correct errors by means of journal entries

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3.2 Correction of Errors

Learning objective

Identify the type of error that has caused an imbalance (or no imbalance) in the trial balance, understand its impact on the profit‑or‑loss account and the statement of financial position, and correct it by preparing the appropriate journal entry(s).

Why errors occur (Cambridge wording)

  • Transposition of figures
  • Omission of a transaction
  • Commission (recording the wrong amount)
  • Principle error (wrong account used)
  • Compensating errors (two errors that offset each other)
  • Complete reversal of a transaction
  • Original entry made in the wrong period
  • Use of a suspense account when the correct ledger account is not yet known

Types of errors, their effects and typical corrections

Type of error (Cambridge phrasing) Effect on trial balance
✅ balanced ❌ out of balance		 Effect on P/L or SFP Key takeaway (AO2) Typical correcting entry
(All amounts are the difference required to correct the error)
Transposition error ❌ – the side containing the transposed figure is higher or lower by the difference. Only the amounts in the affected accounts are wrong; profit‑or‑loss is not directly affected. Adjust the two accounts by the difference (debit the account that is too low, credit the account that is too high). Debit / Credit the affected accounts for the difference.
e.g. Purchases Dr £270, Accounts Payable Cr £270
Commission error ❌ – the side containing the incorrect amount is higher or lower by the amount of the error. Revenue or expense is misstated, so profit is misstated by the error amount. Profit is overstated/understated by exactly the amount recorded incorrectly. Debit or credit the affected expense/revenue account for the shortfall/over‑statement and offset the corresponding contra‑account.
e.g. Rent Expense Dr £180, Cash Cr £180
Omission of a transaction ✅ – both debit and credit are missing, so the trial balance still balances. Assets, liabilities, revenue and/or expense are understated; profit is understated if revenue or expense is omitted. All amounts involved are omitted, so profit and balances are too low. Record the missing transaction in the correct period.
e.g. Cash Dr £800, Sales Revenue Cr £800
Principle error (wrong account used) Either ✅ or ❌ – the trial balance balances only if the debit and credit amounts are equal. Profit is affected when the wrong account belongs to a different classification (e.g., expense recorded as an asset). Profit may be misstated because an expense has been capitalised (or vice‑versa). Reverse the original entry and re‑record using the correct account(s).
e.g. Repairs & Maintenance Cr £5 000, Equipment Dr £5 000
Compensating errors ✅ – the errors offset each other, so the trial balance still balances. Profit may be unchanged if the over‑statement and under‑statement are of the same amount and nature; otherwise profit is affected. Identify each error separately – the net effect on profit depends on the nature of each error. Correct each error with its own journal entry.
e.g. Advertising Expense Dr £200, Cash Cr £200 + Sales Revenue Dr £200, Accounts Receivable Cr £200
Complete reversal of a transaction ❌ – the trial balance is out of balance by twice the original amount (debit and credit interchanged). Both profit and the balances of the involved accounts are misstated. Profit and balances are wrong by the full amount of the original transaction. Reverse the reversed entry (restore the original debit/credit orientation) and, if required, adjust the amount.
e.g. Bank Dr £2 000, Sales Cr £2 000
Original entry made in the wrong period ✅ – the trial balance for each period still balances, but the amounts are recorded in the wrong period. Profit of the period in which the entry was recorded is misstated; the correct period’s profit is also misstated. Profit is shifted from one period to another. Reverse the entry in the wrong period and record it in the correct period.
see Example 6
Use of a suspense account ✅ – the suspense entry is used to balance the trial balance while the proper account is unknown. No impact on profit until the suspense entry is cleared. Profit is unaffected until the amount is transferred to the correct account. When the correct account is identified, transfer the amount from Suspense to that account.
e.g. Suspense Dr £900, Advertising Expense Cr £900

General steps for correcting errors (Cambridge AO2)

  1. Identify the error and determine the correct amount.
  2. Decide which accounts are affected (asset, liability, expense, revenue, or equity).
  3. Prepare the correcting journal entry:
    • If the original entry was wrong, reverse it first (swap debit and credit).
    • Record the correct amount in the appropriate accounts.
    • For an omission, simply record the missing transaction.
    • If a suspense account was used, transfer the amount out of Suspense to the proper account.
  4. Post the correcting entry to the ledger.
  5. Re‑prepare the trial balance to confirm that it now balances (or remains balanced if it already was).
  6. Check the profit‑or‑loss account and the statement of financial position for any residual impact.

Effect of errors on profit & financial position (summary)

  • Revenue/expense errors (commission, omission, principle) → profit misstated by the error amount.
  • Asset or liability errors (principle, complete reversal) → SFP balances misstated; profit may be affected later (depreciation, interest).
  • Compensating errors → profit unchanged only when the over‑ and under‑statements are of equal amount and same nature.
  • Suspense‑account entries → no profit impact until cleared.

Illustrative examples

Example 1 – Transposition error

Purchase of inventory should be £1 250 but was posted as £1 520.

Difference = £270 (too high).

Purchases                     Dr   270
    Accounts Payable                     Cr   270

Example 2 – Omitted cash sale

A cash sale of £800 was omitted.

Cash                         Dr   800
    Sales Revenue                         Cr   800

Example 3 – Commission error (under‑stated expense)

Rent expense should be £1 200 but was recorded as £1 020 (under‑stated by £180).

Rent Expense                 Dr   180
    Cash                                   Cr   180

Example 4 – Principle error (wrong account used)

Equipment costing £5 000 was incorrectly debited to Repairs & Maintenance.

Repairs & Maintenance       Cr   5 000
    Equipment                               Dr   5 000

Example 5 – Complete reversal

Original correct entry: Bank Dr £2 000  Sales Cr £2 000

Entered in reverse: Sales Dr £2 000  Bank Cr £2 000

Correcting entry (restore original orientation):

Bank                         Dr   2 000
    Sales                                 Cr   2 000

Example 6 – Original entry made in the wrong period

Office supplies of £1 500 purchased on 28 Feb were recorded in March.

(Reverse in March)
Office Supplies               Cr   1 500
    Bank                                   Dr   1 500

(Record in February)
Office Supplies               Dr   1 500
    Bank                                   Cr   1 500

Example 7 – Use of a suspense account

A credit purchase of £900 was posted to an unknown expense account and placed in Suspense.

When the correct expense (Advertising) is identified:

Suspense                     Dr   900
    Advertising Expense                     Cr   900

Practice exercise

Identify the error in each scenario and write the correcting journal entry. Show the effect on the trial balance and, where relevant, on profit.

  1. Advertising expense of £350 was recorded as £530.
  2. Cash received from a customer for £1 200 was posted to Sales Revenue, but the Cash account was omitted.
  3. A purchase of £2 400 was recorded as £2 040 (transposition of 4 and 0).
  4. Equipment costing £3 200 was recorded as a credit to Equipment (complete reversal).
  5. A £750 credit sale was entered in the sales journal for the wrong month.
Suggested diagram: Flowchart showing the steps – Error identified → (reverse if required) → Correct entry → Posting → Trial‑balance verification.

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