Rectification of Errors

y Financial Statements should show true and fair view of

affairs of the business.

y Book Keepers and accountants puts efforts but still

possibility of errors.
y Identifying and locating of such errors is essential as many

people use these statements.

y Identify/ Locate--- rectify

Meaning of Errors
y Un intentional commission or omission of amounts and

accounts in the process of recording the transactions .

y Omission Means: error occurs because of not doing some

thing or doing some thing incompletely.

y Commission: here error is committed because lack of

concentration I,e you supposed to one thing but you do something different

y What is rectification of Errors y Correcting the errors in the records by proper technique. y What is the objective of Rectification of Errors? y y

To prepare correct accounting records. To Prepare correct financial statement P& L and Balance Sheet

Types of Errors
y Errors of omission: a transaction that is not recorded

entered partially or not at all entered

y Errors of Principle: GAAP is not followed y Compensating Errors: Purchases Register total is more and Sales

Register Total is more by the same amount.

y Errors of Commission: ( not disclosed by Trial Balance) y

a transaction that is calculated incorrectly. One example of an error of commission is subtracting a figure that should have been added.

wrong posting, Posting on wrong side posting wrong amount

y Duplicating Error: y An error of duplication arises when the same transaction has

been recorded twice I the books of original entry, and hence posted two times in the ledger. y The trial balance does not reveal such errors. y Suspense Account: y An account which is opened when the trail l balance does not tally. The difference in the trial balance is transfered to suspense Account.

Examples of error of Commission

y Transaction not entered in Journal. y Wrong entry like wrong amount or wrong account. y Omission to post a transaction y Posting twice an entry.

Rectification of Errors

Errors affecting one account only

(affect agreement of Trial Balance)
i. ii. iii. iv.

Errors affecting two or more accounts

(do not affect agreement of Trial Balance) i. Errors of Posting to wrong account ii. Errors of omission iii. Errors of principle

Errors of Posting Errors of Casting Errors of Carry forward Errors of omission of balance of any account in the trail balance

When the errors can be discovered

y Before preparation of Trial Balance. y After T.B but before Final Accounts y After preparation T. B and Final Accounts

Methods of Rectification of Errors

y 1. By Striking off wrong figure and replacing it by a

correct one not suggested

Date Payments By Purchases A/c Rs 1015 1050

y 2. By Passing a Journal Entry:

It is followed where errors take place in two accounts. We can divide into

y 1. Errors which occurs simultaneously in two accounts causing a short

debit in one and excess debit in another or an excess credit in one and a short credit in another account
y Cash Sales

Rs 5000/Cash Account Dr 5000 To Hari Priyas A/c i. More credit to Hari Priya ii. Less Credit to Cash sales correction: Hari Priyas A/c ---------- Dr 500 To Cash Sales A/c

5000

5000

2. An error which occurs simultaneously in two accounts but on the

opposite sides causing a more or less debit in one and more or less credit in a the other account Purchases from Naresh Trading Co. Rs 501 Purchases A/c Dr 105 To Naresh Trading Co A/c 105 i. Less debit to Purchases A/c ii. Less credit to Naresh Trading Co A/c Correction: Purchases A/c ------- Dr 396 To Naresh Trading Co A/c 396 ( Being a credit purchase of Rs 501 written as 105 in the purchases book no w correct)

y 3. An error which occurs in two accounts due to omission of

recording the transaction in a subsidiary book .

y Purchase s Rs 500 from A omitted to be recorded.
y Pass an entry for correction:

y 3. Making further debit or credit entry in the account y

affected putting the difference in Suspense:

y Example: Depreciation Rs 1,000 is shown as 100 y In the depreciation a/c it will be shown as y To Wrong posting y of Rs 1,000 as 100 corrected

Rs 900

y If there is difference in the trial balance because of this

transaction y Depreciation A/c Dr y To Suspense A/c

900

y Rectification of Errors when there is no Suspense

Account:
y Rectification is made without journal entry. y This method is followed when as a result of the error the trial balance

disagree and the difference has not been transferred to Suspense Account.
y Example: Salary Paid Rs 20,000 is entered as Rs 2000in salaries Account:

y ------- Set right by debiting Rs 18,000 in salary account

Rectification of Errors when there is Suspense Account:

y when it is not possible to locate the error before preparing

the final accounts and preparation of the final account can not be delayed.
y The difference in trail balance is transferred to suspense

Account and carried forward to the next year. When errors are located the rectifying entries will be passed. y After rectification suspense account will be automatically closed.

