Question

QUESTION ONE

1. Briefly explain the following types of errors:

(i) Error of commission                                                                                          

(ii) Error of principle                                                                                              

(iii) Complete reversal of entries                                                                             

(iv) Compensating errors                                                                                        

2. The trial balance of Amanda Ltd as at 30 April 2018 did not balance. On investigation, the following errors were discovered:
   1. A loan of Sh.2,000,000 from one of the directors has been correctly entered in the cashbook but posted to the wrong side of the loan account.
   2. The purchase of a motor vehicle on credit fro Sh.2,860,000 had been recorded by debiting the supplier’s account and crediting the motor expenses account.
   3. A cheque for Sh.80,000 from Ogola, a customer to whom goods are regularly supplied on credit, was correctly entered in the cashbook but was posted to the credit of bad debts recovered account in the mistaken belief that it was a receipt from Agola, a customer whose debt had been written off three years earlier.
   4. In reconciling the company’s cash book with the bank statement, it was found that bank charges of Sh.38,000 had not been entered in the company’s records.
   5. The totals of the cash discount columns in the cashbook for the month of April 2018 had not been posted to the respective discount accounts.

The figures were:

	Sh.
Discounts allowed	184,000
Discounts received	397,000

6. The company had purchased some plant on 1 March 2017 for Sh.1,600,000. The payment was correctly entered in the cashbook but was debited to the plant repairs account. Depreciation on such plant is provided for at the rate of 20% per annum on cost.

Required:

(i) Journal entries with narrations to correct the above errors.                                

(ii) Suspense accounts showing the original difference                                            

                                                                                                                        

Answer 1

1. Error of commission :

As errors of commission are often caused due to the mistake committed by the clerk, they are also called as clerical errors. Also known as error of inadvertence.

If we debit or credit an account, other than the correct account, but with the correct amount, the total debits and credits in the ledger will remain equal and hence the trial balance will not disclose the error.

2. Error of principal

An error of principle is caused by a lack of knowledge of accounting principles. The common error is the treatment of capital expenditure as revenue expenditure or vice versa. Capital expenditure is expenditure on purchase of fixed assets whereas revenue expenditure is incurred on day to day running of the business. Thus the purchase of a motor car is a Capital Expenditure while the purchase of fuel for the car is revenue expenditure.

3.  Complete reversal of entries

If a transaction is so recorded that the account to be debited is credited and the account to be credited is debited, both with the correct amount, the debit and credit entries in the ledger would be equal and the trial balance will remain unaffected.

Effect on accounts

The account to be debited is credited and the account to be credited is debited.

Rectification entry

The correct entry should be made with twice the amount to erase the effect of the incorrect entry and to establish the correct entry.

4. Compensating Errors – Definition

In the case of compensating errors, we observe that one of the errors already committed being offset by another error or more than one errors. That means, compensating errors are caused due to the errors committed to compensate each other or offset each other.