Rectification Of Errors in Accounting  – CA Foundation, CPT notes, PDF

This article is about the Rectification Of Errors in Accounting for CA foundation CPT students. we also provide pdf file at the end.

We will study in this chapter: What type of errors are committed, their consequences on account & how the same are rectified.

STUDY IN THIS CHAPTER IS DIVIDED INTO FOLLOWING SECTIONS :

1. Rectification in same year’s Books

♦     Without suspense account

♦     With suspense account

1. Rectification in subsequent years Books

RECTIFICATION IN SAME YEARS BOOK

INTRODUCTION :

On the basis of books of account, financial statements are prepared. This financial statement provides management & other user groups the information about the performance by the entity & its financial health. Similarly the books of account provides various types of information to the management for day to day operation & control.

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If such information is not error free, the user group will be mislead & their decisions so taken can prove to be wrong. Hence it is absolutely necessary that all errors (if there are any) must be located/identified & then rectified. Larger the volume of transactions greater are the chances of error. Similarly quality of persons involved in accounting department & the control system used will also influence the level of errors.

Its humane to err. And its human being only who has to identify & rectify errors.

11.1     CORRECT ACCOUNTING:

Basic elements/features of the correct accounting are as follows:

♦     All transactions & events must be recorded/entered

♦     Transactions & events must be recorded in correct books of entry

♦     Transactions & events must be recorded by Double entry system & by following proper accounting Principles (Concepts & conventions/norms)

♦     All entries must be fully & correctly posted to ledger accounts.

♦     There must be arithmetical accuracy:

■     in Recording i.e. passing entry,

■     in Posting figures in accounts,

■     in totalling & balancing of books of Entry &

■     in totalling & balancing of ledger accounts.

Student may have observed that all above have been studied in Chapter l basics of book keeping & accounting.

11.2     ERROR :

11.2.1  Meaning of an Error:

If in books of account anyone or more of the above mentioned basic elements/features of correct accounting is not followed, then we will say an error/mistake has been committed. Thus an error means not adhering (following) 100\ the accounting procedure & norms.

Books of Entry is only subsidiary to ledger accounts, therefore what is ultimately important is what happened (debit or credit) to accounts, while judging the impact of errors & deciding its rectification. Posting is made from books of entry to account, hence error in book of entry is significant only to the extent it affects ledger account.

Ex.: Sale to A & Co. was wrongly entered as sale to ‘A’ but correctly posted to A & Co’s, a/c thus no error & hence requires no rectification entry.

Interpretation: While interpreting the questions on rectification of error, students should follow the following norms:

(a)   Whatever is stated (mentioned) as wrong is wrong, whatever follows from it is also wrong, but rest of the accounting (on which question is silent) is correct.

(b)   Posting follows from entry but not the other way, hence if entry is wrong, consequent posting will also be generally wrong. But if posting is given as wrong, that doesn’t mean entry is wrong.

(c)   Posting from Sales book, Purchase book, Returns book. Bills Receivable book, Bills Payable book etc. to party account is made from individual figures, whereas total of such book is posted to Sales, Purchase, Sales Return, Purchase return, Bills Receivable, Bills Payable a/c . Hence wrong recording of individual figure will affect both posting, whereas totalling error will affect only posting to sale, purchase a/c etc. & not to individual party a/c.

11.2.2  Classification of Errors (types of errors) and its effect on agreement of Trial Balance :

1. Errors of Principle:

♦     That means there is error in applying some accounting principle.

♦     Such errors will not affect the agreement of trial balance i.e. these are double sided error.

Ex. Treating a revenue expense as capital expenditure or vice versaor the recording of sale of a fixed asset as ordinary sale.

2. Clerical Errors:

♦     These are the errors committed in applying the accounting procedure.

♦     Such errors may or may not affect the agreement of trial balance.

These can be further classified as follows.

(a)   Errors of Omission:

(i)    Omitting an entry completely from the subsidiary book. Full omission hence Trial Balance will agree. Ex.: Sale of Rs. 5,000 to A on 30.3.06 is not recorded.

(ii)   Omitting to post the ledger account from the subsidiary books. Partial omission hence Trial Balance will not agree.

Ex.: A sale entry of Rs. 10,000 not posted to A’s a/c.

(b)   Errors of Commission:

(i)    Writing wrong amount in the Subsidiary book. Trial Balance will agree.

