Rectification of errors

Rectification of Errors

Before preparingTrial Balance

After trial balanceBut before Trading,

P/L and Balance sheet

After preparingTrading and P/L

and Balance sheet

Hit the individualaccount

Hit profit or reserve orCapital{do not bother

about individual/nature Of expenditure}And hit the Balance sheet Only net balance

if it affects Balance sheet

1. Failure to record a transaction or to post a transaction.

2. Recording the same erroneous amount for both the debit and the credit parts of a transaction.

3. Recording the same transaction more than once.

4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.

Errors that will not cause the trial balance to be unequal:

Error Correction Procedure

1. Journal entry is incorrect Draw a line through the errorbut not posted. and insert correct title or

amount.


Correction of Errors


1. Journal entry is incorrect Draw a line through the errorbut not posted. and insert correct title or

amount.


2. Journal entry is correct Draw a line through thebut posted incorrectly. posted error and post

correctly.


Error Correction Procedure Error Correction Procedure

3. Journal entry is incorrect Journalize and post a and posted correcting entry.


What would be the necessary correcting entry?

What would be the necessary correcting entry?

Journal – As recorded and posted

Correcting Errors – An ExampleCorrecting Errors – An Example

On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown.

Date Description Debit Credit

May 5Supplies 12,500 Accounts Payable 12,500

Date Description Debit CreditMay 5Office Equipment 12,500

Supplies 12,500

Journal – As recorded and posted

Correcting Errors – An ExampleCorrecting Errors – An Example

On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown.

Date Description Debit Credit

May 5Supplies 12,500 Accounts Payable 12,500

Basic rules for rectification-1

• If words used ‘account’-means error only with respect to that individual account.

Example: wages paid Rs 50,000 not entered into wages account.

Here wages paid might have affected cash also, but the statement says that it is not entered into wages account only. It does not mention about cash account. Therefore we assume that cash account had been entered correctly.Therefore rectify wages account only. It is one side error or one account error.

Basic rules for rectification-2

• Do not make too many assumptions.• Example: wages paid to install a machinery is

entered into wages account.Here you find wages account is treated as a revenue

expenditure(Refer to the notes earlier) but it is a capital expenditure. “Any expenditure incurred before the asset is put into use to be capitalised”. What about cash account?

We assume that cash account would have been correctly entered. (Continue in the next slide)

You might ask which side of wage account had been entered, whether debit or credit?

Normal assumption is that wages always entered in the debit side(nominal rule).

Do not assume, had been entered into credit side of wages account what would have happened-It is unnecessary assumption(too much in your assumption)

Ask question:whether one/ two accounts is/are affected? Here wages (wrongly entered) but you should enter in the Building account now.

This is a normal assumption.

How do you rectify wages?

• Building account to be debited Rs.50,000• Wages account to be credited Rs.50000• To remove wages from the account put it in the

opposite side of that account.• Every account is born in one side ie debit or

credit.All assets and expenditure accounts are born in the debit side. If you want to kill it put it on the credit side.

• In the same way liabilities and income accounts are born in the credit side. If you want to kill it put it on the debit side.

Rectification rule-3

• Error to be rectified before the preparation of trial balance or after trial balance or after the preparation of Balance sheet.

• Before preparation of Balance sheet-Hit the individual account

• After preparation on trading, profit and loss account and Balance sheet- reduce/increase profit if it is an expense and if it affects asset/liability increase/decrease the net amount only.

Rectification of errors-Rule-4• If one side error(one account) to fulfill the double

entry book keeping we open suspense account provided, trial balance is already prepared.

• Example:- Salary paid to Ranganath not entered into salary account by Rs. 40,000

• The mistake is only in salary debit side because salary appears on the debit side. Cash account is correct(do not assume too much as I have stated earlier).

• Rectification entry: Salary a/c debit Rs.40,000 Suspense a/c credit Rs. 40,000.

Rectification of error-Rule 5

• Suspense account: Meaning When trial balance does not tally(debit is

not equal to credit) in order to close the trial balance we open entirely a new account on the side of deficit.Such account is known as suspense account.

Example:-next page

Example for suspense account• Trial balance: Debit credit• Purchases 5000 -• Wages 3000 -• Sales - 10,000• Building 4000• Suspense account ??? 2000(CR)

Note: here suspense account is a credit balance as trial is not an account

Since debit side of trial balance is more than credit side, suspense account

is not a credit balance

Omitted from book(s )means both debit and credit of such transactions are omitted.

Account means –omitted to enter into that specific account only(normally one side error)

Example: purchases from Mr.Amal not entered in the purchase books Rs. 50,000

Here this transaction is completely omitted as it is given the word books.

To rectify pass a fresh journal entry:JE: debit purchase a/c Rs.50,000 Credit Mr.Amal a/c Rs.50,000Suppose it is stated that not entered into the purchase

account how do you rectify?

Rectification of error-Rule-6

Here, the mistake is only in the purchase account. There is no mistake in Mr. Amal’s account

Rectified entry is: Purchase a/c debit Rs.50,000(real rule) Suspense a/c credit Rs.50,000 (fulfill double entry)

Note: normal assumption is that purchase is always debit.

If it is sales it is always credit.18

Rupees 1000 spent for repairs of building has been posted to building account.

Identify the mistake:1. Repairs 2. Building.Repairs do not increase the capacity of building but to

maintain the building. Therefore it is a revenue expenditure but treated as capital expenditure.

Rectification : add to repairs and remove from buildingRectification entry: repairs a/c debit Rs.1000(real rule) Building a/c credit Rs.1000 (to remove from building a/c)

Exercise-1

Thank you very much

Education

Rectification of errors