Rectification of errors

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Transcript of Rectification of errors

  • Rectification Of ErrorsSubmitted to:-Submitted by:-Chandan GuptaGroup No :- 8Abhinandan SinghJasleen KaurNaman GoyalZuweriya Rao18-Oct-2016MBA, 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.

  • ErrorsErrors not affecting trial balanceErrors affecting trial balance

  • Errors not affecting trial balance

    Errors of commissionErrors of principleErrors of original entryErrors of omissionCompensating errorsComplete reversal of entries

  • Errors affecting trial balanceSuspense account

  • Examples of account

    Correcting entryAssetPurchasesExpensesReturns InwardsDrawingsIncrease DebitDecrease - Credit

  • Examples of account

    Correcting entryLiabilities/CapitalSalesIncomeReturns OutwardsIncrease CreditDecrease Debit

  • Errors Not Affecting Trial Balance

  • Errors of CommissionThe correct amount is entered but in a wrong personal account

  • ExampleA purchase of goods from Salman has been posted to the credit side of Subins account in error, amounting to Rs. 500. The correcting entries should be:

    Original entry:Wrong entry:Purchase A/c Dr 500 To Salmans A/c 500Purchase A/cDr 500 To Subins A/c 500

  • Subins A/cDr 500 To Salmans 500Purchases entered in wrong personal account, now corrected. Journal Entry

  • To Salman 500SubinBy Purchases 500SalmanBy Subin 500

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

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

  • Office Equipment A/c Dr 1,000 To Office Expenses 1,000Purchase of office equipment wrongly entered in the office expenses account, now corrected.Journal Entry

  • To Cash 1,000Office ExpensesBy Office Equipment 1,000Office EquipmentTo Office Expenses 1,000

  • Errors of Original EntryWrong original figure is entered in the journals, and hence posted incorrectly to the accounts.

  • ExampleA 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:Mehirs A/c Dr 1,200 To Bank A/c 1,200Mehirs A/c Dr 1,000 To Bank A/c 1,000

  • Mehirs A/c (1,200-1,000) Dr 200 To Bank A/c 200Payment of Rs.1,200 incorrectly entered as Rs.1,000, now corrected.Journal Entry

  • MehirBy Bank 1,000By Bank 200BankTo Mehir 1,000To Mehir 200

  • Errors of OmissionA transaction has been completely omitted from the accounts.

  • ExampleA sale of Rs. 4,000 to Prashanjeet has been completely omitted from the accounts. The correcting entries should be:

    Original entry:Wrong entry:Prashanjeets A/c Dr. 4,000 To Sales 4,000No entry

  • Prashanjeets A/c Dr. 4,000 To Sales A/c 4,000A sale of Rs. 4,000 was omitted, now corrected.Journal Entry

  • SalesBy Prashanjeet 4,000Prashanjeet To Sales 4,000

  • Compensating ErrorsDebit side errors are equal to credit side errors.

  • ExampleThe 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 20,000Purchases and sales accounts were undercast by Rs. 20,000, now corrected.Journal Entry

  • PurchasesTo Sales 20,000SalesBy Purchases 20,000

    *

  • Complete Reversal of EntriesThe correct amounts are entered in the wrong sides of the two appropriate accounts.

  • ExampleThe purchase of goods on credit from Mr. Amjad for Rs. 6,000 was entered on the debit side of Mr. Amjads 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. Amjads A/c 6,000Mr. Amjads A/cDr 6,000 To Purchase A/c 6,000

  • Purchases A/c Dr. 12,000 To Mr. Amjads A/c (6000*2) 12,000Purchases from Mr. Amjad incorrectly debited to his account and credited to the purchases account, now corrected.Journal Entry

  • To Mr. Amjad 12,000PurchasesBy Mr. Amjad 6,000To Purchases 6,000Mr. AmjadBy 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 sideE.g. a debit entry entered as a credit or a credit entry as a debit

  • (ii) Balancing of accounts:

    Incorrect calculation of a balanceE.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 AccountWhen the trial balance does not agree, the amount of the difference is entered in a suspense account.

  • Total balances extracted 9,000 10,000Suspense account 1,000 10,000 10,000Trial Balance as on 31 March 2015

  • Suspense AccountMar 31 Difference as per trial balance 1,0002015

  • How To Show a Suspense Account on the Balance Sheet

  • Debit Balance of the Suspense Account

  • T formFixed Assets XCurrent Assets XSuspense Account X XBalance Sheet

  • Credit Balance of the Suspense Account

  • T formCapital XLong-term Liabilities XCurrent Liabilities XSuspense Account X XBalance Sheet

  • Correction of ErrorsTo 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 Dr1,500 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

  • ExampleOriginal entry:Wrong entry:Rahuls A/c Dr.2,300To Sales A/c 2,300Rahuls A/c Dr. 3,200To Sales A/c 2,300

    Correct entry:Suspense A/c Dr. 900To Rahuls 900A sale to Rahul for Rs. 2,300 was correctly entered in the sales book but entered in Rahuls account as Rs. 3,200.

  • Original entry:Wrong entry:Roopendras A/c Dr. 9,700To Sales 9,700To Roopendras A/c 9,700To Sales A/c 9,700

    Correct entry: Roopendras A/c Dr.19,400 To Suspense A/c 19,400

    ExampleA credit sale of Rs. 9,700 has been credited to Roopendras 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 SheetFor 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 ProfitSales - (Opening stock + Purchases Closing stock) = Gross ProfitSales - Opening stock - Purchases + Closing stock = Gross Profit

  • 1st order2nd order3rd order

    Sale increaseCr. SalesIncrease in Net ProfitOpening stock increaseDr. StockDecrease in Net ProfitPurchases increaseDr. PurchasesIncrease in Net ProfitClosing stock increaseDr. StockIncrease in Net Profit

  • Profit and loss account: Gross Profit + Income (e.g. Rent received) Expenses (e.g. Motor expenses) = Net Profit1st order2nd order3rd order

    Income increaseCr. IncomeIncrease in Net ProfitExpenses IncreaseDr. ExpensesDecrease in Net Profit

  • Example of errorsAction required on the profitAction required on the balance sheetPurchases undercastSubtract-Purchases overcastAdd-Sales undercastAdd-Sales overcastSubtract-Income undercastAdd-Income overcastSubtract-Expenses un