As explained earlier, certain errors in accounting may not affect the trial balance. When such errors arise, it is necessary to correct them as soon as practicable. This article looks at mistakes that affect figures, that is, the error of original entry.
Meaning of Error of Original Entry
It is a mistake that occurs when a bookkeeper uses the wrong amount to post the transaction.
It can also be defined as an error of wrong amount or figure in the book of accounts.
The error of original entry is closely related to transposition error. In fact, it is the superset of the later. The single difference is that the transposition error occurs when a bookkeeper transposes or interchanges a figure for another. Say, he wrongly posted a sale as 250000 Naira in error where the transaction involved is 520,000 Naira.
The mistake under discussion can come in various ways. The important point here is that a wrong amount has been entered in the books of account. In addition, the error must have occurred to all accounts involved for it not to affect the trial balance.
For example, the employee has recorded 250,000 Naira in the debit side of the sales account and the credit side of the bank account. In this case, the trial balance will still be correct as error is found in two opposite sides.
How to Identify Error of Original Entry
In an examination question, it is very easy to identify a mistake involving figures. Same with an office job. In an examination question, the examiner will show two figures. One of the figures is wrong and the other is correct. For example, the question might be about the payment for fuel for an office car posted as 7,400 Naira instead of 6,400. With this you will know that the wrong amount is 7,400 while the correct one is 6,400.
In an office job, the source document is examined to see if the amount in it is the same as that entered in an accounting information system (for example, QuickBooks). If the amounts are dissimilar, then, an original entry error has occurred.
How to correct this error
To correct the error in accounting, you will need to know if the amount in error is higher or lower than the correct amount. If the figure in error is higher, it is called overcast. However, a lower figure means the mistake is an undercast error.
In the above example, the amount in error of 7,400 Naira is higher. So, there is an overcast mistake of 1,000 Naira (that is, 7,400 + 6,400). The difference of 1,000 is needed to correct the error. In the other illustration, the amount in error is 250,000 Naira lower than the actual figure of 520,000 Naira. Here an undercast of 270,000 Naira needs to be corrected.
Examples of how to correct error of Original Entry
You need to understand if the mistake is overcast or undercast to easily correct the error. If the amount is undercast, it means you should add the figure to the error to correct it. If it is overcast, you need to subtract the figure to the mistake to nil it off.
The above examples can be used to explain it.
Example One: Payment for fuel for an office car was posted as 7,400 Naira instead of 6,400 Naira.
In error, this transaction was posted as:
Dr: Fuel Expenses a/c N7,400
Cr: Cash a/c N7,400
Note: For more understanding of the double entry principle click here.
Because it is an overcast error, the 1,000 difference will be subtracted from the above figure to reduce it to 6,400 Naira. Therefore, the entry to correct the error in a Journal book shall be:
Dr: Cash Account a/c with N1,000
Cr: Fuel Expenses a/c with N1,000.
By posting a counter entry of 1,000 Naira, it will reduce the amount. This will nil off the error to the correct amount of N6,400.
Example Two: Goods sold for 520,000 Naira to a customer. The payment made through a bank transfer was posted as 250,000 Naira.
In error, the entry was posted in the books of account as:
Dr: Bank Account with N250,000
Cr: Sales Account with N250,000
Since the error is an undercast, the difference of N270,000 will be added to the error of N250,000 to arrive at N520,000. Therefore, the mistake is corrected as:
Dr: Bank Account N270,000
Cr: Sales Account N270,000
By not posting a counter entry, the amount of N270,000 will be added to N250,000 Naira to give the correct value of N520,000.
Why this error do no affect trial balance
Any error that affects both the Debit and Credit sides for a transaction will never affect the trial balance. As you may have noticed in the two examples. In both transactions, the error was posted in the debit and credit sides of the respective accounts. So, there will not be unbalanced trial balance.
Here, you have learned that the error of the original entry occurs when the wrong amount is posted in the books of account. To correct the error, you need to identify if it is an undercast or overcast mistake. Then, add to the amount for undercast and subtract for overcast.