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Rectification of errors
Accounting errors can occur unintentionally when recording transactions or preparing financial statements. There are two types of accounting errors: errors not affecting the trial balance, and errors affecting the trial balance. Errors not affecting the trial balance include errors of commission, principle, original entry, omission, and compensating errors. Errors affecting the trial balance result in an unbalanced trial balance, requiring the use of a suspense account to balance. Correcting entries must be made to clear the suspense account and properly reflect transactions in individual accounts. Corrections may also require adjustments to the income statement and balance sheet to accurately report profit and account balances.
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Rectification of errors
- 1. Rectification Of ErrorsSubmitted to:-Submitted by:- Chandan Gupta Group No :- 8 Abhinandan Singh Jasleen Kaur Naman Goyal Zuweriya Rao 18-Oct-2016 MBA, 1st Year
- 2. What is AccountingErrors ? • Accounting Errors are unintentional mistakes that occur in the process of accounting at the time of recording the transaction in journal or at the time of posting them in the ledger.
- 3. Errors • Errors notaffecting “trial balance” • Errors affecting “trial balance”
- 4. Errors not affectingtrial balance • Errors of commission • Errors of principle • Errors of original entry • Errors of omission • Compensating errors • Complete reversal of entries
- 5. Errors affecting trialbalance • Suspense account
- 6. Correcting entry 1. Asset 2.Purchases 3. Expenses 4. Returns Inwards 5. Drawings Increase – Debit Decrease - Credit Examples of account
- 7. Correcting entry 1. Liabilities/Capital 2.Sales 3. Income 4. Returns Outwards Increase – Credit Decrease – Debit Examples of account
- 8. Errors Not AffectingTrial Balance
- 9. Errors of Commission •The correct amount is entered but in a wrong personal account
- 10. Example • A purchaseof goods from Salman has been posted to the credit side of Subin’s account in error, amounting to Rs. 500. The correcting entries should be: Original entry: Wrong entry: Purchase A/c Dr 500 To Salman’s A/c 500 Purchase A/c Dr 500 To Subin’s A/c 500
- 11. Subin’s A/c Dr500 To Salman’s 500 Purchases entered in wrong personal account, now corrected. Journal Entry
- 12. To Salman 500 Subin ByPurchases 500 Salman By Subin 500
- 13. Errors of Principle •An item is entered in the wrong type of account due to misunderstanding of the nature of the item.
- 14. Example • Office equipmentpurchased for Rs. 1,000 in cash has been debited to an office expenses account. The correcting entries should be: Original entry: Wrong entry: Office Equipment A/c Dr 1,000 To Cash 1,0 Office Expenses A/c Dr 1,000 To Cash 1,0
- 15. Office Equipment A/cDr 1,000 To Office Expenses 1,000 Purchase of office equipment wrongly entered in the office expenses account, now corrected. Journal Entry
- 16. To Cash 1,000 OfficeExpenses By Office Equipment 1,000 Office Equipment To Office Expenses 1,000
- 17. Errors of OriginalEntry • Wrong original figure is entered in the journals, and hence posted incorrectly to the accounts.
- 18. Example • A paymentof Rs. 1,200 to a creditor, Mehir, has been entered as both a debit and credit as Rs. 1,000. The correcting entries should be: Original entry: Wrong entry: Mehir’s A/c Dr 1,200 To Bank A/c 1,200 Mehir’s A/c Dr 1,000 To Bank A/c 1,000
- 19. Mehir’s A/c (1,200-1,000)Dr 200 To Bank A/c 200 Payment of Rs.1,200 incorrectly entered as Rs.1,000, now corrected. Journal Entry
- 20. Mehir By Bank 1,000 ByBank 200 Bank To Mehir 1,000 To Mehir 200
- 21. Errors of Omission •A transaction has been completely omitted from the accounts.
- 22. Example • A saleof Rs. 4,000 to Prashanjeet has been completely omitted from the accounts. The correcting entries should be: Original entry: Wrong entry: Prashanjeet’s A/c Dr. 4,000 To Sales 4,000 No entry
- 23. Prashanjeet’s A/c Dr.4,000 To Sales A/c 4,000 A sale of Rs. 4,000 was omitted, now corrected. Journal Entry
- 24. Sales By Prashanjeet 4,000 Prashanjeet ToSales 4,000
- 25. Compensating Errors • Debitside errors are equal to credit side errors.
- 26. Example • The purchasesaccount was undercast by Rs. 20,000, and the sales account was also undercast by Rs. 20,000. The correcting entries should be:
- 27. Purchases A/c Dr.20,000 To Sales A/c 20,000 Purchases and sales accounts were undercast by Rs. 20,000, now corrected. Journal Entry
- 28. Purchases To Sales 20,000 Sales ByPurchases 20,000
- 29. Complete Reversal ofEntries • The correct amounts are entered in the wrong sides of the two appropriate accounts.
