Accounting for Management

Amity Global Business School Bangalore

Rectification of Errors

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 necessarily ensure error less Final Accounts

Classification of Errors
Type of Error Errors of Omission Errors of Commission Explanation These errors include: wrong balancing of account Wrong posting Wrong carry forwards etc. These errors occur when proper distinction between revenue & capital is not made These errors compensate each other. Impact on Trial Balance This error will affect Trial Balance and can be easily located These errors do not affect Trial Balance and are difficult to locate Do not affect trial balance and are difficult to detect. Transaction completely omitted Trial Balance (T.B) will tally

Errors of Principle

Compensating Errors

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
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Suspense Account
Used to temporarily park unreconciled amounts while preparing trial balance. Once errors are located, they are adjusted against Suspense account.

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.

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 Suppliers account towards his dues wrongly debited to purchases account. 4. A sale of Rs.1,200 to David has been passed through the Purchase Book 5. 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 Murthys account.
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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.
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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.500 3. Purchase Returns Book overcast by Rs.100 4. Sales Returns Book undercast by Rs.1,000

Errors rectification after preparation of Trial Balance

1. 2. 3. 4. 5. 6. Sales day book was overcast by Rs.1000 Purchase day book was undercast by Rs.2,000 Discount allowed Rs.300 not posted to discount account A debtors balance of Rs.800 was not included in Debtors list. A sale of Rs.2,000 was posted in the ledger as Rs.200 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 personal account. 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.
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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 the readers of financial statements are able to separate the current years 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 office equipment was charged to office expenses account. 3. Sales Day Book was overcast by Rs.400

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