IGCSE Accounting 0452 - 3.2 Correction of Errors

This section details how to adjust a profit or loss for an accounting period after errors have been identified and corrected.

Understanding Errors in Accounting

Errors are mistakes that occur during the recording of financial transactions. These errors can affect the accuracy of the financial statements. It's crucial to identify and correct these errors to ensure reliable financial reporting.

Types of Errors

Common types of errors include:

• Omissions: A transaction is not recorded at all.
• Duplications: A transaction is recorded more than once.
• Incorrect Entries: A transaction is recorded with the wrong amount or in the wrong account.
• Misclassifications: A transaction is recorded in the wrong account.

The Correction Process

The process of correcting errors involves making adjustments to the profit or loss account and the balance sheet.

1. Identify the Error: Carefully review the trial balance and supporting documentation to identify any errors.
2. Calculate the Amount of Correction: Determine the amount of the error.
3. Adjust the Profit or Loss Account:
   • Omissions: Debit the Income Statement account (e.g., Revenue) and credit the relevant Expense account.
   • Duplications: Debit the relevant Income Statement account and credit the relevant Expense account.
   • Incorrect Entries: Debit the account that was credited and credit the account that should have been credited.
   • Misclassifications: Debit the original account and credit the correct account.
4. Adjust the Balance Sheet Account: Adjust the corresponding balance sheet account to reflect the corrected amount.
5. Prepare a Corrected Profit and Loss Account: Present the adjusted profit and loss account.
6. Prepare a Corrected Balance Sheet: Present the adjusted balance sheet.

Examples of Corrections

Example 1: Omission of Revenue

A revenue of $500 was not recorded.

Account	Debit	Credit
Revenue	$500
Income Statement Adjustment		$500

Example 2: Duplication of Expense

An expense of $200 was recorded twice.

Account	Debit	Credit
Expense Account	$200
Income Statement Adjustment		$200

Example 3: Incorrect Entry to an Expense Account

$100 was incorrectly debited to the 'Office Expenses' account instead of 'Advertising Expenses'.

Account	Debit	Credit
Office Expenses	$100
Advertising Expenses		$100

Presenting Corrected Profit and Loss Account

The corrected profit and loss account will show the adjustments made to reflect the true profit or loss for the period.

Corrected Profit and Loss Account

Account	Amount
Revenue	$500
Expenses	$100 + $200 = $300
Income Statement Adjustment (Omission)	$500
Income Statement Adjustment (Duplication)	$200
Profit/Loss	$500 - $300 + $500 - $200 = $500

Presenting Corrected Balance Sheet

The corrected balance sheet will show the adjustments made to the balance sheet accounts.

Corrected Balance Sheet

Account	Amount
Capital	$1000
Office Expenses	$100
Advertising Expenses	$200
Revenue	$500
Profit/Loss	$500

Note: The profit/loss is directly affected by the errors and the subsequent corrections. The balance sheet accounts are adjusted to reflect the true financial position.