Rectification Of Errors

Submitted to:- Submitted by:-Chandan Gupta Group No :- 8

Abhinandan SinghJasleen KaurNaman GoyalZuweriya Rao

18-Oct-2016 MBA, 1st Year

What is Accounting Errors ?

• 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.

Errors

• Errors not affecting “trial balance”• Errors affecting “trial balance”

Errors not affecting trial balance

• Errors of commission• Errors of principle• Errors of original entry• Errors of omission• Compensating errors• Complete reversal of entries

Errors affecting trial balance

• Suspense account

Correcting entry

1. Asset2. Purchases3. Expenses4. Returns Inwards5. Drawings

Increase – DebitDecrease - Credit

Examples of account

Correcting entry

1. Liabilities/Capital2. Sales3. Income4. Returns Outwards

Increase – CreditDecrease – Debit

Examples of account

Errors Not Affecting Trial Balance

Errors of Commission

• The correct amount is entered but in a wrong personal account

Example

• A purchase of 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

Subin’s A/c Dr 500

To Salman’s 500

Purchases entered in wrong personal account, now corrected.

Journal Entry

To Salman 500

Subin

By Purchases 500

Salman

By Subin 500

Errors of Principle

• An item is entered in the wrong type of account due to misunderstanding of the nature of the item.

Example

• Office equipment purchased 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 1,000

Office Expenses A/c Dr 1,000 To Cash 1,000

Office Equipment A/c Dr 1,000

To Office Expenses 1,000

Purchase of office equipment wrongly entered in the office expenses account, now corrected.

Journal Entry

To Cash 1,000

Office Expenses

By Office Equipment 1,000

Office Equipment

To Office Expenses 1,000

Errors of Original Entry

• Wrong original figure is entered in the journals, and hence posted incorrectly to the accounts.

Example

• A payment of 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

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

Mehir

By Bank 1,000By Bank 200

Bank

To Mehir 1,000To Mehir 200

Errors of Omission

• A transaction has been completely omitted from the accounts.

Example

• A sale of 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

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

Sales

By Prashanjeet 4,000

Prashanjeet

To Sales 4,000

Compensating Errors

• Debit side errors are equal to credit side errors.

Example

• The purchases account was undercast by Rs. 20,000, and the sales account was also undercast by Rs. 20,000. The correcting entries should be:

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

Purchases

To Sales 20,000

Sales

By Purchases 20,000

Complete Reversal of Entries

• The correct amounts are entered in the wrong sides of the two appropriate accounts.

Example

• The purchase of 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

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

To Mr. Amjad 12,000

Purchases

By Mr. Amjad 6,000

To Purchases 6,000

Mr. Amjad

By Purchases 1,2000

Errors Affecting Trial Balance

Errors affecting trial balance 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

• (ii) Balancing of 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

Suspense Account

• When the trial balance does not agree, the amount of the difference is entered in a suspense account.

Total balances extracted 9,000 10,000

Suspense account 1,000

10,000 10,000

Trial Balance as on 31 March 2015

Suspense Account

Mar 31 Difference as per trial

balance 1,000

2015

How To Show a Suspense Account on the Balance Sheet

Debit Balance of the Suspense Account

T form

Fixed Assets X

Current Assets X

Suspense Account X

X

Balance Sheet

Credit Balance of the Suspense Account

T form

Capital X

Long-term Liabilities X

Current Liabilities X

Suspense Account X

X

Balance Sheet

Correction of Errors

• To correct the errors, we should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.

Example

Original entry:

Wrong entry:

Mr. Subham’ A/c Dr 1,500 To Sales A/c 1,500

----------- Dr To Sales 1,500

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 1,500

Example

Original entry:

Wrong entry:

Rahul’s A/c Dr. 2,300To Sales A/c 2,300

Rahul’s A/c Dr. 3,200To Sales A/c 2,300

Correct entry:Suspense A/c Dr. 900To 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.

Original entry:

Wrong entry:

Roopendra’s A/c Dr. 9,700To Sales 9,700

To Roopendra’s A/c 9,700To Sales A/c 9,700

Correct entry: Roopendra’s A/c Dr. 19,400 To Suspense A/c 19,400

ExampleA credit sale of Rs. 9,700 has been credited to Roopendra’s account.

Correct entry:Sales A/c Dr. 2,000 To Suspense A/c 2,000

Sales day book was overcast by Rs. 2,000.

Example

Correct entry:Suspense A/c Dr. 4,000 To Sales A/c 4,000

Sales day book was undercast by Rs.4,000.

Example

Correction of Errors and 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.

Trading account:

Sales - Cost of good sold = Gross Profit

Sales - (Opening stock + Purchases – Closing stock) = Gross ProfitSales - Opening stock - Purchases + Closing stock = Gross Profit

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

Profit and loss account: Gross Profit + Income (e.g. Rent received) – Expenses (e.g. Motor expenses) = Net Profit

1st orderIncome increase

Cr. Income Increase in Net Profit

Expenses Increase

Dr. Expenses Decrease in Net Profit

2nd order 3rd order

Example of errors Action required on

the profit

Action required on the balance

sheetPurchases undercast Subtract -

Purchases overcast Add -

Sales undercast Add -

Sales overcast Subtract -

Income undercast Add -

Income overcast Subtract -

Expenses undercast Subtract -

Expenses overcast Add -

Example of errors Action required on

the profit

Action required on the balance

sheetOpening stock undervalued

Subtract -

Opening stock overvalued

Add -

Closing stock undervalued

Add Increase closing stock

Closing stock overvalued

Subtract Decrease closing stock

Example of errors Action required on

the profit

Action required on the balance

sheetPrepayments of

expenses omittedAdd Increase

prepayments (current assets)

Accruals of expenses omitted

Subtract Increase accruals (current

liabilities)Fixed/current assets

undervalued- Increase fixed/

current assetLiabilities understated - Increase

liabilities

THANKYOU

For Listening