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Accounting for Management

Amity Global Business School

Bangalore



Rectification of Errors

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Rectification of Errors

• Final Accounts are prepared from Trial Balance

• Accuracy of Final Accounts, therefore,

depends on accuracy of Trial Balance• However Trial Balance is a proof only of the

arithmetical accuracy of Ledger & Journal

•

A tallied Trial Balance need not necessarilyensure error less Final Accounts

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Classification of Errors

Type of Error Explanation Impact on Trial Balance

Errors of Omission • Transaction completely omitted Trial Balance (T.B) will tally

Errors of Commission These errors include:

• wrong balancing of account

•

Wrong posting•Wrong carry forwards etc.

This error will affect Trial

Balance and can be easily

located

Errors of Principle These errors occur when proper

distinction between revenue &

capital is not made

These errors do not affect

Trial Balance and are

difficult to locate

Compensating Errors These errors compensate eachother. Do not affect trial balanceand are difficult to detect.

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Sometime more than one error could be made while posting a transaction.

e.g – Purchase of Machinery for Rs.5,000 entered in Purchases Book for Rs.500



Suspense Account

• Used to temporarily park unreconciled

amounts while preparing trial balance.

•

Once errors are located, they are adjustedagainst Suspense account.

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Rectification of Error

• If error is identified before preparing trial

balance, it can be directly adjusted in the

ledger.

• If the error is identified after preparing trial

balance, the rectification entry should be

adjusted against Suspense account wherever

required.

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Errors noticed before Trial Balance preparation

1. A credit sale of Rs.100 to Ramesh has been entered in the

Sales Book as a sale of Rs.1000

2. Machinery purchased for Rs.6,000 incorrectly posted in

Purchases account.3. A cheque of Rs.500 issued to Supplier’s account towards his

dues wrongly debited to purchases account.

4. A sale of Rs.1,200 to David has been passed through the

Purchase Book5. Payment of Rent Rs.5,000 has been posted twice to Rent

account.

6. A sum of Rs.4000 received from Guru has been credited to

Murthy’s account. 7



Important Points to Remember

• For errors noticed before preparation of trial balance,

Suspense account should not be used while recording

rectification entries. If the errors are one-sided errors, then the

rectification journal entry will have only one side (either debit

or credit)

• If errors are noticed after preparation of trial balance:-

– For one sided errors – suspense account will be used to

correct these errors

– For 2 sided errors – if the debit and credit amounts of the 2

sided errors match, suspense account will not be used. Else

the difference between debit and credit side of the

rectification entry will be accounted against Suspense

account.8



One-sided errors before T.B preparation

1. The Sales Book has been overcast by Rs.50

2. The Purchases Book has been undercast by

Rs.5003. Purchase Returns Book overcast by Rs.100

4. Sales Returns Book undercast by Rs.1,000

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Errors rectification after preparation of

Trial Balance

1. Sales day book was overcast by Rs.1000

2. Purchase day book was undercast by Rs.2,000

3. Discount allowed Rs.300 not posted to discount account

4. A debtor’s balance of Rs.800 was not included in Debtors list. 5. A sale of Rs.2,000 was posted in the ledger as Rs.200

6. Sale of goods for Rs.300 to Sundaram was entered in the

purchases book.

7. Salary of manager of Rs.1,000 was debited to his personalaccount.

8. A sum of Rs.310 written as depreciation on furniture had not

been posted to Depreciation account.

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Quiz 1

The trial balance of Mr.ABC as of 31st December 2010 showed a

difference of Rs.1,000 (debit). It was parked in suspense a/c before

the books were closed. Pass rectifying entries and prepare suspense

account.

1. Received from M Rs.700 was posted to the debit of his account.

2. Paid for repairs to Motor Car Rs.280 was debited to the Motor

Car account for Rs.180.

3. Discount Rs.100 received, entered into the cash book, was not

posted to the ledger.4. A sale of Rs.370 to Nihar was entered in the sales book as

Rs.730.

5. Purchases returns was posted to debit of purchase account of

Rs.150.11



Profit & Loss Adjustment Account

• Errors relating to nominal accounts will affect the

profit of the business.

• The errors pertaining to previous years which are

corrected should be shown separately so that thereaders of financial statements are able to separate

the current year’s profits and impact of previous

years’ errors on the profits.

• For correcting the errors of previous years, an

account called Profit & Loss adjustment account is

used.

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Quiz 2

1. Purchases of Stationery for Rs.400 was not

posted to stationery account

2. Rs.2760 paid for purchase of officeequipment was charged to office expenses

account.

3. Sales Day Book was overcast by Rs.400

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