Financial Accounting - Rectification of Errors

 

Financial Accounting

Rectification of Errors

 

Introduction

An accountant can make mistakes or commit errors while recording and posting transactions. These are called ‘Accounting Errors’. So accounting errors are the errors committed by persons responsible for recording and maintaining accounts of a business firm in the course of accounting process. These errors may be in the form of omitting the transactions to record, recording in wrong books or wrong account, or wrong totalling, and so on.

 

Types of error

There are basically two types of errors as follows:

1.             Errors of principle, and

2.             Clerical errors.

 

Clerical errors are again of three types as follows:

1.             Errors of omission,

2.             Errors of commission, and

3.             Compensating errors.

 

Finally, errors of omission may again be classified into two types as follows:

1.             Errors of complete omission, and

2.             Errors of partial omission.

 

Therefore, it can be said that, in totality, overall there are five types of accounting errors as follows:

1.             Errors of principle,

2.             Errors of complete omission,

3.             Errors of partial omission,

4.             Errors of commission, and

5.             Compensating errors.

 

Important Note:

Errors of principle, errors of complete omission and compensating errors are not revealed by the trial balance. In other words, there will be no difference in the trial balance in spite of there are errors of principle, errors of complete omission and compensating errors in the books of accounts before the trial balance is prepared.

 

Rectifying the errors

Every business enterprise prepares its financial statements to provide information of profit earned or loss incurred by it during an accounting period and its financial position on the relevant date. This information will be most useful only if the information is accurate. In order to ensure the accuracy of such information, errors, if any, in accounts should be detected at the earliest and be corrected before preparing the financial statements. It should be clearly understood and kept in mind that the errors should never be rectified by erasing or overwriting because it will encourage manipulations and frauds in accounts.

 

In accounting practice there are some definite methods to rectify the accounting errors. These are based on generally accepted accounting practices and procedures. Rectification of errors using these methods is called rectification of accounting errors. So it is a process of rectification. It is generally done by passing a journal entry to nullify the effect of the error.

Stages of identifying an error

There are three stages:

1.             Identifying an error before preparation of trial balance.

        (Type: 1 Errors)

2.             Identifying an error after preparation of trial balance but before preparation of   final accounts.

        (Type: 2 Errors)

3.             Identifying an error after preparation of final accounts.

        (Type: 3 Errors)

Rectifying Type: 1 errors 

Identified before preparation of trial balance

 

One-sided errors

At this stage, since ledger accounts are still open, one-sided errors are rectified by passing rectification entries of proper amount directly into the proper side of the relevant (i.e. affected) ledger accounts.

 

Example: 1

Purchases day book is overcast for the month of July, 2020 by Rs 8,000.

 

Solution: 1

The total of the purchase day book is posted to the debit of purchase account. Therefore, purchase account is affected and to rectify this error an entry of Rs 8,000 will be made on the credit side of the purchase account with the words written as “Over casting of Purchase Day Book for the month of July, 2020”.

Purchase A/c

Date	Particulars	Rs	Date	Particulars	Rs
				By Over casting of Purchase Day Book for the month of July, 2020	8,000

 

Example: 2

A sum of Rs 1,200 paid to Ashok has been wrongly credited to his account.

 

Solution: 2

Ashok A/c is only affected because his account has been credited instead of being debited, whereas it is implied that there is no mistake in the cash book. In this case, Ashok A/c is to be debited to nullify the effect of its being wrongly credited and at the same time it is to be debited for cash paid to Ashok. Therefore, Ashok A/c is to be debited for a total amount of Rs 2,400 (Rs 1,200 + Rs 1,200).

Ashok A/c

Date	Particulars	Rs	Date	Particulars	Rs
	To The amount   paid but wrongly credited	2,400

Example: 3

Purchase of furniture for Rs 5,000 was wrongly entered in the purchases day book, but the furniture account was correctly debited for the same purchase.

 

Solution: 3

In this case only purchases account has been affected. Purchases account has been wrongly debited by Rs 5,000. Therefore, purchases account is now credited to nullify the wrong debit.