Ex.: A purchase of Rs. 5,000 from ‘X¹ is entered in purchase book as Rs. 500

(ii)   Posting the wrong account in the ledger. Trial Balance will agree.

Ex.: From Sales book A’s account is debited by Rs. 8000 instead of B’s account.

(iii)   Wrong casting of subsidiary books.

Ex.: Total of Bills Receivable book is taken as 1,05,000 instead of 1,00,500 (iv) Posting the wrong amount in the ledger.

Ex.: From Sales Return book As account is credited b\ Rs.8,000 instead of Rs.8,800

(v) Posting an amount on the wrong side of an account.

Ex.: From Sales Rook L’s account is credited

(vi)  Wrong balancing of an account.

Ex.: Balance of Furniture account is taken as Rs. 7,000 instead of Rs. 3,000

Note. In case of errors described in fin) to (vi) above. Trial Balance will not agree.

(c)   Compensating Errors:

Two or more mistakes which compensate the effect of each other on trial balance & hence Trial Balance will agree.

Ex.: Excess debit Rs. 1,000 to Furniture a/c & Excess credit of Rs. 1,000 to Sales a/c.

11.2.3  Alternative Classification of errors/mistake from accounting point of view:

(1)   Errors which affects the agreement of trial balance i.e. it will cause difference in trial balance (one sided errors). In this the amount of debit & credit effect given in accounts does not tally.

(2)   Errors which doesn’t affect the agreement of trial balance i.e. inspite of such errors the trial balance will tally, (double sided errors). In this the amount of debit & credit is equal.

The above classification is more relevant for students for deciding the rectification entry.

11.3 RECTIFICATION:

11.3.1  Meaning of Rectification:

Rectification means bringing to the correct position, whatever wrong has been done.

Accounting effect given + Rectification entry = Correct Accounting which should have been done.

11.3.2  Necessity of Rectification:

The errors should be rectified otherwise the final accounts i.e. Profit & Loss A/c and Balance Sheet will not show correct i.e. True & Fair position & such erroneous information can mislead the decision maker.

11.3.3  Time of Rectification:

The errors should be rectified in the same year’s books of account. But if the books of account are already closed i.e. financial statements have been prepared & used then it wall have to be rectified in the next financial year’s books of account.

11.3.4  Rectification in the same year can be:

(1)   Before preparation of Trial Balance i.e. without opening a Suspense a/c. or

(2)   After preparation of Trial Balance i.e. after opening a Suspense a/c.

11.3.5  Suspense Account:

♦     When trial balance does not tally, the difference is put to an account named as Suspense a c. Difference is:

■     debited (if debit side of trial balance is short) or

■     credited (if credit side of trial balance is shor t) to Suspense a/c

♦     Thus with the help of suspense a/c ti ial balance is artificially tallied.

♦     While passing rectification entry for one sided errors, the one effect Dr. or Cr. will go into the a/c in which mistake is committed 6i the other effect will be given to Suspense a/c.

♦     When all such one sided errors are rectified the Suspense a/c will become Nil.

♦     While rectifying double sided errors, suspense account will not get affected.

Whenever required by the question, annum t & nut in e of difference in Trial balance can be ascertained by preparing a Suspense a/c. The balancing figure of suspense account after all rectification, would be the difference of trial balance.

11.3.6  Steps for locating difference in Trial balance:

(a) Checking all documents/vouchers to ascertain that all are correctly entered.

(b)   Checking Rank Reconciliations.

(c)   Similarly checking balances/lull accounts with major parties debtor, creditors, loan account etc.

(d) Scrutinising the ledgers, to locate if there is anything missing.

(e) Applying ratio tests, comparison with previous year data etc.

If there is difference in trial balance indicating arithmetical inaccuracy, then following further steps will be necessary :

(f) Checking of posting from various books of entry to ledger accounts.

(g)   Checking of totalling of various books of entry like sales book, purchase book etc.

(h)   Checking of totalling & balancing of ledger accounts.

(i) Checking of Trial balance with ledger account balances.

ILLUSTRATIONS

Illustration 11.1 : Correct the following errors unearthed before preparation of the Trial Balance.

(a)   A welding machine purchased for Rs. 5600 from the Oxygen Co. Ltd., has been entered in the purchase Day Book.

(b)   The total of the Returns outwards Book is Rs. 100 short.

(c)   A sale of Rs. 175 to M/s Gupta & Mukherjee has been entered in the sales Book as Rs. 157.

