B2: 4.07 Compensating Errors

What are compensating errors?

Unlike the other errors covered so far, compensating errors are actually two errors, each of which cause a difference in the totals of the debit and credit columns of the trial balance, but the difference in one cancels out the difference in the other. As this situation would be quite a coincidence, compensating errors tend to be rare.

When compensating errors have been found, they can be corrected using a journal.

Illustration

On 4th October, the Griffin’s bookkeeper posted two transactions:

Posting 1

AccountDebitCredit
Machinery£1,210
Bank£1,260

The debit to the machinery account was incorrect as the amount should have been recorded as £1,260

Posting 2

AccountDebitCredit
Sales ledger control£2,730
Sales£2,680

The credit to the sales account was incorrect as the amount should have been £2,730

The errors were spotted and corrected by the bookkeeper on 8th October.

The debits of the first posting are £50 less than the credits (i.e. £1,260 less £1,210) and the credits of the second posting are £50 less than debits (i.e. £2,730 less £2,680). Individually, these errors would be disclosed in the trial balance but together will result in there being no difference between the total debits and credits.

The net results of these errors is as follows:

  1. The Machinery account balance will be £50 too low
  2. The Sales account balance will be £50 too low

These errors could then be correct using two journals (one to remove the incorrect entries and another to record the correct amounts) or a single journal

Correcting the error using two journals

The first journal will remove the incorrect entries in the ledger accounts containing errors (i.e. the Machinery account and the Sales account).

The second journal will record the entries that should have been made originally.

The journals will then be posted to the General Ledger accounts as shown below (the original incorrect entries are shown in black and the above journals are shown in blue).

Correcting the error using one journal

This type of error can also be corrected using a single journal which give the same overall effect of the two journals detailed above. For our above example, the journal to be posted to the General Ledger would be:

The journal would be recorded as follows in the General Ledger accounts:

The two methods may be examined, so students must be able to use both.

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