Purchases A/c

Date	Particulars	Rs	Date	Particulars	Rs
				By The amount wrongly debited to purchase account	5,000

 

Two-sided errors

At this stage, since ledger accounts are still open, two-sided errors are also rectified by passing rectification journal entries directly into the relevant (i.e. affected) ledger accounts.

 

The rectification journal entries are made by applying the following rules:

 

1.             Debit that account which should have been debited but not so done and credit that account which should have been credited but not so done.

2.             Debit that account which was wrongly credited and credit that account which was wrongly debited.

3.             If the total of debit and the total of credit in the rectification journal entry are not same, the difference amount should be entered in the appropriate side of the appropriate ledger account along with appropriate narration.

Example:

Rectify the following errors which are identified before preparation of trial balance:

i.                  Amount of Rs 1,500 received from Govind were credited to Har Govind.

ii.                Sales for Rs 20,000 made to Malvika were not entered in the Sales Day Book.

iii.             Salary of Rs 7,500 paid to accountant Raman was debited to his personal account.

iv.           Old furniture sold for Rs 2,800 was entered in the Sales Day Book.

v.             Carriage paid Rs 500 on purchase of a machine was debited to carriage account.

vi.           Cash Rs 50,000 paid to the creditor Atulya Ghose was debited to Prafulla Ghose.

Solution:

Rectification journal entries

Date	Particulars	LF	Debit (Rs)	Credit (Rs)
(i)	Har Govind A/c      Dr       To  Govind A/c (Being amount received from Govind wrongly credited to Har Govind is now corrected)		1,500	1,500
(ii)	Malvika A/c        Dr       To  Sales A/c (Being sales to Malvika omitted to be entered in the Sales Day Book is now corrected)		20,000	20,000
(iii)	Salary A/c        Dr       To  Raman A/c (Being salary paid to Raman wrongly debited to his personal account now corrected)		7,500	7,500
(iv)	Sales A/c         Dr       To  Furniture A/c (Being old furniture sold wrongly entered in the Sales Day Book is now corrected)		2,800	2,800
(v)	Machine A/c         Dr       To  Carriage A/c (Being amount paid for carriage on purchase of machine wrongly debited to carriage account is now corrected)		500	500
(vi)	Atulya Ghose     Dr      To  Prafulla Ghose (Being amount paid to Atulya Ghose wrongly debited to Prafulla Ghose is now corrected)		50,000	50,000

 

Rectifying Type: 2 errors

Identified after preparation of trial balance

but before preparation of final accounts

 

At this stage, since ledger accounts are already closed, rectifications are made by making rectification journal entries only.

 

One-sided errors

These errors are rectified by making rectification journal entries either debiting suspense account and crediting the affected ledger account or crediting suspense account and debiting the affected ledger account.

Two-sided errors

These errors are rectified by making rectification journal entries applying the following rules:

1. Debit that account which should have been debited but not so done and credit that account which should have been credited but not so done.

2. Debit that account which was wrongly credited and credit that account which was wrongly debited.

3. If the total of debit and the total of credit in the rectification journal entry are not same, either debit or credit suspense account to balance the journal entry.

Click here for Illustration showing Rectification of Type: 2 Errors

Rectifying Type: 3 errors

Identified after preparation of final

accounts

 

At this stage, rectifications of errors are made in the same way as in the case of “rectifying errors identified after preparation of trial balance but before preparation of final accounts” with the only exception that, all the nominal accounts in the rectification journal entries will be replaced by “Profit and loss adjustment account”.

Click here for Illustration showing Rectification of Type: 3 Errors

Rectification of Errors

More Selected Problems and Solutions for Practice

 

Illustration: 1

Correct the following errors without opening a Suspense Account

a)     The Sales Book has been totalled Rs 100 short.

b)     Goods worth Rs 150 returned by Green & Co. have not been recorded anywhere.

c)     Furniture purchased from Gulab & Bros. for Rs 1,000 has been entered in Purchases Day Book.

d)     Discount of Rs 18 allowed to G. Mohan & Co. has not been entered in the Discount Column of the Cash Book. The account of G. Mohan & Co. has, however, been correctly posted.

