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Rectification of Accounting Errors
Rectification of Accounting Errors
NIZAM COLLEGE
(AUTONOMOUS-NAAC ACCREDITED-CPE STATUS)
OSMANIA UNIVERSITY
HYDERABAD.
Certificate
1. Errors of Principle
When a transaction is recorded against the fundamental principles of accounting, it is
an error of principle. For example, if revenue expenditure is treated as capital
expenditure or vice versa.
2. Clerical Errors
These errors can again be sub-divided as follows:
Rectification
Stages of correction of accounting errors
(a) Correction of errors affecting one side of one account Such errors do not let the
trial balance agree as they effect only one side of one account so these can't be
corrected with the help of journal entry, if correction is required before the
preparation of final accounts. So required amount is put on debit or credit side of the
concerned account, as the case maybe. For example:
(i) Sales book under cast by Rs. 500 in the month of January. The error is only in
sales account, in order to correct the sales account, we should record on the credit
side of sales account 'By under casting of. sales book for the month of January Rs.
500".I'Explanation:As sales book was under cast by Rs. 500, it means all accounts
other than sales account are correct, only credit balance of sales account is less by
Rs. 500. So Rs. 500 have been credited in sales account.
(ii) Discount allowed to Marshall Rs. 50, not posted to discount account. It means
that the amount of Rs. 50 which should have been debited in discount account has
not been debited, so the debit side of discount account has been reduced by the
same amount. We should debit Rs. 50 in discount account now, which was omitted
previously and the discount account shall be corrected.
(iil) Goods sold to X wrongly debited in sales account.
This error is effecting only sales account as the amount which should have been
posted on the credit side has been wrongly placed on debit side of the same account.
For rectifying it, we should put double the amount of transaction on the credit side of
sales account by writing "By sales to X wrongly debited previously."
(iv) Amount of Rs. 500 paid to Y, not debited to his personal account. This error of
effecting the personal account of Y only and its debit side is less by Rs. 500 because
of omission to post the amount paid. We shall now write on its debit side. "To cash
(omitted to be posted) Rs. 500.
How the errors or their rectification effect the profit-following rules are helpful in
understanding it :
(I) If because of an error a nominal account has been given some debit the profit will
decrease or losses will increase, and when it is rectified the profits will increase and
the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but
the amount debited to machinery repairs account -this error will reduce the profit. In
rectifying entry the amount shall be transferred to machinery account from
machinery repairs account, and it will increase the profits.
(il) If because of an error the amount is omitted from recording on the debit side of a
nominal account-it results in increase of profits or decrease in losses. The
rectification of this error shall have reverse effect, which means the profit will be
reduced and losses will be increased. For example, rent paid to landlord but the
amount has been debited to personal account of landlord-it will increase the profit as
the expense on rent is reduced. When the error is rectified, we will post the
necessary amount in rent account which will increase the expenditure on rent and so
profits will be reduced.
(iil) Profit will increase or losses will decrease if a nominal account is wrongly
credited. With the rectification of this error, the profits will decrease and losses will
increase. For example, investments were sold and the amount was credited to sales
account. This error will increase profits (or reduce losses) when the same error is
rectified the amount shall be transferred from sales account to investments account
due to which sales will be reduced which will result in decrease in profits (or increase
in losses).
(iv) Profit will decrease or losses will increase if an account is omitted from posting in
the credit side of a nominal or goods account. When the same will be rectified it will
increase the profit or reduce the losses.
For example, commission received is omitted to be posted to the credit of
commission account. This error will decrease profits ( or increase losses) as an
income is not credited to profit and loss account. When the error will be rectified, it
will have reverse effect on profit and loss as an additional income will be credited to
profit and loss account so the profit will increase ( or the losses will decrease).
If due to any error the profit or losses are effected, it will have its effect on capital
account also because profits are credited and losses are debited in the capital
account and so the capital shall also increase or decrease. As capital is shown on the
liabilities side of balance sheet so any error in nominal account will effect balance
sheet as well. So we can say that an error in nominal account or goods account
effects profit and loss account as well as balance sheet.