(d)   A purchase of Rs. 215 from M/s Guha & Roy had been posted to the debit of their account.

(e)   Discount allowed to D. Majhail, Rs.15 had not been entered in the Cash Book, but the full amount (including discount) has been credited to D. Majhail’s account.

(f)    Licence fee for proprietor’s gun, Rs. 30 had been debited to General Expenses Account.

(g)   A sale of Rs.200 for old furniture has been passed through the sales book.

Solution :

Working Note:

Solution : Rectification Entry

Explanatory Comments to above solution:

♦     1st and 2nd columns are made to explain the error committed, there is no necessity to make the same in Exam.

♦     As per Question errors were located before preparation of trial balance i.e. to be solved as without preparing suspense a/c. But to have a comparable idea we have given rectification with suspense a/c also.

♦     Observe the difference between two types of rectification, the only difference is wherever double entry was incomplete, it is completed by giving effect to suspense a/c.

♦     At many places for developing clear understanding of what accounting has been done, hypothetical figures are included in Columns 1 and 2. This in no way disturb the answer i.e. rectification entry. You may assume any other figure.

♦     Refer “Forming of Rectification Entry” to see how errors is understood & rectified by comparing columns 1 & 2 above.

♦     a, c, f & g are double sided error, hence their rectification is same both in ‘with suspense’ or ‘without suspense’ situation.

♦     a, f & g are Errors of Principle, e is Errors of Partial omission and b, c & d are Error of commission.

Suspense Account

Note: From suspense a/c, we can conclude that the Trial Balance Credit side was short by Rs. 515/-

Illustration 11.2: Ganesh drew a Trial Balance of his operations for the year ended 31.03.2006. There was a difference in the Trial Balance which he closed with a Suspense Account. On a scrutiny by the Auditors, the following errors were found:

(i)    Purchases day book for the month of April, was undercast by Rs. 1000

(ii)   Sales day book of October, was overcast by Rs. 10,000

(iii)   A furniture purchased for Rs. 8,100 was entered in the Furniture Account as Rs. 810.

(iv)  A bill for Rs. 10,000 drawn by Ganesh was not entered in the Bills Receivable Book.

(v)   A machinery purchased for Rs. 10,000 was entered in the purchased day book.

Pass necessary Journal Entries to rectify the same and ascertain the difference in the Trial Balance that was shown under the Suspense Account in respect of the above items.

Solution :

Suspense Account

Comment:

♦     Debit side of Trial balance was short by Rs. 18290. Trial balance was temporarily tallied by putting that diff. to debit of suspense a/c. Now after rectification the suspense a/c has become nil that means trial balance is now tallied.

♦     (iv)& (v) are double sided error, hence their rectification docs not involve suspense a/c but (f), (ii) It (iii) are one sided error, hence their rectification involves suspense a/c.

♦     (v) is Error of Principle, (vi) is Errors of Full omission and (i), (ii) & (iii) are Error of commission.

Illustration 11.3 : The accountant of X prepared the Trial Balance for the year ended 31st March, 2006. But there was a difference and the accountant put the difference in Suspense Account. Rectify the following errors found and prepare the Suspense Account:

(1)   The total of the Returns outward book, Rs.420 has not been posted in the ledger.

(2)   Purchase of Rs.350 from Y has been entered in the sales book. However Y’s a/c has been correctly entered.

(3)   A sale of Rs.390 to Z has been credited to his account as Rs.290.

(4)   Old furniture sold for Rs.5,400 had been entered as Rs.4,500 in sales account.

(5)   Goods taken by proprietor, Rs.500 have not been entered in the books at all.

Solution :

Suspense Account

Comment:

♦     Debit side of Trial balance was short by Rs. 60.

♦     (5) is double sided error, hence their rectification does not involve suspense a/c but (1), (2), (3) & (4) are one sided error, hence their rectification involves suspense a/c.

♦     (4) is Error of Principle as well as Error of coin mission, (5) is Errors of Full omission, (1) is Errors of Partial omission and (2) & (3) are Error of commission.

Illustration 11.4 : A book-keeper finds the difference in the Trial Balance amounting to Rs. 1,000 and puts it in the Suspense Account. Later on he detects the following errors.

