Financial Accounting · Correction of errors

Effect of Errors on Profit and Trial Balance in ACCA Financial Accounting

Updated 11 October 2026

Correct each error with a journal, then ask two questions: does it change an income or expense, and does it change the trial balance totals? Adjust draft profit only for income and expense changes. Use a suspense account for errors that stop the trial balance agreeing. Show the changes in a statement of corrected profit.

Understand Effect of Errors on Profit and Trial Balance

An error is a mistake in the books. Some errors are found because the trial balance does not balance. Others stay hidden. Both kinds can change profit, so you must know how to tell what each error does.

Start with the profit test. Profit is income minus expenses. An error changes profit only if it involves an income or expense account. If both sides of the wrong entry are in the statement of financial position (for example, a debit to one asset instead of another), profit does not change. Errors that involve an expense or income account, such as expensing a non-current asset, do change profit.

Now the trial balance test. The trial balance lists debit and credit balances. An error where only one side of an entry is posted, or where the debit and credit amounts differ, makes the totals disagree. This includes a one-sided omission. The difference goes to a suspense account. Some errors leave the totals equal, so there is no suspense entry. These are a complete omission (both sides left out), errors of commission, errors of principle, compensating errors and complete reversal. An error of original entry also leaves the totals equal when both sides are posted with the same wrong amount.

To correct profit, you take the draft profit and add or deduct the effect of each correction. If a correction reduces an expense or raises income, profit goes up. If it raises an expense or reduces income, profit goes down. A statement of corrected profit lists each item with its effect, so the marker can follow your logic.

You may also be asked for a revised trial balance or the corrected suspense balance. Here you adjust each ledger balance affected by the journals and check that the suspense account clears to nil once all errors are corrected.

Key formulas to remember

Corrected profit: Corrected profit = Draft profit + increases in profit − decreases in profit; Only corrections that touch income or expense accounts change profit.
Effect on profit of an expense correction: Expense understated → profit falls. Expense overstated → profit rises.; Apply the same logic in reverse for income: income understated → profit rises.
Suspense account balance: Suspense = difference between total debits and total credits in the trial balance; If debits exceed credits, suspense is a credit balance. If credits exceed debits, suspense is a debit balance.
Errors not shown by the trial balance: Omission, commission, principle, original entry, compensating, complete reversal; These do not create a suspense balance, but they may still change profit.

How to solve Effect of Errors on Profit and Trial Balance questions

Use this method for any question on correcting errors and their effect on profit or the trial balance.

1List each error separately and write what was done and what should have been done.
2Write the correcting journal for each: debit and credit with amounts. Use suspense only where the trial balance was out.
3Look at each journal. If it has an income or expense account, work out whether profit rises or falls.
4Set out the statement: draft profit, then each adjustment with a clear plus or minus sign and the amount.
5Total the adjustments and calculate corrected profit.
6If asked, check the suspense account: the corrections to it should clear it to nil.
7If asked for a revised trial balance, adjust each affected account and check total debits equal total credits.
8Re-read the question to confirm you used the right starting profit and sign.

Quickest way: Plus or minus test for each error

When to use it: Use it for multiple-choice and number-entry questions where you only need the new profit figure.

For each error, ask: is an income or expense account involved? If not, ignore it for profit.
If yes, decide what the correct expense or income should be compared with what was recorded.
Expense too low means deduct the difference. Expense too high means add the difference.
Income too low means add. Income too high means deduct.
Add or deduct all items from the draft profit once, then check you used every error.

Common mistakes in Effect of Errors on Profit and Trial Balance

Changing profit for errors that only involve statement of financial position accounts.
Students assume every error alters profit.
Fix: Check the journal. If there is no income or expense account in it, profit stays the same.
Using the wrong sign when an expense is understated.
Students see an increase in an expense and add it to profit.
Fix: A larger expense lowers profit. Deduct it. Say it aloud: more expense, less profit.
Putting every error through suspense.
Students link all corrections with the suspense account.
Fix: Use suspense only when the trial balance did not balance. Errors of omission, commission and principle are corrected directly between the accounts concerned.
Getting the suspense balance side wrong.
Students forget that the suspense account is the balancing figure.
Fix: If debits are higher in the trial balance, credit suspense. If credits are higher, debit suspense.
Using the full amount for a transposition error instead of the difference.
Students rush and correct the full amount instead of the difference.
Fix: For a transposition, correct only the difference between the wrong and right figures. For an omitted entry, correct the full amount.
Forgetting that depreciation may follow a correction of a capital item.
Students stop after moving an item from expense to asset.
Fix: If the question gives a depreciation policy, add the extra depreciation as a profit reduction.

