ACCA Applied Knowledge · Financial Accounting · Trial balance
Which one of the following is an example of a compensating error?
An overcast of $700 on the sales account offset by an overcast of $700 on the purchases account is a compensating error. Two independent mistakes cancel in the totals, so debits still equal credits and the trial balance does not reveal either mistake.
- AThe sales account was overcast by $700 and the purchases account was overcast by $700Correct
- BA sale of $350 was recorded in the books of the seller but the invoice was never entered in the customer's receivables account
- CA cheque from a customer for $410 was debited to bank and credited to payables
- DA credit note of $90 was recorded as an invoice
Explanation
A compensating error occurs when two or more independent errors offset each other so that the trial balance still balances. Overcasting sales (a credit) by $700 and purchases (a debit) by $700 cancel out in the totals. Option B is an omission, C is a wrong account (principle/commission), and D is a reversal of entries.
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