What are compensating error?

When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil.

The correct answer is option 2- When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil.

Compensating Errors- When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. Such errors do not affect the tallying of the trial balance. For example, if purchases book has been overcast by 10,000 resulting in excess debit of 10,000 in purchases account and sales returns book is undercast by 10,000 resulting in short debit to sales returns account is a case of two errors compensating each other’s effect. One plus is set off by the other minus, the net effect of these two errors is nil and so they do not affect the agreement of trial balance.

OTHER OPTIONS-

• Errors committed at the time of recording the transaction in the books of original entry or while posting to the ledger- Errors of Omission.

• Errors which are occurred when accounting principles are violated while recording transactions due to which trial balance does not tally- Errors of Principle.

• Errors which are committed due to wrong posting of transactions, wrong totalling or wrong balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of amount in the books of original entry- Errors of Commission.