Compensating Errors (Cambridge International IGCSE Accounting)

Compensating errors

What are compensating errors?

• Compensating errors occur when the effects of unrelated errors balance out when totalling the debits and credits

• Example

  • A business sells $100 worth of goods to Steve and $200 worth of goods to Tony

  • The transactions were entered correctly into the sales account

  • Both Steve and Tony’s accounts were debited $150

    • Overall the assets have still increased by $300

How do I correct compensating errors?

• Correct each error separately
• The total of the debits should equal the total of the credits

Worked Example Ashika sold $100 worth of goods to Steve and $200 worth of goods to Tony. On 1 March 2024, Ashika identified that both of these transactions were entered into the sales ledger accounts as $150. The transactions were entered correctly into the sales account.

Prepare journal entries to correct the error. A narrative is required.

Answer:

The accounts currently look like:

• Debit Steve $150
• Debit Tony $150
• Credit sales $300

The accounts should look like:

• Debit Steve $100
• Debit Tony $200
• Credit sales $300

Fix the errors

• Credit $50 to Steve’s account to reduce the balance
• Debit $50 to Tony’s account to increase the balance

Final answer: Journal

Final answer: Date	Final answer: Details	Final answer: Debit Final answer: $**	Final answer: Credit Final answer: $
Final answer: 2024 Final answer: Mar 1	Final answer: Tony	Final answer: 50
	Steve		Final answer: 50
	Final answer:** Correction of compensating errors - Tony’s account was understated by $50 and Steve’s account was overstated by $50**