Page 132 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 7.3 Types of Errors

There are two types of errors:

Errors which cannot be located by Trial Balance

The following errors cannot be detected by the trial balance means in spite of agreeing the totals
of debit side and credit side, these errors occur in the accounts.

1. Error of Omission: These errors occur when any business transaction is completely omitted
from the recording in the books of original records.

Example: As goods, sold of 10,000 to Mr. Ram, is entered nowhere in the original
books then its effect will also not come on the ledger and trial balance. Thus such type of errors
cannot be located by trial balance.
2. Error of Commission: Such types of errors are found when one account is debited or
credited in the place of another account.

Example: As cash received from Shyam 1,000 has been credited in the name of Ram.
Such type of errors do not affect the agreement of the totals of the debit and credit side of the trial
balance but they affect the result of the business.
3. Error of Principle: These errors occur when there is wrong classification between the
capital and revenue nature incomes or expenditures.

Example: As the purchases of furniture of 20,000 are entered in the book of purchases
while it should be in furniture account. Such errors cannot be located by trial balance.
4. Compensating Error: When two errors of the same account occur and the effect of one
error is compensated by the effect of other error it is called compensating error.

Example: If purchase of 10,000 from Ajay is credited only by 1,000 while the purchases
from Vijay for 1,000 is credited by 10,000. Thus, such type of errors do not affect on the
agreement of the Trial Balance.

Errors which can be located by Trial Balance

The error which affects the agreement of the totals of the Trial balance can be located easily.
These errors may be relating to:
(i) Totals of the subsidiary books or ledger accounts.

(ii) Balancing of an account of the ledger.
(iii) Wrong posting of any amount in any account.
(iv) Posting of any account may be in the wrong side of the account.

(v) Balance of any account may be omitted in writing in the Trial Balance.
(vi) Wrong total of the Trial Balance.
(vii) Partially omitted means omission may be the part of the transaction. If it is a part of the
transaction then it would affect trial balance and can be located by trial balance.

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