the capital/retained‑earnings account, an error also distorts the Statement of Financial Position.
- The Cambridge syllabus requires you to show how the correction affects both the Income Statement and the Balance Sheet.
2. Types of errors
| Error type |
Description & IGCSE example |
Impact on trial balance |
Effect on profit / loss |
| Error of Omission |
Transaction is completely left out.
Example: A cash sale of £2 500 is not recorded. |
Both debit and credit are missing → trial balance still balances. |
Revenue omitted → profit understated;
Expense omitted → profit overstated. |
| Error of Commission |
Correct accounts are used but the amount is wrong.
Example: Office supplies purchased for £350 recorded as £530. |
Debit and credit totals remain equal → trial balance balances. |
If expense is overstated, profit is understated; if revenue is overstated, profit is overstated. |
| Error of Principle |
Transaction recorded in the wrong type of account.
Example: Repair cost of £1 200 debited to Machinery (asset) instead of Repairs & Maintenance Expense. |
Debit and credit totals are unchanged → trial balance balances. |
Expense shown as asset → profit overstated; correcting it reduces profit. |
| Transposition error |
Digits are reversed when writing the amount.
Example: £540 recorded as £450. |
Trial balance still balances (the same total is on each side).
Note: No suspense account is required; the correcting entry is posted directly. |
May increase or decrease profit depending on whether the figure relates to revenue or expense. |
| Duplication error |
Same transaction recorded twice.
Example: A purchase of £800 recorded on two separate days. |
Debit and credit totals are both increased by the same amount → trial balance balances. |
Revenue duplicated → profit overstated; expense duplicated → profit understated. |
| Compensating error |
Two or more errors offset each other so that the trial balance still balances.
Example: Sales of £1 200 omitted but a purchase of £1 200 omitted as well. |
Trial balance balances. |
Profit is still wrong because the omitted revenue and expense affect the Income Statement differently. |
3. Suspense accounts
- Purpose: A temporary holding account used **only when** the trial balance does not balance.
- When to use: As soon as the difference between total debits and credits is identified.
- How to clear:
- Investigate the underlying error(s).
- Post the correcting journal entry(s).
- Transfer the balance out of the suspense account so that it returns to zero.
4. Detecting errors – quick‑check techniques
- Compare ledger totals with the trial balance – any mismatch points to an error that affects the trial balance.
- Check that every transaction has a corresponding debit and credit (use an “error‑checking checklist”).
- Look for unusual figures – transposition errors often involve digits that are close in value (e.g., 63 vs 36).
- Re‑run the trial balance after posting any correcting entry; the balance should be zero before moving to the next period.
5. Effect of correcting an error on the financial statements
- Income Statement (Profit or Loss) – Adjust profit by the net effect of the error on revenue and expenses.
- Statement of Financial Position – Update the balances of any assets, liabilities or equity accounts that were involved in the error.
- Opening retained earnings / capital –
- If the error relates to a **prior accounting period**, the correction is made directly to the opening retained‑earnings (or capital) balance.
- If the error is discovered in the **current period**, restate the current profit or loss and then transfer the corrected profit to the closing capital/retained‑earnings account.
6. Steps to adjust profit or loss after an error is discovered
- Identify the error: state the accounts involved, the amount recorded and the amount that should have been recorded.
- Determine the impact on profit or loss (increase or decrease and by how much).
- Prepare the correcting journal entry (or entries).
- If the trial balance is out of balance, first post the amount to a suspense account, then clear the suspense account after the correction.
- If the trial balance already balances, post the correcting entry directly.
- Post the entry(s) to the ledger.
- Re‑calculate the profit or loss and restate the Income Statement.
- Update the related asset, liability or equity balances on the Statement of Financial Position.
- For prior‑period errors, adjust the opening retained‑earnings (or capital) balance.
- For current‑period errors, transfer the corrected profit to the closing capital/retained‑earnings account.
- Record a brief disclosure in the notes to the accounts, stating:
- the nature of the error,
- the amount corrected, and
- the effect on profit (or loss) and on equity.
7. Worked examples
7.1 Omitted cash sale (error of omission – current period)
ABC Ltd. discovers that a cash sale of £2 500 was omitted.
- Impact on profit: Profit is understated by £2 500.
- Correcting journal entry:
| Account | Debit (£) | Credit (£) |
|---|
| Cash | 2 500 | |
| Sales Revenue | | 2 500 |
The Income Statement profit increases by £2 500 and the closing capital/retained‑earnings balance is increased by the same amount.
7.2 Repair recorded as an asset (error of principle – current period)
A repair costing £1 200 was debited to Machinery instead of Repairs & Maintenance Expense.
- Effect on profit: Profit was overstated by £1 200.
- Correcting journal entry:
| Account | Debit (£) | Credit (£) |
|---|
| Repairs & Maintenance Expense | 1 200 | |
| Machinery | | 1 200 |
The correction reduces profit by £1 200 and also reduces the carrying amount of Machinery by £1 200; equity is unchanged after the profit adjustment.
7.3 Transposition error in revenue (current period)
Sales of £540 were entered as £450.
- Effect on profit: Profit understated by £90.
- Correcting journal entry (no suspense account needed):
| Account | Debit (£) | Credit (£) |
|---|
| Sales Revenue | | 90 |
| Sales Revenue (or a “Correction” account) | 90 | |
After posting, the trial balance remains balanced and profit increases by £90.
7.4 Prior‑period omission of a purchase (error of omission – prior period)
In the previous year a purchase of £1 800 was omitted from the purchases journal. The error is discovered in the current year.
- Effect on profit (prior period): Last year’s profit was overstated by £1 800.
- Correcting entry (made to opening retained earnings):
| Account | Debit (£) | Credit (£) |
|---|
| Opening Retained Earnings | 1 800 | |
| Purchases | | 1 800 |
The correction reduces opening retained earnings by £1 800, leaving the current year’s profit unchanged but ensuring the equity figure in the Balance Sheet is correct.
7.5 Bank reconciliation error (control‑account error – current period)
The cash book shows a receipt of £1 000 that was not recorded in the bank statement, creating an unexplained difference.
- Impact: Cash balance in the Statement of Financial Position is overstated by £1 000; profit is unaffected.
- Correcting entry (trial balance already balanced, so no suspense account):
| Account | Debit (£) | Credit (£) |
|---|
| Bank | | 1 000 |
| Cash Book (or “Bank Reconciliation” account) | 1 000 | |
Clearing the discrepancy restores the correct cash balance on the Balance Sheet.
8. Summary – key points to remember
- Classify each error (omission, commission, principle, transposition, duplication, compensating) and note whether it affects the trial balance.
- Use a suspense account **only when** the trial balance does not balance; clear it as soon as the underlying error is corrected.
- Profit or loss is adjusted by the net effect of the error on revenue and expenses.
- After profit is corrected, update the related asset, liability or equity balances on the Statement of Financial Position.
- For errors that belong to a prior period, adjust the opening retained earnings (or capital); for current‑period errors, restate the current profit or loss and then transfer it to the closing capital/retained‑earnings account.
- Disclose in the notes: the nature of the error, the amount corrected, and the effect on profit (or loss) and equity.