NETAJI NAGAR COLLEGE B.COM 1st Year, 2018 DR. BISWAJIT BHADRA

Rectification of Errors

ERRORS- THE CONCEPT Errors 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.

TYPES OF ERRORS On 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 error More than one sided error [Two sided error]

SINGLE-SIDED ERRORS All 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] OR Both the debit and credit aspects of the accounts by different amounts.

SINGLE-SIDED ERRORS These can be – Errors of partial omission OR Errors of Commission: Errors of Casting Errors of Carry-forward Errors of posting to wrong account Errors of posting on wrong side of correct account Errors in balancing an account

DOUBLE SIDED ERRORS Errors 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.

DOUBLE SIDED ERRORS These can be – Errors of total omission: Complete omission of recording Complete omission of posting Errors of Commission: Recording transaction in wrong book of accounts Incorrectly recording transaction in correct book of accounts

DOUBLE SIDED ERRORS Errors of principle Errors of misposting Compensating errors

Rectification of Errors The 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 Balance After the preparation of Trial Balance but before Final Accounts After the preparation of Final Accounts

Before the preparation of Trial Balance At 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.

After the preparation of Trial Balance but before Final Accounts At 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.

Suspense Account Existence 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.

After the preparation of Trial Balance but before Final Accounts- Rectification Rectification 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.

After the preparation of Final Accounts At 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.

Profit & Loss Adjustment Account It 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.

Effect on profit or loss When any nominal account is debited in rectification entry- Profit decreases or loss increases When any nominal account is credited in rectification entry- Profit increases or loss decreases

EXAMPLES: Before Preparing The Trial Balance 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

Credit sale to Ram 5400 was posted to his account. 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

Sales day book was overcast by 8200 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

Commission payable to John 400 was wrongly recorded as Commission Receivable from him 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

Return Inward Book was cast short by 4500 Return Inward Account will be debited by 4500 Goods returned by Shyam 9300 was posted to his account from the Return Inward Book as 3900. Shyam account will be debited by 5400

EXAMPLES: After Preparing The Trial Balance 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

A purchase of 67100 had been posted to the debit of supplier as 61700 Suspense A/c …Dr. 128800 (67100+61700) To Creditor A/c 128800 A cash sale of 7300 to Rupam correctly entered in the cash book, was posted to the debit of Rupam’s personal account in the ledger. Suspense A/c …Dr. 14600 To Sales A/c 7300 To Rupam A/c 7300

Purchase Day Book was overcast by 52300 Suspense A/c …Dr. 52300 To Purchase A/c 52300 The purchase day book total 69600 had been posted as 66900 Purchase A/c …Dr. 2700 To Suspense A/c 2700

An item of purchase of 15100 was entered in the inward invoice book as 1500 and posted to the supplier’s account as 5100 Purchase A/c …Dr. 13600 [15100-1500] To Creditor A/c 10000 [15100 – 5100] To Suspense A/c 3600 Bills receivable from X of 100000 was posted to the credit of bills payable account and also credited to the account of X Bills Receivable A/c…Dr. 100000 Bills Payable A/c…. Dr. 100000 To Suspense A/c 200000

EXAMPLES: After Preparing The Final Accounts Purchase stationery 4500 was recorded as purchase of machinery Profit & Loss Adjustment 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

A purchase of 67100 had been posted to the debit of supplier as 61700 Suspense A/c …Dr. 128800 (67100+61700) To Creditor A/c 128800 A cash sale of 7300 to Rupam correctly entered in the cash book, was posted to the debit of Rupam’s personal account in the ledger. Suspense A/c …Dr. 14600 To Profit & loss Adjustment A/c 7300 To Rupam A/c 7300

Purchase Day Book was overcast by 52300 Suspense A/c …Dr. 52300 To Profit & Loss Adjustment A/c 52300 The purchase day book total 69600 had been posted as 66900 Profit & Loss Adjustment A/c …Dr. 2700 To Suspense A/c 2700

Bills receivable from X of 100000 was posted to An item of purchase of 15100 was entered in the inward invoice book as 1500 and posted to the supplier’s account as 5100 Profit & Loss Adjustment A/c …Dr. 13600 [15100-1500] To Creditor A/c 10000 [15100 – 5100] To Suspense A/c 3600 Bills receivable from X of 100000 was posted to the credit of bills payable account and also credited to the account of X Bills Receivable A/c…Dr. 100000 Bills Payable A/c…. Dr. 100000 To Suspense A/c 200000

Profit & Loss Adjustment A/c ..Dr. 1000 [ 500 X 2] 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

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