1. Purchased goods from Ravi Rs. 15,000 but entered into Sales Book.
2. Received one bill for Rs. 25,000 from Arun but recorded in Bills Payable Book.
3. An item of Rs. 3,500 relating to prepaid rent account was omitted to he brought forward.
4. An item of Rs. 2,000 in reaped of purchase returns, had been wrongly entered in the purchase book, party a/c was correctly posted.
5. Rs. 25,000 paid to Hari against our acceptance were debited to Harish Account.
6. Bills received from Janki for repairs done to Machine Rs. 2,500 and Machine supplied for Rs. 45,000 were entered in the Purchase Book as Rs. 46,000. Janki a/c was credited with Rs. 47,500.

Give rectifying journal entries with full narration and prepare Suspense Account.

Solution :

Suspense Account

Comment:

♦     Debit side of Trial balance was short by Rs. 1000 Amt. of diff. was given but side was not given.

♦     (1), (2) & (5) are double sided error, hence their rectification does not involve suspense a/c but (3), (4), & (6) are one sided error, hence their rectification involves suspense a/c.

♦     (6) is Error of Principle as well as Error of commission, (3) is Errors of Partial omission, and (1), (2). (4) & (5) are Error of commission.

Illustration 11.5: The trial balance of a firm is out. The following errors were found subsequently, to have been committed. Pass journal entries to correct them, and ascertain the difference in the Trial Balance.

(a)   An amount of Rs. 100 was received from D. Das on 31st December, 2005, but had been entered in the Cash Book on 3rd January, 2006.

(b)   The Returns Inwards Books for December has been cast Rs. 100 short.

(c)   The purchase of an office table costing Rs.300 had been passed through the Purchase Day Book.

(d)   Rs.375 paid for wages to workmen for making show cases had been charged to wages account.

(e)   A purchase of Rs. 671 had been posted to the debit of the creditor’s account as Rs.617. The creditor is P. Panna & Co.

(f)    A cheque for Rs.200 received from P.C Joshi has been dishonoured on maturity and was passed to the debit of Allowances Account.

(g)   Goods amounting to Rs. 100 had been returned by a customer and were taken into stock but no entry in respect thereof was made in the books.

(h)   Rs. 2,000 paid for the purchase of a motor-cycle for Mr. Dull (a partner) had been charged to Miscellaneous Expenses Account.

(i)    A sale of Rs. 200 to Singhani & Co. was credited to their account.

(j)    A sale of Rs. 1.000 had been passed through the Purchase Day Book. The customer’s account has, however, been correctly debited.

(k)   While carrying forward the total of the sales book from one page to the next, the amount was written as Rs.1,76,658 instead of Rs. 1,67,568.

Solution :

SUSPENSE ACCOUNT

Comment:

♦     Debit side of Trial balance was short by Rs. 6302/-

♦     (a), (c), (d), (f), (g) & (h) are double sided error, hence their rectification does not involve suspense a/c but (b), (e), (i),

(j)    & (k) are one sided error, hence their rectification involves suspense a/c.

♦     (d) & (h) are Error oi Principle, (g) is Errors of Pull omission, and (a), (b), (c), (e). (f), (i), (j) & (k) are Error of commission. Illustration 11.6 : Pass necessary journal entries to rectify the following errors:

(i)    An amount of Rs.200 withdrawn by the proprietor for his personal use has been debited to trade expenses account.

(ii)   A purchase of goods from Nathan amounting to Rs. 300 has been wrongly entered through the sales-book.

(iii)   A credit sale of Rs. 100 to Santhanam has been wrongly passed through the purchases-book.

(iv)  Rs. 150 received from Malhotra have been credited to Mchrotra.

(v)   Rs. 375 paid on account of salary to the cashier Dhawan stands debited to his personal account.

(vi)  A contractor’s bill for extension of premises amounting to Rs. 2,750 has been debited to building repairs account.

(vii) On 25th June, goods of the value of Rs. 500 were returned by Akash Deep and were taken into stock but the returns were entered in the books under date 3rd July, i.e., after the expiration of the financial year on 30th June.

(viii) A bill of Rs. 200 for old office furniture sold to Sethi were entered in the sales-day-book.

(ix) The periodical total of the sales-book was cast short by Rs. 100.

(x) An amount of Rs. 80 received on account of interest was credited to commission account.

Solution :

Rectification of Entry In same Year

Comment:

♦     Credit side of Trial balance was short by Rs. 100/-

♦     (i) to (viii) & (x) arc double sided error, hence their rectification does not involve suspense a/c but (ix) is one sided error, hence their rectification involves suspense a/c.

