Study tips: using a four line journal to correct errors

Accounts preparation is tricky, because to do it successfully we have to understand what we’re doing as well as why we’re doing it. 

In this article we’re going to focus in-depth on using a four line journal to correct errors.

What’s is it?

A journal gives instructions to make entries in general ledger accounts.  Journals are used to make non-routine adjustments such as the correction of errors.

Why is it important to correct errors?

The fundamental qualitative accounting characteristic of faithful representation requires financial information to accurately reflect an organisation’s business and, as far as possible, be complete, neutral and error free.  Accountants should also comply with the fundamental ethical principle of integrity, which means acting with honesty, transparency and fairness in all professional and business relationships and when carrying out professional work.

What specific challenges do we face when identifying and correcting errors?

The fact that some are disclosed, due to an imbalance between the debits and credits in the transaction and that fact that some are not, as the debits and credits balance.  It is vital to know which type of error you are dealing with,  as this affects the accounts used in the correction.

The identifying and correcting errors series covers the basic knowledge that this article develops and might be good to read through before you go any further.

Suspense account:

A temporary account that is created when the debit entries do not equal the credit entries of a transaction.   The balance on the suspense account will equal the imbalance in the transactions and can be the result of errors in both debit and credit entries.

Once all the errors are corrected the balance of the suspense account will be reduced to zero.

Disclosed errors:

Entries that have caused the creation of a suspense account.  As a consequence, the suspense account must be involved in the correction.

Non-disclosed errors:

Errors that do not cause the creation of a suspense account because the total debits equal the total credits in the incorrect transaction.  The correction will therefore not involve the suspense account at all.

How do we best deal with error corrections?

Use a logical and structured approach.  As errors can be made anywhere and at any time in the accounts unfortunately there isn’t a single way to resolve them.  The best we can do is have a method for correcting them once they have been identified:

  1. What entries have been made?

  2. Are the debits and credits ?

Yes – non-disclosed error, suspense account not involved

No – disclosed error, suspense account used

  1. What entries should have been made?

  2. Compare steps one and three to help identify the correction needed, removing the incorrect entries and then posting the correct entries if appropriate.

Using working to help you ‘see’ what is going on can be really helpful, either notes or T accounts.*

Worked example with notes:

A van was bought for £5,000 cash.  The correct amount was debited to the bank account and credited to the motor expenses account.

  1. What entries have been made?

Bank                                      £5,000 Dr

Motor Expenses               £5,000 Cr

  1. Are the debits and credits equal?

Yes – the entries are equal so this is a non-disclosed error and the suspense account isn’t involved.

  1. What entries should have been made?

Motor Vehicles at Cost                   £5,000 Dr

Bank                                                     £5,000 Cr

There are two errors in this transaction.  An error of principle as the wrong type of account has been used and an error of reversal as the debits and credits are the wrong way round.

  1. Compare steps one and three to help identify the correction needed, removing the incorrect entries and then posting the correct entries if appropriate.

In this case it is appropriate to remove the original incorrect entries, by using the same accounts identified in step one but reversing the debits and credits.  Then write a new journal with the correct entries using the details from step three.

Worked example, with T accounts:

The bank was debited with £400 which was a payment for rent but no other entries were made.

  1. What entries have been made?

2. Are the debits and credits equal?

3. What entries should have been made?

4. Compare steps one and three to help identify the correction needed, removing the incorrect entries and then posting the correct entries if appropriate.

Again in this case it is appropriate to remove the original incorrect entries and then to write a new journal with the correct entries.  Remember that because there was an imbalance in the original debit and credit entries, the error was disclosed and therefore the suspense account must be included in the correction.

How can be certain that our accounts are error free?

We can’t.  Unfortunately we can never be 100% sure our accounts are error free due to the nature of undisclosed errors.  However, we can ensure that the journal corrections made to the suspense account clear each entry that was made in it to rebalance an originally imbalanced transaction.

If we know the balance on the suspense account, we can also double check that it clears to nil once we have corrected all the disclosed errors.

* Remember if you use T accounts to help you work out the journal entries required this does not mean that the entries will have been made. Entries in accounts only happen after the journal has been posted.

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

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