Distinguish an omission from an error of principle

An omission means the transaction was never recorded, while an error of principle means it was recorded in the wrong class of account. Both leave debits equal to credits, but they need different corrections and often different effects on profit.

This lesson finishes suspense and correcting errors by sharpening the naming skill used in identifying which error needs a suspense account.

What are the three questions?

Ask these in order about the wrong entry.

1. Was the transaction recorded at all? If not, it is an omission. If both sides are missing, the trial balance still agrees.
2. If it was recorded, was it in the right class of account? If an asset was charged as an expense, or an expense as an asset, it is an error of principle.
3. If the class was right, was it the wrong account within that class? Then it is an error of commission. The class is the same, so profit is unchanged.

Notice that an omission is corrected by posting the whole entry as if for the first time. A principle or commission error is corrected by moving the amount from the wrong account to the right one.

Worked example

Harapan Printing finds four errors.

1. A credit sale of RM 520 to a customer, Tan, was never recorded.
2. A printing machine costing RM 6,400, paid by cheque, was debited to the repairs account.
3. Insurance of RM 210 was debited to the rates account.
4. A cash sale of RM 300 was recorded as RM 30 in both cash and sales.

Step 1, apply the questions.

• Error 1: not recorded at all, so omission. Correction: debit Tan RM 520, credit Sales RM 520.
• Error 2: recorded, but an asset was charged to an expense. Principle. Correction: debit Machinery RM 6,400, credit Repairs RM 6,400.
• Error 3: recorded, both accounts are expenses. Commission. Correction: debit Insurance RM 210, credit Rates RM 210.
• Error 4: both sides carry the same wrong figure, so original entry. Correction: debit Cash RM 270, credit Sales RM 270.

Step 2, compare the profit effects.

Step 3, check the amounts. For error 4, the correct sale is 300 and the recorded one is 30, so the gap is 300 − 30 = RM 270.

The mistake to watch for

A common slip is to call error 3 an error of principle because “it is in the wrong account”.

Mistaken label: error of principle, with an effect on profit of 210.

Insurance and rates are both expenses, so moving RM 210 between them leaves total expenses unchanged. The label should be commission, and the profit effect is nil.

The words “wrong account” are not enough. Always ask whether the wrong account is in the same class as the right one. Same class means commission, different class means principle.

A second slip is to describe a transaction with only one side posted as an omission. If the debit was posted and the credit was not, the trial balance disagrees, so the error is held in suspense, not corrected as an omission.

Check yourself

Name each error and write the correction, then open the answer.

1. A motor van costing RM 15,000 was debited to motor expenses.

2. A credit purchase invoice of RM 340 from a supplier was lost and never recorded.

3. Wages of RM 280 were debited to the salaries account. Does it affect profit?

Where this leads next

With the names secure, test everything together in the suspense and correcting errors practice set. The double-entry and ledger trainer is a good place to try an entry before writing it.

If the labels slip whenever the wording changes, our teachers can rehearse that with you in online one-to-one Accounting tuition.