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Correcting Accounting Errors

We look to find accounting mistakes we might have made after preparing the trial balance. Most importantly, if the debits in our trial balance do not match our credits, we've probably either made a mistake preparing the trial balance, or we've made a mistake somewhere in our general journal or in posting to the ledger. Not all mistakes will make the trial balance out-of-balance, and it's good if we can find and correct these mistakes too - but that's a lot more work than the first approach. 

Finding mistakes when the trial balance is out-of-balance:

1. Re-add all of the columns in your trial balance. It may simply be a math error. Similarly, if your trial balance is off by a number such as 10, 100, or 1000, it is most likely a math error. Double check that you added correctly and that you copied in all the right numbers. 

2. Did you omit an account, or put the accounts balance in the wrong column when preparing the trial balance? If you did, this will make the trial balance off by twice the amount of the error. Divide the out-of-balance amount by two and look for an account on your trial balance with that amount. 

3. Did you make a transposition error (write $2100 as $1200) or a slide error (write $2100 as $210) when preparing the trial balance? If the out-of-balance number is divisible by 9, it is likely one of these two types of errors. Double check the trial balance for accounts with similar numbers. 

4. Is there an error in the general journal or a posting error (was a transaction not posted correctly) in the ledger accounts? You might have to go back and look at your records and follow them through the journal and ledger to find the error. Look for records of transactions with similar amounts to the amounts discussed above.

When the error is found because of an out-of-balance trial balance, we open what is called a suspense account. The suspense account will be the same as the out-of-balance amount of the trial balance. When the error is found, and corrected, it is cancelled out with the suspense account. 

For example, a mistake could be made where accounts receivable was accidentally debited by $100 instead of credited. The out-of-balance amount of the trial balance would be $200. We would make a temporary suspense account for $200, and a correcting entry as follows:


                                     

Finding mistakes that won't make the trial balance out-of-balance:

1. Error of Ommission: An entire transaction is missed. There will be no debit, or credit entered.
2. Error of Commission: A double entry is made, but one entry is journalized or posted to the wrong personal account (for example, when receiving payment from a client, recording it to another client's account.
3. Error of Principle: Recording an entry to the wrong classification of account, such as capitalizing an expense.
4. Compensating Errors: When two or more errors accidentally cancel eachother out.
5. Error of Original Entry: The number used to enter the original transaction is wrong, both for the debit amount and equally for the credit amount. This may include transposition or slide errors. 
6. Reversal: The accounts to be debited and credited may get switched.

If the error is made in the general journal and/or the ledger, we may have to do a correcting journal entry and post it to the correct accounts. Don't worry, this is easy. For example, imagine ABC.co received a payment from one of its customers, Q, for $500 cash. However, the bookkeeper accidentaly credits it to M's account. Now it looks like M paid $500, not Q. We do a simple correcting entry with the following note:

                                       

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