♦     (i), (vi), (viii) is Error of Principle, and (ii) to (v), (vii), (ix) & (x) are Error of commission.

RECTIFICATION IN SUBSEQUENT YEARS BOOKS

INTRODUCTION :

When the errors could not be traced & accounts need be finalized, then Annual financial statements are prepared & books of account is closed by putting difference if any to suspense a/c. Later on the search for error may continue & if errors as & when identified will be rectified in subsequent years books of Account.

It is an accepted practice not to make any accounting (changes) once the books of account are closed i.e. Annual Financial Statements are finalized and certified by the Auditors.

11.4     RECTIFICATION IN THE NEXT YEAR :

♦     If errors are located after finalizing the accounts then it should be rectified in the next years accounts.

♦     The difference of Trial balance will also get transferred to next years books under the name Suspense a/c.

♦     This will involve preparation of Profit & Loss Adjustment account.

11.5 PROFIT & LOSS ADJUSTMENT ACCOUNT :

♦     The rectification entry will be same as passed in case of rectification in same year except that wherever any Income or Expenses a/c. is involved, the Debit/Credit will be made in P&L adjustment a/c. and not in the Income or Expenses a/c.

♦     Otherwise this years profit will be affected by the errors of last year.

♦     The balance in P&L adjustment a/c. will be transferred to capital a/c.

♦     This is the amount of error in last years P&L a/c. If P&L adjustment a/c shows:

■     Credit balance that means last year less profit was shown by P&L a/c because of errors

■     Debit balance that means last year more profit was shown by P&L a/c because of errors

♦     As per AS-5 (Accounting Standard-5) this is prior period adjustment & shoμld be shown in P&L a/c may be after ascertaining current years profit, hence P&L Adj. can be transferred to P&L a/c.

11.6 COMPARISON BETWEEN THE ONE SIDED & DOUBLE SIDED ERROR :

Hence agreement of Trial Balance does not guarantee that it is error free it only gives reasonable assurance of arithmetical accuracy . But non-agreement of Trial balance certainly confirms existence of arithmetical inaccuracy.

11.8 FORMING RECTIFICATION ENTRY:

Steps to be followed for solving a rectification problem are as follows:

(i) After reading the particular item of question about errors (a) ascertain what is the effect (debit, credit) given to accounts (in ledger) & (b) Decide what should be the correct accounting (debit & credit) of that item.

(ii) Remember that account is ultimate for us & debit – debit in same account gets added, similarly credit – credit in same account gets added but debit & credit in the same account gets subtracted. Apply this in point (iii).

(iii) By comparing items (a) & (b) of (i) above you may come across following situations & treat the same as mentioned there against

♦     An account is not debited or less debited <- debit it.

♦     An account is not credited or less credited ← credit it.

♦     An account is wrongly debited or more debited ← credit it.

♦     An account is wrongly credited or more credited ← debit it.

♦     After making above if double entry is not yet completed, then make it double entry by debiting or crediting the difference to suspense a/c.

♦     If rectification is being done in subsequent year then in place of income & expenses account, P&L adjustment account will be debited or credited as the case may be.

(iv)  If difference of trial balance was known & was first written in Suspense a/c then after all rectification, the suspense account will become nil (i.e. closed), if it still has some balance, that will mean that someone sided errors still exist.

If difference was not known, then after rectifying all errors given, the balance of suspense account will indicate the difference of trial balance.

(v)   In case of rectification in subsequent year, the balance of P&L adjustment account should be transferred to P&L a/c as prior period adjustment as per Accounting Standard 5: “Net profit or loss for the period, period items & changes in Accounting Policy”. Many times it is directly transferred to Capital account just to show its ultimate effect because in Proprietary & Partnership concern the balance of P&L is usually transferred to Capital a/c.

ILLUSTRATIONS

Illustration 11.7 : A book-keeper while preparing his trial balance finds that the debit exceeds by Rs.7,250. Being required to prepare the final account for the year 2005, he places the difference to a Suspense Account. In the next year i.e. 2006 the following mistakes were discovered:

(a)   A sale of Rs.4,000 has been passed through the Purchase Day-book. The entry in customer’s account has been correctly recorded.

(b)   Goods worth Rs.2,500 taken awav by ihc proprietor for his use has been debited to Repairs Account.

(c)   A Bill receivable for Rs. 1,300 received from Krishna has been dishonoured on maturity but no entry passed.

