st Year 2018 DR BISWAJIT BHADRA 1 2 Rectification of Errors ERRORS THE CONCEPT Errors are unintentional mistakes made by the accountantbookkeeper while recording transactions in the books of accounts ID: 1028594
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1. NETAJI NAGAR COLLEGEB.COM 1st Year, 2018DR. BISWAJIT BHADRA1
2. 2Rectification of Errors
3. ERRORS- THE CONCEPTErrors are unintentional mistakes made by the accountant/book-keeper while recording transactions in the books of accounts. In the process of accounting, a trial balance is prepared which only reflects the arithmetical accuracy but does not guarantee the absence of any errors in the books . In such a case if trial balance agrees there may or may not be errors in the books but if trail balance does not agree it clearly indicates some kind of error(s) in the books of accounts.3
4. TYPES OF ERRORSOn the basis of nature:ERRORS OF OMISSION [Total/Partial]ERRORS OF COMISSION [Amount/Account]ERRORS OF PRINCIPLE [Nature of expenditure]ERRORS OF MISPOSTING [Ledger]COMPENSATING ERRORS [Set off]On the basis of effects:One sided errorMore than one sided error [Two sided error]4
5. SINGLE-SIDED ERRORSAll errors are not identified by the trail balance. Errors which are identified at the time of tallying the trial balance are SINGLE-SIDED ERRORS.These errors affect only one side of the accounts[either debit side or credit side] ORBoth the debit and credit aspects of the accounts by different amounts.5
6. SINGLE-SIDED ERRORSThese can be –Errors of partial omission ORErrors of Commission:Errors of CastingErrors of Carry-forwardErrors of posting to wrong accountErrors of posting on wrong side of correct accountErrors in balancing an account6
7. DOUBLE SIDED ERRORSErrors which do not get identified by the trial balance usually affect both the debit as well as the credit aspects of the accounts by the same amount. So they are also referred to as DOUBLE SIDED ERRORS.Such an error can be rectified only by a rectification entry.7
8. DOUBLE SIDED ERRORSThese can be –Errors of total omission:Complete omission of recordingComplete omission of postingErrors of Commission:Recording transaction in wrong book of accountsIncorrectly recording transaction in correct book of accounts 8
9. DOUBLE SIDED ERRORSErrors of principleErrors of mispostingCompensating errors9
10. Rectification of ErrorsThe type of rectification entry to be passed depends on the stage at which error has been detected.The stages of error detection are –Before the preparation of Trial BalanceAfter the preparation of Trial Balance but before Final AccountsAfter the preparation of Final Accounts10
11. Before the preparation of Trial BalanceAt this stage, the ledger accounts are not yet closed for the accounting period. So rectification at this stage is done by passing a Rectification Statement for any single sided error.For rectifying a double sided error a rectification entry may be passed involving personal, real or nominal accounts.11
12. After the preparation of Trial Balance but before Final AccountsAt this stage, the ledger accounts are already closed for the accounting period. So while preparing trial balance if any error is detected, repetitive checking is done to identify the cause of such error.If the error cannot be identified even after such checking but the preparation of final accounts cannot be delayed further, the trial balance is tallied on a temporary basis with the help of Suspense Account.12
13. Suspense AccountExistence of Suspense Account indicates the presence of some error in the books of accounts.Suspense Account arises when:Trial balance cannot be tallied Accountant is not sure of the accounting treatment of any particular transaction.Suspense A/c is a temporary measure which has to be disposed by identifying and rectifying the error. 13
14. After the preparation of Trial Balance but before Final Accounts- RectificationRectification of any error is done by passing a Rectification Entry.Rectification of single sided errors are done by passing rectification entries involving Suspense A/c.Rectification of double sided errors are done by passing rectification entries without involving Suspense A/c. 14
15. After the preparation of Final AccountsAt this stage, Final Accounts have been prepared. So all nominal accounts have been closed with a closing entry.Rectification of any Nominal Account is therefore done by replacing such nominal account with Profit & Loss Adjustment Account.Rectification of single sided errors are done by passing rectification entries involving Suspense A/c.Rectification of double sided errors are done by passing rectification entries without involving Suspense A/c.15