 

Solution: 1

Rectifications of errors without opening Suspense A/c

a) Since sales book has been cast Rs 100 short, Sales Account in the General Ledger has been credited Rs 100 short. Therefore, the rectification entry is:

Date	Particulars		Dr (Rs)	Cr (Rs)
	Under-casting of sales book	Dr	1,000
	To Sales A/c			1.000

 

b) To rectify the complete omission required rectification entry (i.e. the original correct journal entry) is:

 

Date	Particulars		Dr (Rs)	Cr (Rs)
	Returns Inward A/c	Dr	150
	To Green & Co. A/c			150

 

c) Here Purchases Account has been wrongly debited by Rs 1,000, whereas the debit should have been made to the Furniture Account. Therefore, the rectification entry is:

Date	Particulars		Dr (Rs)	Cr (Rs)
	Furniture A/c	Dr	1,000
	To Purchases A/c			1.000

 

d) Here Discount Allowed A/c has been wrongly omitted to be debited, whereas the customer’s account has been correctly posted. Therefore, the necessary rectification entry is:

Date	Particulars		Dr (Rs)	Cr (Rs)
	Discount Allowed A/c	Dr	18
	To Omission of entry in Cash Book			18

 

Illustration: 2

Mr. Agarwal closed his books of accounts on 31.03.2023 and finalised his accounts in spite of a difference in the trial balance. The difference was Rs 830 the credits being short; it was carried forward in a suspense account. After the finalisation of accounts, however, following errors were located:

a)         A sale of Rs 2,300 to Mr. Lala was posted to the credit of Mr. Mala.

b)         The total of the Returns Inward Book for July, 2014 Rs 1,240 was not posted in the ledger.

c)         Freight paid on a machine Rs 5,600 was posted to the Freight account as Rs 6,500.

d)         White carrying forward the total in the Purchase Account to the next page, Rs 65,590 was written instead of Rs 56,950.

e)         A sale of machine on credit to Mr. Mehta for Rs 9,000 was not entered in the books of accounts at all. The book value of the machine (after depreciation) on the date of sale was Rs 7,500.

 

Pass journal entries to rectify the errors and make your comments on the books of accounts of Mr. Agarwal assuming that he charges depreciation on machinery @ 10% on the balance at the end of the year.

 

Illustration: 3

Rectify the following errors assuming that the errors were detected

(a)     Before the Preparation of Trial Balance;

(b)     After the preparation of Trial Balance but before preparation of Final Accounts; and

(c)      After the preparation of Final Accounts.

 

Errors detected:

(i)            Purchase of Plant for Rs 10,000 wrongly passed through Purchase Account.

(ii)          Sales Day Book was cast short by Rs 1,000.

(iii)        Cash paid to Mr. X for Rs 1,000 was posted to his account as Rs 100.

(iv)        Purchase of goods from Mr. T for Rs 3,500 was entered in the Purchase Day Book as Rs 500.

(v)          Paid salary for Rs 3,000 wrongly passed through wages account.

 

Illustration: 4

A merchant, while balancing his books of accounts notices that the Trial Balance did not tally. It showed excess credit of Rs 1,700. He placed the difference to Suspense A/c. Subsequently he noticed the following errors:

 

(a)     Goods brought from Narayan for Rs 5,000 were posted to the credit of Narayan’s A/c as Rs 5,500.

(b)     An item of Rs 750 entered in Purchase returns book was posted to the credit of Pandey to whom the goods had been returned.

(c)      Sundry items of furniture sold for Rs 26,000 were entered in the sales book.

(d)     Discount of Rs 300 from creditors had been duly entered in creditor’s A/c but was not posted to discount A/c.

 

Pass necessary journal entries to rectify these errors. Also show the Suspense A/c.

 

Illustration: 5

Pass necessary journal entries to rectify the following errors detected after the preparation of Trial Balance but before preparation of Final Accounts:

(a)     An amount of Rs 200 withdrawn by owner for personal use was debited to trade expenses.

(b)     Purchase of goods of Rs 300 from Nathan was wrongly entered in sales book.

