Rectification of Error

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Transcript of Rectification of Error

Slide 1

Chapter 9

Rectification of ErrorsSlide 1/33www.afzalur.com

Rectification of Errors CHAPTER AT A GLANCE (Chapter 9)9.01 Types of Errors9.01.01 Errors Disclosed by the Trial Balance9.01.02 Errors not Disclosed by the Trial Balance9.01.03 Steps of Locating Errors9.02 Rectification of Errors9.03 Suspense AccountSlide 2/33www.afzalur.com

Rectification of Errors 9.01 TYPES OF ERRORSErrors may be divided into two categories Errors disclosed by the Trial Balance and Errors not disclosed by the Trial Balance.Slide 3/33www.afzalur.com

Rectification of Errors 9.01 TYPES OF ERRORS9.01.01 ERRORS DISCLOSED BY THE TRIAL BALANCE Where one aspect of the Journal entry is posted in the Ledger. Where both the aspects of Journal entry are posted to one side of an account. Wrong totalling of subsidiary books. Posting the correct amount in one account and wrong amount in the other account. Wrong totalling or balancing of a Ledger account.Slide 4/33www.afzalur.com

Rectification of Errors 9.01 TYPES OF ERRORS9.01.01 ERRORS DISCLOSED BY THE TRIAL BALANCE Omitting to post the totals of subsidiary books into the Ledger. Omitting to write the Cash Book balances in the Trial Balance. Omitting to write the balance of an account in the Trial Balance. Writing a balance in the wrong column of the Trial Balance. Totalling the Trial Balance wrongly.

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Rectification of Errors 9.01 TYPES OF ERRORSERRORS NOT DISCLOSED BY THE TRIAL BALANCE Errors of Principle, Compensating Errors Errors of complete omission. Posting the correct amount on the correct side but in the wrong account. Recording wrong amount in the books of original entry (but the recorded amount is debited and credited). Recording both aspects of a transaction twice in the books of accounts.Slide 6/33www.afzalur.com

Rectification of Errors 9.01 TYPES OF ERRORSBroad Classification of Errors Error of Principal Error of Omission Error of Commission Compensating ErrorSlide 7/33www.afzalur.com

Rectification of Errors

Error of Principal When a transaction is recorded in contravention of accounting principles, it is known as an Error of Principle. Such errors do not affect the Trial Balance as amounts are placed on the correct side but in a wrong account. An example of such an error is treating the purchase of an asset and/or other amounts spent such as freight, etc., on its acquisition as revenue expenditure instead of as a capital expenditure. Slide 8/33www.afzalur.com

Rectification of Errors

Errors of Omission A transaction, if completely or partially omitted from being recorded in the books of accounts, constitutes an Error of Omission. Error of Complete Omission arises if a transaction is not recorded in the books of accounts or a transaction recorded in the Journal is not posted in the Ledger. Such errors do not affect the Trial Balance. An example of such an error is not recording a purchase of furniture or not posting it into the LedgerSlide 9/33www.afzalur.com

Rectification of Errors

Error of Partial Omission is an error different from the error of complete omission. Such errors result in the Trial Balance not agreeing. Examples Credit sale recorded in the Sales Book but not posted into Party Account, or the total not being carried to the next page.

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Rectification of Errors

Errors of CommissionErrors of Commission are errors which arise due to wrong recording, wrong posting, wrong carrying forward, wrong casting of subsidiary books, wrong balancing, etc.Slide 11/33www.afzalur.com

Rectification of Errors

Errors of Commission may be classified as follows Error of Recording Error of Casting Error in Carrying Forward Error of Posting

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Rectification of Errors

Error of RecordingThis error arises when any transaction is incorrectly Recorded in the book of original entry.Example Goods of Rs.5,000 purchased on credit from Mohan are recorded in the purchases book as Rs.15,000.Slide 13/33www.afzalur.com

Rectification of Errors

(ii) Error of CastingThis error arises when a mistake is committed in totalling. ExamplePurchase Book is totalled as Rs.10,000 instead of Rs.1,00,000.

