Correction of Errors
In this lesson, we will learn how to correct different types of errors found in the accounts using journals. We will also learn how these errors affect the profit for the year and how to correct the profit by preparing a Statement of Adjusted Profit.
Related Lessons:
Correcting Different Types of Errors
Generally, there are five major categories of errors that may be present in the business accounts that do not affect the balancing of the Trial Balance.
Below are the journal entries to correct these errors:
When a transaction is omitted or not recorded, we record it as normal.
When a transaction amount is overstated, we reduce the affected account by the amount of the difference.
When a transaction amount is understated, we increase the affected account by the amount of the difference.
When a transaction is recorded in the wrong account, we subtract the amount from the incorrect account and add it to the correct account.
When a transaction is recorded on the wrong side of both accounts, we correct it by reversing the entries in both accounts and recording them on the correct side.
Statement of Adjusted Profit
The Statement of Adjusted Profit is prepared to correct the profit figure after adjusting for all errors found in the accounts.
We start off the statement with the header that states the date that this statement represents.
Next, we record the amount of the profit containing the errors.
For errors that overstates the profit, we minus these amounts from our profit.
For errors that understated the profit, we add these amounts to our profit.
Finally, we calculate the adjusted profit for the year.