Worked examples

Example 1

Draft profit for the year is $48,000. Three errors are found. (1) Repairs of $2,500 were debited to the non-current assets account. (2) Rent received of $900 was credited to the rent expense account. (3) A payment of $1,200 for insurance was debited to the electricity account. Calculate the corrected profit.

Show the solution

Error 1: repairs are an expense, so debit repairs expense $2,500 and credit non-current assets $2,500. Expenses rise, so profit falls by $2,500.
Error 2: rent received of $900 should have been credited to income. It was credited to rent expense instead, so it was recorded as an expense reduction, not as income. Correcting journal: debit rent expense $900, credit rent income $900. Expenses rise by $900 and income rises by $900, so the net effect on profit is nil. In the original entry the credit sat in expenses, so profit was already counted once and does not change.
Error 3: both are expenses, so total expenses are unchanged. Debit insurance $1,200 and credit electricity $1,200. Profit does not change.
Corrected profit: $48,000 − $2,500 = $45,500.

Answer: Corrected profit is $45,500.

Example 2

A trial balance did not agree and the difference was put to a suspense account. Draft profit is $30,000. Errors: (1) A sale of $1,800 was debited to receivables but not credited to sales. (2) Discount allowed of $400 was credited to the discount allowed account instead of being debited. The receivable was credited correctly. (3) A purchases invoice of $700 was debited to purchases twice, with the credit to payables posted once. Correct profit and state the suspense balance before correction.

Show the solution

Error 1: the credit to sales is missing, so debits exceeded credits by $1,800. This part of the suspense balance is a credit of $1,800. Correcting journal: debit suspense $1,800, credit sales $1,800. Sales rise, so profit rises by $1,800.
Error 2: discount allowed should have been a debit of $400, but a credit of $400 was posted. With the receivable credit also posted, credits exceeded debits by $800. This part of the suspense balance is a debit of $800. The discount allowed expense is understated by $800 (a credit of $400 instead of a debit of $400). Journal: debit discount allowed $800, credit suspense $800. Expenses rise, so profit falls by $800.
Error 3: the invoice was debited to purchases twice but credited to payables once, so purchases are overstated by $700 and debits exceeded credits by $700. This part of the suspense balance is a credit of $700. Journal: debit suspense $700, credit purchases $700. Purchases fall, so profit rises by $700.
Profit: $30,000 + $1,800 − $800 + $700 = $31,700.
Suspense before correction: credit $1,800 + credit $700 − debit $800 = net credit $1,700. Check: the corrections debit suspense $1,800 + $700 = $2,500 and credit it $800, a net debit of $1,700. This clears the account to nil.

Answer: Corrected profit is $31,700. The suspense account had a credit balance of $1,700 before correction.

Exam tips

Read each error and write the journal first. It shows both the profit effect and the suspense effect.
In multiple-response questions, select only errors that change profit if the question asks for that, not those that affect the trial balance.
Check the sign of every adjustment before you total. One wrong sign gives a wrong answer and often matches a distractor.
Number-entry questions may ask for the suspense balance: say whether debit or credit before you type the figure.
In multi-task questions, use the draft profit given in the question, not a figure you calculated earlier unless told to.

Practice questions from Correction of errors

Effect of Errors on Profit and Trial Balance: frequently asked questions

Do all errors change profit?

No. An error changes profit only when an income or expense account is wrongly stated. Errors between two asset or liability accounts leave profit unchanged.

What is a statement of corrected profit?

It starts with the draft profit. You then list each error with the amount added or deducted. The final line is the corrected profit. It shows the marker how you reached your answer.

Why does a trial balance still balance with some errors?

Errors such as omission, commission, principle, original entry, compensating and complete reversal keep total debits equal to total credits. The trial balance cannot detect them.

How do I know whether suspense is debit or credit?

Compare the trial balance totals. If debits are higher, you credit suspense to balance it. If credits are higher, you debit suspense.