(d)   Salary Rs.650 paid to a clerk has been debited to his Personal Account.

(e)   A Purchase of Rs. 750 from Raghubir has been debited to his account. Purchases Account has been correctly debited.

(f)    A sum of Rs.2.250 written off as depreciation on furniture has not been debited to Depreciation Account.

Draft the Journal entries for rectifying the above mistakes and prepare Suspense Account.

Solution :

Rectification in Subsequent Year

Comment:

♦     Balance in suspense a/c indicates that in last year’s Trial balance, Credit side was short by Rs. 7250.

♦     As the rectification is being carried out in the next years books of account, the Profit & Loss adjustment account is debited/credited in place of income & expenses account.

♦     The credit balance of Rs. 7,600 in Profit & Loss adjustment account indicates that in last year less profit was shown.

♦     (b), (c)& (d) is double sided error, hence their rectification does not involve suspense a/c but (a), (e) & (f) are one sided error, hence their rectification involves suspense a/c.

♦     (b) is Error of Principle, (c) is Error of Lull omission and (a), (d). (e) & if) are Error of commission.

Illustration 11.8 : The following mistakes were located in the hooks of a concern after its books were closed and a suspense Account was opened in order to get the Trial Balance agreed.

(a)   Sales Day Book was over cast by Rs.100.

(b)   A sales of Rs.50 to X was wrongly debited to the account of Y.

(c)   General Expenses of Rs.18 was posted in the General Ledger at Rs.80.

(d)   A bill receivable for Rs.155 was passed through Bills payable Day Book – This bill was given by Z.

(e)   Legal expenses Rs. 119 paid to Mr. Dufty was debited to his personal account.

(f)    Cash received from C. Dass was debited to G. Dass Rs. 150.

(g)   While earning forward the total of one page of the Purchases Book to the next the amount of Rs. 1235 was written as Rs. 1325.

Find out the nature and amount of the Suspense Account and pass entries for the rectification of the above errors in the subsequent year’s books.

Solution :

Rectification in Subsequent Year

SUSPENSE ACCOUNT

P&L ADJUSTMENT ACCOUNT

Note: Debit balance Rs. 67 indicates that last years profit was shown excess.

Comment:

♦     Balance in suspense a/c indicates that in last year’s Trial balance, Credit side was short by Rs.352

♦     As the rectification is being carried out in the next years books of account, the Profit & Loss adjustment account is debited/credited in place of income & expenses account.

♦     The debit balance of Rs.67 in Profit & Loss adjustment account indicates that in last year excess profit was shown.

♦     (b), (d) & (e) is double sided error, hence their rectification does not involve suspense a/c but (a), (c), (f) & (g) are one sided error, hence their rectification involves suspense a/c.

♦     All errors are Error of commission although error (e) can also be considered as Error of Principle.

Illustration 11.9 : In 2006 Sen found accidentally that his books for 200*5 contained some errors. The errors were:

1. An invoice for Rs. 1,000 for goods purchased from Basu was entered in Sales Returns Book.
2. Goods bought on credit from Ramlal for Rs. 1,500 were entered in the Sales Book as Rs.1,050.

iii. A Cash Discount of Rs.50 allowed to G. Gupta remained un-posted to his account.

100. The Sales Book for the month of April was overcast by Rs. 100. It was also found that a sale of Rs.456 to Kabir was entered in the Sales Book as Rs.645 from where he was debited by Rs.615.
101. A machine purchased on 1 st January, 2003 for Rs. 10,000 (on which Rs.2,000 depreciation had been written off for the two years 2003 and 2004) had been sold on 1st July, 2005 for Rs.8,500 but the sale was entered in the sales Day Book.
102. Rs.460 paid for freight on machinery purchased on Oct. 1, 2005 was debited to Freight Account as Rs.640. Give journal entries to rectify the errors. Your entries must not affect current year’s profit or loss. Do you have any comments to offer?

Solution:

Rectification In Subsequent Year

P&L Adjust mini Account

Suspense Account

Comment:

♦     Balance in suspense a/c indicates that in last year’s Trial balance, Credit side was short by Rs.100.

♦     As the rectification is being carried out in the next years books of account, the Profit & Loss adjustment account is debited/credited in place of income & expenses account.

♦     The debit balance of Profit & Loss adjustment account indicates that in last year profit was shown excess by Rs. 10,211.

