Accounting – 3.2 Correction of errors | e-Consult

Correcting Entries:

1. Accounts Receivable Error (£500):

This is a difference between a credit and debit balance. To correct this, we need to reverse the incorrect entry and then record the correct one.

Correcting Entry: Debit Accounts Receivable £500, Credit Equity £500

Explanation: The debit balance of £500 in Accounts Receivable was incorrect. We debit Accounts Receivable to reduce the balance and credit Equity to reflect the correct impact on the owner's equity.

2. Rent Expense Omission (£120):

Rent expense was not included in the income statement. This affects the profit and retained earnings, which in turn affect equity.

Correcting Entry: Debit Rent Expense £120, Credit Retained Earnings £120

Explanation: We debit Rent Expense to increase the expense and credit Retained Earnings to reflect the increase in profit and its impact on the owner's equity.

3. Cash Error (£200):

This is another difference between a debit and credit balance. We need to reverse the incorrect entry and then record the correct one.

Correcting Entry: Debit Cash £200, Credit Equity £200

Explanation: The credit balance of £200 in Cash was incorrect. We debit Cash to reduce the balance and credit Equity to reflect the correct impact on the owner's equity.

Corrected Statement of Financial Position (Example - showing impact on Equity):