ACCA Applied Knowledge · Financial Accounting

Correction of errors: formula sheet

Full chapter guide

Key formulas

Trial balance test: Total debits = Total credits; If equal, the trial balance balances. This does not prove there are no errors.
Errors that do not affect the trial balance: Omission, commission, principle, original entry, compensating, reversal; Debits still equal credits, so the trial balance cannot reveal them.
Errors that do affect the trial balance: One-sided entry, unequal debit and credit, addition or balancing error; These create a difference, which is placed in a suspense account.
Correcting a reversal: Correcting entry = 2 × original amount; This applies only to a pure reversal, where both the debit and the credit were swapped. Debit what should have been credited, and vice versa, for twice the amount. Do not use it for other error types.
Correction journal logic: Reverse the wrong entry, then post the right entry; Net the two steps into one journal in the exam.
Correcting journal logic: Correcting entry = Correct entry − Entry actually made; Reverse the wrong debit and credit, post the right ones, then net off accounts that appear twice.
Errors that do not need suspense: Omission (of both debit and credit), commission, principle, original entry, compensating, reversal: the trial balance still balances; No suspense is needed because the trial balance still balances, and the correcting journal balances on its own. For a compensating error, make the correction to each account separately.
Errors that need suspense: Suspense = the balancing figure that makes trial balance debits equal credits; If debits exceed credits, suspense is a credit; if credits exceed debits, suspense is a debit.
Suspense rule: Corrected suspense balance = 0; If your suspense account does not clear to nil, you have missed or mis-posted an entry.
One-sided entry correction: Post the missing side and clear suspense with the other side; For a missing debit, Dr the account, Cr suspense. For a missing credit, Cr the account, Dr suspense.
Effect on profit: Profit change = Income corrections − Expense corrections; Extra income raises profit. Extra expense cuts profit. Moves between asset or liability accounts do not change it.

Quick revision

Error of omission: a transaction is left out completely, so the trial balance still balances.
Error of commission: posted to the wrong account of the same type, so the trial balance still balances.
Error of principle: posted to the wrong type of account, such as capital expenditure treated as an expense; the trial balance still balances.
Error of original entry: wrong amount used in both the debit and the credit; the trial balance still balances.
Compensating errors: two errors of equal and opposite amounts cancel out; the trial balance still balances.
Reversal of entries: debit and credit swapped; the trial balance still balances.
Single-sided entries, or debit and credit of different amounts, make the trial balance fail and need suspense.
Correcting journal: remove the wrong entry, then post the right one, or post only the difference.
If the trial balance debits are lower than credits, the suspense account has a debit balance.
Suspense is not a real asset or liability; it should be cleared to nil once all errors are corrected.
Only corrections to income or expense accounts change profit; those to assets and liabilities alone do not.
Check the direction: an expense understated means profit was overstated, so deduct the correction from profit.

Common mistakes

Thinking a balancing trial balance means the books are correct. Fix: Remember it only proves debits equal credits. Six error types can still sit in the ledgers.
Confusing commission with principle. Fix: Commission stays within the same class of account, such as expense to expense. Principle moves to a wrong class, such as asset to expense.
Reversing the wrong entry but forgetting to post the right one Fix: Always write two lines first: wrong and right. Then net them.
Putting the suspense balance on the wrong side Fix: The suspense account is the balancing figure. If debits exceed credits in the trial balance, suspense is a credit balance. If credits exceed debits, suspense is a debit balance.

Exam tips

In multiple response questions, select exactly the number stated. Check each option by asking whether debits still equal credits.
Know the six types by definition, not by example only. Exam wording changes the example but not the definition.
For correcting journals in number entry questions, calculate the net effect on profit first. Then check the sign.
Read the stem for the words 'would not be revealed by the trial balance'. This tells you the answer is one of the six types.
Check each correction against its effect on profit before you submit.
Write wrong entry and right entry as two lines before choosing an option or typing an answer. It prevents most errors.
If an option does not balance, or uses suspense for an error that left the trial balance balanced, reject it.
For profit questions, list each account in the correction and note only income and expense changes.