- 30. Example • The purchaseof goods on credit from Mr. Amjad for Rs. 6,000 was entered on the debit side of Mr. Amjad’s account and the credit side of the purchases account. The correcting entries should be: Original entry: Wrong entry: Purchase A/c Dr 6,000 To Mr. Amjad’s A/c 6,000 Mr. Amjad’s A/c Dr 6,000 To Purchase A/c 6,000
- 31. Purchases A/c Dr.12,000 To Mr. Amjad’s A/c (6000*2) 12,000 Purchases from Mr. Amjad incorrectly debited to his account and credited to the purchases account, now corrected. Journal Entry
- 32. To Mr. Amjad12,000 Purchases By Mr. Amjad 6,000 To Purchases 6,000 Mr. Amjad By Purchases 1,2000
- 33. Errors Affecting TrialBalance
- 34. Errors affecting trialbalance may occur when • (i) recording transactions in the accounts: – (1) omitting a debit or credit entry – (2) posting a wrong amount to one of the accounts – (3) recording an entry on the wrong side • E.g. a debit entry entered as a credit or a credit entry as a debit
- 35. • (ii) Balancingof accounts: Incorrect calculation of a balance – E.g. overcast or undercast (iii) Drawing up a trial balance: (1) omitting a balance from the trial balance (2) incorrectly posting an amount to the trial balance (3) incorrectly posting a balance to the wrong side of the trial balance
- 36. Suspense Account • Whenthe trial balance does not agree, the amount of the difference is entered in a suspense account.
- 37. Total balances extracted9,000 10,000 Suspense account 1,000 10,000 10,000 Trial Balance as on 31 March 2015
- 38. Suspense Account Mar 31Difference as per trial balance 1,000 2015
- 39. How To Showa Suspense Account on the Balance Sheet
- 40. Debit Balance ofthe Suspense Account
- 41. T form Fixed AssetsX Current Assets X Suspense Account X X Balance Sheet
- 42. Credit Balance ofthe Suspense Account
- 43. T form Capital X Long-termLiabilities X Current Liabilities X Suspense Account X X Balance Sheet
- 44. Correction of Errors •To correct the errors, we should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.
- 45. Example Original entry: Wrong entry: Mr.Subham’ A/c Dr 1,500 To Sales A/c 1,500 ----------- Dr To Sales 1,50 A credit sale of Rs.1,500 to Mr. Subham has been omitted from his account. Correct entry:Mr. Subham’ A/c Dr. 1,500 To Suspense A/c 1,5
- 46. Example Original entry: Wrong entry: Rahul’sA/c Dr. 2,300 To Sales A/c 2,300 Rahul’s A/c Dr. 3,200 To Sales A/c 2,300 Correct entry:Suspense A/c Dr. 900 To Rahul’s 900 A sale to Rahul for Rs. 2,300 was correctly entered in the sales book but entered in Rahul’s account as Rs. 3,200.
- 47. Original entry: Wrong entry: Roopendra’sA/c Dr. 9,700 To Sales 9,700 To Roopendra’s A/c 9,700 To Sales A/c 9,700 Correct entry: Roopendra’s A/c Dr. 19,400 To Suspense A/c 19,400 Example A credit sale of Rs. 9,700 has been credited to Roopendra’s account.
- 48. Correct entry:Sales A/cDr. 2,000 To Suspense A/c 2,000 Sales day book was overcast by Rs. 2,000. Example
- 49. Correct entry:Suspense A/cDr. 4,000 To Sales A/c 4,000 Sales day book was undercast by Rs.4,000. Example
- 50. Correction of Errorsand Effects on the Profit and Balance Sheet • For errors affecting the final accounts (I.e. profit calculation and balances carried down) • Corrections are also required for the profit/loss and balances in the balance sheet.
- 51. Trading account: Sales -Cost of good sold = Gross Profit Sales - (Opening stock + Purchases – Closing stock) = Gross Profit Sales - Opening stock - Purchases + Closing stock = Gross Profit
- 52. 1st order Sale increase Cr.Sales Increase in Net Profit Opening stock increase Dr. Stock Decrease in Net Profit Purchases increase Dr. Purchases Increase in Net Profit Closing stock increase Dr. Stock Increase in Net Profit 2nd order 3rd order
- 53. Profit and lossaccount: Gross Profit + Income (e.g. Rent received) – Expenses (e.g. Motor expenses) = Net Profit 1st order Income increase Cr. Income Increase in Net Profit Expenses Increase Dr. Expenses Decrease in Net Profit 2nd order 3rd order
- 54. Example of errorsAction required on the profit Action required on the balance sheet Purchases undercast Subtract - Purchases overcast Add - Sales undercast Add - Sales overcast Subtract - Income undercast Add - Income overcast Subtract - Expenses undercast Subtract - Expenses overcast Add -
- 55. Example of errorsAction required on the profit Action required on the balance sheet Opening stock undervalued Subtract - Opening stock overvalued Add - Closing stock undervalued Add Increase closing stock Closing stock overvalued Subtract Decrease closing stock
- 56. Example of errorsAction required on the profit Action required on the balance sheet Prepayments of expenses omitted Add Increase prepayments (current assets) Accruals of expenses omitted Subtract Increase accruals (current liabilities) Fixed/current assets undervalued - Increase fixed/ current asset Liabilities understated - Increase liabilities
- 57.