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Rectification of Errors

(iii) Error in Carrying ForwardThis error arises when a mistake is committed in Carrying Forward a total of one page to the next page.Example Total of Purchases Book is carried forward as Rs.10,000 instead of Rs.1,000.Slide 15/33www.afzalur.com

Rectification of Errors

(iv) Error of Posting This error arises when information recorded in the books of original entry are incorrectly entered in the Ledger.Examples: Posting the total of the Sales Book in the Purchases Account instead of the Sales Account. Posting the total of the Sales Book Rs.10,505 as Rs.10,500 in the Sales Account.Slide 16/33www.afzalur.com

Rectification of Errors

(iv) Error of Posting Some of these errors affect the Trial Balance while others do not. Examples of errors that affect the Trial Balance are Purchases Book being undercast by Rs.1,000 or the Sales Bookbeing overcast by Rs.1,000. Examples of errors that do not affect the Trial Balance are purchase being recorded as Rs.10,000, instead of Rs.1,000, purchase being recorded in the Sales Book

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Rectification of Errors

4. Compensating Errors Compensating errors are those errors the effect of which is nullified by another error of equal amount.Example Shyams Account was debited with Rs.100 instead of Rs.1,000 while Ram Prasads Account was debited with Rs.1,000 instead of Rs.100.

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Rectification of Errors 9.01.03Steps to Locate the ErrorsThe two columns of the Trial Balance should be totalled again. If in the place of a number of accounts, only one amount has been written in the Trial Balance, the list of such accounts should be checked and totalled again. For example, the list of sundry debtors.It should be seen that the cash and bank balances have also been written in the Trial Balance.The exact difference in the Trial Balance should be established. The Ledger should be perused; it is possible that a balance equal to the difference has been omitted from the Trial Balance. Slide 19/33www.afzalur.com

Rectification of Errors 9.01.03Steps to Locate the Errors4. The Ledger accounts should be balanced again.The casting of subsidiary books should be checked again, especially if the difference is Re. 1, Rs.10, Rs.100, Rs.1,000, etc.

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Rectification of Errors 9.01.03Steps to Locate the Errors6. If the difference is big, the balance in the various accounts should be compared with the corresponding accounts in the previous period. If the figures differ materially, the causes should be seen; it is possible that an error has been committed. ExampleThe sales account for the current year shows a balance of Rs.32,53,000 whereas it was Rs.36,45,000 last year; it is possible that there is an error in the Sales Account.Slide 21/33www.afzalur.com

Rectification of Errors 9.01.03Steps to Locate the ErrorsPosting of amounts equal to half the difference should be checked. It is possible that an amount has not been posted or has been posted on the wrong side.8. If there is still a difference in the Trial Balance, a complete checking will be necessary. The posting of all entries including the opening entry should be checked. It may be better to begin with the Nominal Accounts.Slide 22/33www.afzalur.com

Rectification of Errors 9.01.03Steps to Locate the Errors9. If it is not possible to locate the errors, the difference in the Trial Balance is temporarily transferred to a Suspense Account. Whenever any one-sided error is detected, it is subsequently rectified through the Suspense Account.

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Rectification of Errors 9.02 RECTIFICATION OF ERRORS Errors, whether affecting the Trial Balance or not must be detected and corrected. The procedure followed to rectify the errors committed and to set right accounting records is called Rectification of Errors.Slide 24/33www.afzalur.com

Rectification of Errors 9.02 RECTIFICATION OF ERRORSObjectives Preparing correct accounting records. Ascertaining correct net profit or loss for the accounting period by preparing the Profit and Loss Account with the correct figures. Exhibiting a true financial position of the concern on a particular date by preparing the Balance Sheet with the correct accounting data.Slide 25/33www.afzalur.com

Rectification of Errors 9.02 RECTIFICATION OF ERRORSRectification of errors depends upon the time of their detection and the types of errors. In the following way1. Rectification of Errors before the Preparation of Trial Balance(i) One-sided Errors (Errors affecting the Trial Balance)(ii) Two-sided Errors (Errors not affecting the Trial Balance)2. Rectification of Errors after Preparation of the Trial Balance but before the Preparation of Final Accounts(i) One-sided Errors (Errors affecting Trial Balance)(ii) Two-sided Errors (Errors not affecting Trial Balance)3. Rectification of Errors in the Next Accounting YearSlide 26/33www.afzalur.com

Rectification of Errors 9.03 SUSPENSE ACCOUNTSometimes, when the accountant is not in a position to locate the difference in the Trial Balance and has to close the books of accounts, he may then, put the Trial Balance difference to a newly opened account known as the Suspense Account. Slide 27/33ww