16. Profit & Loss Adjustment AccountIt is a special account that replaces nominal accounts if errors are rectified after preparation of Final Accounts.It is called so because adjustments of the nominal accounts results in the adjustment of profit/loss of the preceding period. The net balance of the P/L Adjustment A/c helps to know the correct profit/loss for the accounting period.16
17. Effect on profit or lossWhen any nominal account is debited in rectification entry- Profit decreases or loss increasesWhen any nominal account is credited in rectification entry- Profit increases or loss decreases17
18. EXAMPLES: Before Preparing The Trial Balance18 The following errors were committed by the Book-keeper. Rectify the errors assuming that they were detected before preparing the Trial Balance: Rs. 50000 paid for construction of new room was charged to office expense account. Building A/c ….Dr. 50000 To Office Expense A/c 50000
19. Credit sale to Ram 5400 was posted to his account.19 Ram Account will be debited to 5400 Purchase from Amir 6500 was entered in the Purchase Day Book as 5600. Purchase A/c ….Dr. 900 To Amir A/c 900
20. Sales day book was overcast by 820020 Sales account will be debited by 8200 Wages paid for installation of a machine for 56000 wrongly debited to wages account. Machinery account …Dr. 56000 To wages account 56000
21. Commission payable to John 400 was wrongly recorded as Commission Receivable from him21 Commission Receivable A/c …Dr. 400 Commission Payable A/c … Dr. 400 To John A/c 800 A purchase of 8000 from Lama was passed through the Sales Day Book Purchase A/c ..Dr. 8000 Sales A/c .. Dr. 8000 To Lama A/c 16000
22. Return Inward Book was cast short by 450022Return Inward Account will be debited by 4500Goods returned by Shyam 9300 was posted to hisaccount from the Return Inward Book as 3900.Shyam account will be debited by 5400
23. EXAMPLES: After Preparing The Trial Balance23 Purchase stationery 4500 was recorded as purchase of machinery Stationery A/c..Dr. 4500 To Machinery A/c 4500 Cash paid to Bose 30100 was posted in his account as 10300 Bose A/c… Dr. 19800 To Suspense A/c 19800
24. A purchase of 67100 had been posted to the debit of supplier as 6170024Suspense A/c …Dr. 128800 (67100+61700)To Creditor A/c 128800A cash sale of 7300 to Rupam correctly entered inthe cash book, was posted to the debit of Rupam’spersonal account in the ledger.Suspense A/c …Dr. 14600To Sales A/c 7300To Rupam A/c 7300
25. Purchase Day Book was overcast by 5230025Suspense A/c …Dr. 52300To Purchase A/c 52300The purchase day book total 69600 had been posted as 66900Purchase A/c …Dr. 2700To Suspense A/c 2700
26. An item of purchase of 15100 was entered in the inward invoice book as 1500 and posted to the supplier’s account as 510026Purchase A/c …Dr. 13600 [15100-1500]To Creditor A/c 10000 [15100 – 5100]To Suspense A/c 3600Bills receivable from X of 100000 was posted tothe credit of bills payable account and also creditedto the account of XBills Receivable A/c…Dr. 100000Bills Payable A/c…. Dr. 100000To Suspense A/c 200000
27. EXAMPLES: After Preparing The Final Accounts27Purchase stationery 4500 was recorded aspurchase of machineryProfit & Loss Adjustment A/c..Dr. 4500 To Machinery A/c 4500Cash paid to Bose 30100 was posted in his accountas 10300Bose A/c… Dr. 19800To Suspense A/c 19800
28. A purchase of 67100 had been posted to the debit of supplier as 6170028Suspense A/c …Dr. 128800 (67100+61700)To Creditor A/c 128800A cash sale of 7300 to Rupam correctly entered inthe cash book, was posted to the debit of Rupam’spersonal account in the ledger.Suspense A/c …Dr. 14600To Profit & loss Adjustment A/c 7300To Rupam A/c 7300
29. Purchase Day Book was overcast by 5230029Suspense A/c …Dr. 52300To Profit & Loss Adjustment A/c 52300The purchase day book total 69600 had beenposted as 66900Profit & Loss Adjustment A/c …Dr. 2700To Suspense A/c 2700
30. An item of purchase of 15100 was entered in the inward invoice book as 1500 and posted to the supplier’s account as 510030Profit & Loss Adjustment A/c …Dr. 13600 [15100-1500]To Creditor A/c 10000 [15100 – 5100]To Suspense A/c 3600Bills receivable from X of 100000 was posted tothe credit of bills payable account and also creditedto the account of XBills Receivable A/c…Dr. 100000Bills Payable A/c…. Dr. 100000To Suspense A/c 200000
31. 31 Discount of 500 allowed to a debtor has been treated as discount received. The debtor’s account has been correctly credited. Profit & Loss Adjustment A/c ..Dr. 1000 [ 500 X 2] To Suspense A/c 1000
32. 32THANK YOU