♦     (i) (ii) & (v) are double sided error, hence their rectification does not involve suspense a/c but (iii), (iv) & (vi) are one sided error, hence their rectification involves suspense a/c.

♦     (v) is Error of Principle, (vi) is Error of Principle as well as error of commission, (iii) is Error of Partial omission and (i), (ii) & (iv) are Error of commission.

Illustration 11.10: Nitish closes his books on 31st December. In 2005, his books showed a difference which he transferred to the debit of his Capital Account and prepared the Profit and Loss Account and Balance Sheet after doing so he found that the under mentioned errors had been committed in 2005.

(i)    A machine, book value Rs.8200 was sold on credit to Mehtani for Rs.7500. The amount was posted to the credit of Mehta.

(ii)   A cheque for Rs.2,100 was received from Kapoor and was correctly dealt with. It was, however, returned dishonoured and was then posted to the debit of Trade Expenses A/c.

(iii)   The closing stock sheets for 2005 were found to be totalled Rs. 10,000 in excess.

(iv)  The income tax paid on behalf of the proprietor, Rs.2370 was debited to Income Tax Account as Rs.3720.

(v)   A steel cupboard was purchased for Rs. 1250, it was debited to General Expenses Account as Rs. 2150. Give journal entries to carry out the corrections required. How much was the difference in the books on December 31, 2005?

Solution :

Suspense Account

P&L Adjustment account

Comment:

♦     Last year difference in Trial balance was transferred (debited) to Capital a/c. Hence suspense a/c does not have it as opening balance. Therefore after rectification instead of suspense a/c getting closed, it is showing balance Rs. 12,750 which is transferred (credited) to capital a/c so that last years debit to capital a/c gets nullified.

♦     The debit balance of Profit & Loss adjustment account indicates that in last year profit was shown excess by Rs.2.030.

♦     (ii)& (iii) are double sided error, hence their rectification does not involve suspense a/c but (i), (iv) & (v) are one sided error, hence their rectification involves suspense a/c.

♦     (iv) & (v) are Error of Principle as well as error of commission, and (i), (ii) & (iii) are Error of commission.

Illustration 11.11 : The books of account of B. Quick for the year ending 31 st March, 2005 were closed with a difference in books carried forward. The following errors were detected subsequently:

(a)   Goods Rs. 125 returned to Mita Bros, were recorded in the Returns Inward Book as Rs. 251 and from there it was posted to die debit of Mita Bros. Account.

(b)   A credit sale of Rs. 760 was wrongly posted as Rs. 670 to the customer account in the Sales ledger.

(c)   Closing Stock was overstated by Rs. 5,000 being casting error in the schedule of inventory.

(d)   Paid acceptance to Bala Ram for Rs. 7,600 was posted to the debit of Sita Ram as Rs. 6,700.

(e)   Goods purchased from A & Co. Rs. 3,250 entered in the Sales Day Book for Rs. 3,520.

(f)    Rs. 1,500 being the total of the discount column on the credit side of the Cash Book was not posted. Pass rectification entries in the next year.

Solution :

Rectification in Subsequent year

Suspense Account

P&L Adjustment Account

Comment:

♦     Balance in suspense a/c indicates that in last year’s Trial balance, Credit side was short by Rs. 1012.

♦     The debit balance of Profit & Loss adjustment account indicates that in last year profit was shown excess by Rs.9.894

♦     (c) & (e) are double sided error, hence their rectification does not involve suspense a/c but (a), (b), (d) & (f) are one sided error, hence their rectification involves suspense a/c.

♦     (f) is error of Partial omission, and (a) to (e) are Error of commission.

PRACTICE PROBLEMS

(Answers & Hints given at the end of the Chapter)

Rectification in same year

P.1 : A book-keeper finds that the trial balance is out. He puts the difference to a newly opened suspense account. Subsequently, the following errors were located:

(a)   The purchases book for January, 2011 has been cost Rs. 1,000 short.

(b)   A credit purchase for Rs. 6,710 had been posted to the debit of the creditor’s account as Rs. 6,170; Rajan being the concerned creditor.

(c)   A credit sale for Rs. 6,000 has been passed through the purchases book.

(d)   Rs. 4,000 paid to B was debited to As Account.

Pass journal entries to rectify the above mentioned errors. Also prepare the suspense account assuming that there are no other errors.

P.2 : There were error in the Trial Balance of Mr. Steel on 31st March, 2011, and the difference in Books was carried to a Suspense Account. On going through the Books you find that:

(a) Rs. 5,400 received from Mr. A was posted to the debit of his account.

