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.
On 4th October, the Griffin’s bookkeeper posted two transactions:
The debit to the machinery account was incorrect as the amount should have been recorded as £1,260
|Sales ledger control||£2,730|
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:
- The Machinery account balance will be £50 too low
- 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.