Solution
(i) Purchases A/c Dr. 20,000
To Raghu’s A/c 20,000
(Credit purchases from Raghu omitted to be recorded, now corrected)
Solution
(i) Suspense A/c Dr. 16,000
To Sales A/c 16,000
(Cash sales not posted to sales account now rectified)
Solution
(i) It was recorded through journal proper. From journal
proper posting to all the accounts are made individually.
Hence, no posting was made to depreciation account and
machinery account. Therefore, rectification entry will be :
Trial balance of Anurag did not agree. It showed an excess credit Rs.
10,000. Anurag put the difference to suspense account. He located the
following errors :
(i) Sales return book over cast by Rs. 1,000.
(ii) Purchases book was undercast by Rs. 600.
(iii) In the sales book total of page no. 4 was carried forward to page 5
as Rs. 1,000 instead of Rs. 1,200 and total of page 8 was carried
forward to page 9 as Rs. 5,600 instead of Rs. 5,000.
(iv) Goods returned to Ram Rs. 1,000 were recorded through sales
book.
(v) Credit purchases from M & Co. Rs. 8,000 were recorded through
sales book.
(vi) Credit purchases from S & Co. Rs. 5,000 were recorded through
sales book. However, S & Co. were correctly credited.
(vii) Salary paid Rs. 2,000 was debited to employee’s personal
account.
Solution
(i) Suspense A/c Dr. 1,000
To Sales Return A/c 1,000
(Sales returns book overcast by Rs. 1,000, now corrected).
Note : Errors in carry forward the total of one page to another during
a period finally affects the total of that book resulting in error of
under/overcastting.
Suspense Account
Dr. Cr.
Date Particulars J.V Amount Date Particulars J.V Amount
Rs. Rs.
Difference 10,000 Purchases 600
as per Sales 400
trial Purchases 5000
balance Sales 5000
Sales 1,000
return
11,000 11,000
Problem : 5
Trial balance of Rahul did not agree. Rahul put the difference to
suspense account. Subsequently, he located the following errors :
(i) Wages paid for installation of Machinery Rs. 600 was posted to
wages account.
(ii) Repairs to Machinery Rs. 400 debited to Machinery account.
(iii) Repairs paid for the overhauling of second hand machinery
purchased Rs. 1,000 was debited to Repairs account.
(iv) Own business material Rs. 8,000 and wages Rs. 2,000 were used
for construction of building. No adjustment was made in the books.
(v) Furniture purchased for Rs. 5,000 was posted to purchase account
as Rs. 500.
(vi) Old machinery sold to Karim at its book value of Rs. 2,000 was
recorded through sales book.
(vii) Total of sales returns book Rs. 3,000 was not posted to the
ledger.
Solution
Suspense Account
Dr Cr
Date Particulars J.V Amount Date Particulars J.V Amount
Rs. Rs.
Difference 7,500 Furniture 4,500
as per Sales 3.000
trial return
balance
7,500 7,500
Hence, original difference in Trial Balance was Rs. 7,500 excess credited.
Problem : 6
Trial balance of Anant Ram did not agree. It showed an excess credit
of Rs. 16,000. He put the difference to suspense account.
Subsequently the following errors were located:
(i) Cash received from Mohit Rs. 4,000 was posted to Mahesh as Rs.
1,000.
(ii) Cheque for Rs. 5,800 received from Arnav in full settlement of his
account of Rs. 6,000, was dishonoured. No entry was passed in the
books on dishonour of thecheque.
(iii) Rs. 800 received from Khanna, whose account had previously been
written off as bad, was credited to his account.
(iv) Credit sales to Manav for Rs. 5,000 was recorded through the
purchases book as Rs. 2,000.
(v) Purchases book undercast by Rs. 1,000.
(vi) Repairs on machinery Rs. 1,600 wrongly debited to Machinery
account as Rs. 1,000.
(vii) Goods returned by Nathu Rs. 3,000 were taken into stock. No
entry was recorded in the books.
Solution
Suspense Account
Rectification of error in Tally is very simple and prompt effective on your final
accounts of company. You can easily rectify your voucher entry with only two
easy steps
1st step
Display >> Daybook >> select the date >> Select The Voucher
Entry
nd
2 step