A payment of cash of ₦20 to John was entered on the receipt side of the cash book in error and credited to John's account.
Which of the following journal entries can be used to correct the error?
Which of the following journal entries can be used to correct the error?
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Correct Answer: Option A
Explanation:
The situation:
A payment of ₦20 was made to John, but the ₦20 was entered on the receipt side of the cash book in error.
Additionally, ₦20 was credited to John's account, which also was a mistake since it was a payment from the business to John.
The problem:
The ₦20 should have been recorded as a payment, not a receipt, and John's account should have been debited, not credited. The mistake involved both the cash book and the crediting of John's account.
How to fix it:
To correct the mistake:
- Cancel the incorrect entry: The payment of ₦20 was wrongly entered on the receipt side (which debited cash). We need to reverse this by crediting cash (removing the cash entry from the receipt side).
- Correct John’s account: Since John's account was credited, it shows that he owes the business ₦20. We need to debit his account to cancel this incorrect credit.
The correct journal entry:
A. John: ₦40 Dr, Cash: ₦40 Cr.
Why this is correct:
₦40 Dr to John: This reverses the wrong credit of ₦20 in John's account and removes it.
₦40 Cr to Cash: This reverses the incorrect debit made to the cash account.
The situation:
A payment of ₦20 was made to John, but the ₦20 was entered on the receipt side of the cash book in error.
Additionally, ₦20 was credited to John's account, which also was a mistake since it was a payment from the business to John.
The problem:
The ₦20 should have been recorded as a payment, not a receipt, and John's account should have been debited, not credited. The mistake involved both the cash book and the crediting of John's account.
How to fix it:
To correct the mistake:
- Cancel the incorrect entry: The payment of ₦20 was wrongly entered on the receipt side (which debited cash). We need to reverse this by crediting cash (removing the cash entry from the receipt side).
- Correct John’s account: Since John's account was credited, it shows that he owes the business ₦20. We need to debit his account to cancel this incorrect credit.
The correct journal entry:
A. John: ₦40 Dr, Cash: ₦40 Cr.
Why this is correct:
₦40 Dr to John: This reverses the wrong credit of ₦20 in John's account and removes it.
₦40 Cr to Cash: This reverses the incorrect debit made to the cash account.