(c)      A credit sale of Rs 100 to Santhanam was wrongly passed through purchase book.

(d)     Rs 150 received from Malhotra were credited to Mehrotra.

(e)     Rs 375 paid as salary to cashier Dhawan was debited to his personal A/c.

(f)       A bill of Rs 2,750 for extension of building was debited to building repairs A/c.

(g)     Goods of Rs 500 returned by Akashdeep were taken into stock, but returns were not posted.

(h)     Old furniture sold for Rs 200 to Sethi was recorded in sales book.

(i)        The period end total of sales book was under cast by Rs 100.

(j)       Amount of Rs 80 received as interest was credited to commission.

 

Illustration: 6

Rectify the following error and find out the effect of the errors on Net Profit.

i)           Purchases of Rs 300 from Raman passed through Sales Book.

ii)         Bill received from Ramu for Rs 500 passed through Bills Payable Book.

iii)       An item of Rs 150 relating to Prepaid Rent was omitted to be brought forward from last year.

iv)       Rs 400 paid to Mehta B, against our acceptance was debited to Mehta N.

v)         Received Rs 300 from Ajit whose account for Rs 300 was written off earlier and posted to the credit of Amit.

vi)       Transistor sold to Karun for Rs 750 passed through Sales Book twice.

 

Illustration: 7

Following errors were detected in the Accounts of Atma Ram and Sons for the year ended 30^th June, 2023:

i.            A builder’s bill for Rs 2,700 for the erection of a small shed was debited to repairs account.

ii.          A cheque for Rs 300 received from Rahim Bux and Co. was dishonoured and debited to allowances account.

iii.        Goods to the value of Rs 150 returned by Chandmal Bros. were included in stock, but no entry was made in the books.

iv.        Repairs to plant amounting to Rs 567 had been charged to plant and machinery account

v.          Wages paid to the firm’s own workmen for making certain additions to machinery amounting to Rs 550 were posted to wages account.

vi.        A cheque for Rs 75 received from Lala Ram was credited to the account of Tika Ram and debited incorrectly to cash account.

vii.      A sum of Rs 100 drawn by the proprietor for personal use was debited to travelling expenses account.

 

Give journal entries to correct these errors.

 

Illustration: 8

On going through the Trial balance of Ball Bearings Co. Ltd. you find that the debit is in excess by Rs 150. This was credited to “Suspense Account”. On a close scrutiny of the books the following mistakes were noticed:

1)         The totals of debit side of “Expenses Account” have been cast in excess by Rs 50

2)         The “Sales Account” has been totalled in short by Rs 100.

3)         One item of purchase of Rs 25 has been posted from the day book to ledger as Rs 250.

4)         The sale return of Rs 100 from a party has not been posted to that account although the party’s account has been credited.

5)         A cheque of Rs 500 issued to a supplier towards his dues has been wrongly debited to the purchases account.

6)         A credit sale of Rs 50 has been credited to the Sales Account and also to the Sundry Debtors’ Account.

 

You are required to –

i)           Pass necessary journal entries for correcting the above;

ii)         Prepare the “Suspense Account” as it would appear in the ledger; and

iii)       Show how they affect the Profits.

 

Illustration: 9

The books of accounts of Aryan Limited for the year ending 31.03.2023 were closed with a difference in the trial balance carried forward. The following errors were detected subsequently:

(a)     Return outward book was under cast by Rs 100.

(b)     Rs 1,500 being the total of discount column on the credit side of the cash book were not posted.

(c)      Rs 6,000, being the cost of purchase of office furniture was debited to Purchase A/c.

(d)     A credit sale of Rs 760 was wrongly posted as Rs 670 to the customers A/c. in the sales ledger.

(e)     The Sales A/c was under casted by Rs 10,000 being the carry over mistakes in the sales day book.

(f)       Closing stock was over casted by Rs 10,000 being casting error in the schedule or inventory. Pass rectification entries in the next year.

 

Pass necessary journal entries to rectify the above errors, prepare suspense account and state effect of the errors in determination of the net profit for the year ending 31.03.2023.