Compensating Errors – Definition
In the case of compensating errors, we observe that one of the errors already committed being offset by another error or more than one errors. That means, compensating errors are caused due to the errors committed to compensate each other or offset each other.
Explanation of Compensating Errors
In fact, when the errors have compensated, the trial balance is in agreement, with the result that locating such errors becomes difficult. Further, compensating errors pose greater problems than other types of errors because they are not single errors but a combination of more than one error. That indicates that there is a need to identify not one error but more than one error or a number of errors to correct them.
For example, if advertising charges paid $1,000 is debited in the advertising account as $1,500 and the interest received $2,000 is credited in the interest account as $2,500, then the excess debit of $500 in advertising account is set off against the excess credit in the interest account. As the excess debit is compensated with the excess credit the trial balance fails to reveal such errors.
It is possible that two or more such errors may be made in the books of account which cancel out the effect of each other.
For example, if sales book is overcast by $1,000 and the purchases book is also overcast by $1,000, the net effect in the ledger will be nil because the over-debit in purchases account will be nullified by the over-credit in sales account. A group of two or more errors each of whom individually affects the trial balance but which collectively nullify each other’s impact is called compensating errors. The rectification entries for compensating errors are made by correcting each error individually.
The trial balance extracted on 31 December 2017 from the books of a wholesaler failed to agree and he placed the difference to a Suspense Account. The trial balance totals were Dr. $213,820 and Cr. $212,230. Later, the following errors were discovered:
- An invoice for $620 issued to Levis was recorded in the sales book as $1,620 and posted to ledger accordingly.
- Returns Inwards Book was overcast by $100.
- A credit note for$550 received from Sydney Traders was recorded correctly in the appropriate subsidiary book but posted to the credit of Sydney Traders Account.
- A cheque for $1,780 received from Harry was entered in the cash book but not posted to his personal account in the ledger.
- Credit purchase of an office machine for $1,250 was journalized through the purchases book. (This means it was treated as a purchase of goods, instead of an asset.)
- A purchase of goods for $5,340 from Melbourne Wholesalers was recorded correctly in the purchases book but posted to their account in the ledger as $5,430.
- Goods costing $950 were taken by the owner for his personal use but no entry was made in the books to record this fact in the books.
- There was a mistake in balancing the Salaries Account. Its balance was shown as Dr. $16,230 instead of the correct balance Dr. $15,330.
Required: Rectification entries in Journal and Suspense Account, duly balanced.
Note: The Dr. side total ($213,820) of Trial Balance had exceeded the Cr. side total ($212,230) by $1,590. Therefore the opening entry in Suspense Account was made at $1,590 on the Cr. Side, bringing total credits equal to total debits.