Rectification after final accounts

y A Profit & Loss Adjustment Account is opened and

rectification are passed through the same. y Nominal accounts affected by the rectification of errors are not touched at all. y Balance of this account transferred to Capital Account.

y The following errors were committed by the Accountant of Geetha Dye Chemicals: a. b. c. d. e.

Cash Rs 350 paid to Triman Chemicals posted as Rs 530. Purchase of Stationery worth Rs 150 remained un posted from the cash book. Rs 2,60 paid for purchase of new office furniture was charged to office expenses account. Credit Sales to Trivedi & Co of Rs 300 was posted to the credit of their account. A purchase of Rs 420 from Maruti & Co , was passed through the Sales Day Book as Rs 240. How do you rectify these errors assuming that. They were detected before preparing the Trial Balance They were detected after preparing Trial Balance but before final accounts( difference being taken to Suspense Account) Detected after final accounts( narration to journal entries not required)

i. ii. iii.

y Rectify the following errors

y An amount of Rs 600 withdrawn by the proprietor has been debited y y y y

to salaries A/c Furniture purchased Rs 500 has been wrongly debited to purchases account. An amount of Rs 300 spent on repairs to machinery has been wrongly debited t Machinery A/c An amount of Rs 400 received on sale of old machinery has been credited to sales account. A Sum of of Rs 200 received from Rakesh has been credited Rajesh

y How will you rectify the following errors discovered before a. b. c. d.

e.

preparation of the Trial Balance. Rs 1,000 spent for repairs of buildings has been posted to building Account A sale of Rs 730 to Mohinder Singh has been entered in the Sales Book as Rs 370. Goods worth Rs 500 Purchased from Raju have been omitted to be recorded in the books. Rs 400 paid as salary to a clerk has been debited to his personal account. Rs 75 discount allowed by a creditor has been debited to discount

Account. f. The total of sales Book has been added Rs 100 too much g. Office furniture purchased fro Rs 1,800 has been passed through the Purchases Book.

y i) Errors detected before preparing the Trial Balance

Sr. No a b c d

Particulars Credit Triman Chemicals RS 180(530-350) Debit Stationery Account Rs 150 Office Furniture A/c Dr To Office Expenses Account Debit Trevedi & Cos Account 600 (300 for cancelling the wrong credit and Rs 300 for the proper debit) Dr To Maruti & Co Account ( For cancelling the wrong credit given to Sales Account) Purchases Account Dr To Maruti & Co Account ( For the correct entry) Sales Account

LF

Dr Rs Cr Rs

260 260

240 240 420 420

y ii) Errors detected after preparing the Trial Balance but before preparing the final

account. y JOURNA ENTREIS IN THE BOOKS OF GEETHA DYE CHEMICALS

Sr. No a b c d Particulars Suspense Account Dr. To Triman Chemicals A/c (530-350) Stationery Account Dr. To Suspense Account LF Dr Rs Cr Rs 180 180 150 150 260 260 300 300 240 240 420 420

Office Furniture A/c Dr To Office Expenses Account Trevedi & Cos Account Dr To Suspense A/c(300 for cancelling the wrong credit and Rs 300 for the proper debit) Dr To Maruti & Co Account ( For cancelling the wrong credit given to Sales Account) Purchases Account Dr To Maruti & Co Account ( For the correct entry) Sales Account

y y

ii) Errors detected after preparing the final accounts JOURNA ENTREIS IN THE BOOKS OF GEETHA DYE CHEMICALS

Sr. No a b c d

Particulars Suspense Account Dr. To Triman Chemicals A/c (530-350) Profit and Loss Adjustment Account Dr To Suspense Account Office Furniture A/c Dr To Profit and Loss Adjustment Account Trevedi & Cos Account Dr To Suspense A/c(300 for cancelling the wrong credit and Rs 300 for the proper debit) Profit and Loss Adjustment A/c Dr To Maruti & Co Account ( For cancelling the wrong credit given to Sales Account) Profit and Loss A/c To Maruti & Co Account ( For the correct entry) Dr

LF

Dr Rs Cr Rs 180 180 150 150 260 260 300 300 240 240 420 420

all nominal accounts are ignored and entries are made only for expenses & incomes not accounted and assets wrongly debited