Section 3 of 8
Correcting errors often changes the reported profit figure. The key is to identify whether the correction affects an income or expense account.
| Correction entry | Effect on profit |
|---|---|
| DR an expense account | Profit decreases (expense increases) |
| CR an expense account | Profit increases (expense decreases) |
| DR an income account | Profit decreases (income decreases) |
| CR an income account | Profit increases (income increases) |
| DR or CR an asset, liability or capital account | No effect on profit |
£
Draft profit X,XXX
Add: [corrections that increase profit] XXX
Less: [corrections that decrease profit] (XXX)
-----
Revised profit X,XXX
Draft profit = £18,400
| Error | Correction | Profit effect |
|---|---|---|
| Commission: £300 in wrong debtor account | DR correct debtor / CR wrong debtor | None (asset adjustment) |
| Omission: wages £800 never posted | DR Wages £800 / CR Bank £800 | −£800 (expense added) |
| Principle: van insurance £600 debited to Motor Vehicles | DR Motor Expenses £600 / CR Motor Vehicles £600 | −£600 (expense recognised) |
| Reversal: discount received £150 reversed | DR Discount Received £300 / CR Bank £300 | −£300 (income reduces: was £150 wrong side, correction nets −£300 then adds correct side) |
Revised profit = £18,400 − £800 − £600 − £300 = £16,700
Shortcut for reversal errors: the profit impact is double the original amount because the wrong entry misallocates the amount in the wrong direction and the correction must reverse that and create the correct entry.
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