(b) Rs. 1,000 being purchases return were posted to the debit of purchases Account.

(c) Discount received Rs. 2,000 was posted to the debit of Discount Account.

(d) Rs. 2,740 paid for Repairs to Motor Car was debited to Motor Car Account as Rs. 1,740.

Give Journal Entries to rectify the above error and ascertain the amount transferred to Suspense Account on 31st March, 2011, assuming that the Suspense Account is balanced after the above corrections.

P.3: The trial balance of N Ltd. does not tally. In order to give it a semblance of agreement, the accountant of the company transfers the difference to a newly opened suspense account. Later on, he discovers the following errors.

(i)         An amount of Rs. 5,850 paid for purchase of a new typewriter for the accounts department has been wrongly passed through the purchases book.

(ii) An item of Rs. 780 in the sales book has been posted as Rs. 960 in the customer’s account.

(iii) An addition in the returns inward book has been cost Rs. 240 excess.

(iv) An item of Rs. 450 appearing in the discount column on the credit side of cash book has been posted to the credit side of the concerned personal account as Rs. 540.

Give journal entries to rectify the above mentioned errors and also show the suspense account.

P.4 : Pass journal entries to rectify the following errors:

(i) Wages paid to workers for installing a machinery, Rs. 750 were debited to wages account.

(ii) A dishonoured bill receivable for Rs. 5,000 returned by the bank with whom it had been discounted was credited to bank and debited to bills receivable account.

(iii) A sum of Rs. 1,000 drawn by the proprietor for his personal use was debited to travelling expenses account.

Rectification in subsequent year

P.5 : A book-keeper finds the following errors in subsequent year.

(a) Goods worth Rs. 15,000 purchased from Ravi, but entered in the sales book.

(b) Received a promissory note for Rs. 25,000 from Arun,, but entered in the bills payable book.

(c) Rs. 5,000 paid to Hari against acceptance was debited to Harish.

(d) A bill was received for repairs of furniture for Rs. 2,500. The amount was debited to furniture account.

Pass journal entries to rectify the above errors and prepare the P&L Adj. a/c

P.6: The trial balance of Hari did not agree. He put the difference in a newly opened suspense account. Later on, he located the following errors:

(a) A credit purchase for Rs. 6,710 from Supreme Industries had been posted to their debit as Rs. 6,170.

(b) The return inwards book had been cost Rs. l,i)00 short.

(c) A credit sale of Rs. 10,000 had been passed through the purchases day book. The customer’s account had, however, been correctly debited.

(d) Rs. 3,750 paid as wages for the erection of a new machine had been charged to wages account.

Pass journal entries to rectify the above errors in next years books and prepare the suspense account.

P.7 : A merchant, while balancing his books of account, finds that the trial balance shows excess debit of Rs. 1,700. Being required to prepare the final accounts, he places the difference to a newly opened suspense account which he carries forward. In the next accounting year, the following errors are discovered:

(i) Goods bought from Narayan amounting to Rs. 5,000 had been posted to the credit of Narayan as Rs. 5,500.

(ii) An item of Rs. 1,000 entered in the sales return book was posted to the debit of Pandey who had returned the goods.

(iii) Discount amounting to Rs. 200 from a creditor hadbeenduly entered in the creditor’s account, but not posted to discount account.

Draft journal entries necessary for rectifying the above mentioned errors.

Prepare the suspense account and show the ultimate effect of the errors on the last year’s profit by preparing profit and loss adjustment account.

P.8 : The triad balance of Hari for the year ended on 31.03.2012 did not agree. He put the difference in a newly opened suspense account and finalized the accounts. In the next year, he located the following errors:

(a) Rs. 4,000 paid for freight on machinery purchased on Oct.l, 2011 was debited to Freight Account. Depreciation on Machinery is charged @ 20% p.a.

(b) Sundry items of furniture having book value Rs. 30,000 on 1.4.2011, was sold on 30.11.2011 for Rs. 26,000 had been entered in the sales book. Depreciation on furniture is charged @ 15% p.a.

(c) An item of prepaid rent Rs. 5,000 was omitted to he brought forward.

(d) The closing stock sheets as on 31.03.2011 were found to be totalled Rs. 10,000 in excess. Pass journal entries to rectify the above errors in next years books.

ANSWERS AND HINTS FOR

Practice Problems

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