33
Rectification of Errors Chapter 9 Rectification of Errors Slide 1 /33 www.afzalur.com
| Date post: | 16-Jan-2017 |
| Category: |
Education |
| Upload: | afzalur-rahman |
| View: | 410 times |
| Download: | 0 times |
Rectification of Errors
www.afzalur.com
Chapter 9
Rectification of Errors
Slide 1/33
Rectification of Errors
www.afzalur.com
CHAPTER AT A GLANCE (Chapter 9)9.01 Types of Errors
9.01.01 Errors Disclosed by the Trial Balance9.01.02 Errors not Disclosed by the Trial Balance9.01.03 Steps of Locating Errors
9.02 Rectification of Errors9.03 Suspense Account
Slide 2/33
Rectification of Errors
www.afzalur.com
9.01 TYPES OF ERRORSErrors may be divided into two categories Errors disclosed by the Trial Balance and Errors not disclosed by the Trial Balance.
Slide 3/33
Rectification of Errors
www.afzalur.com
9.01 TYPES OF ERRORS9.01.01 ERRORS DISCLOSED BY THE TRIAL BALANCE Where one aspect of the Journal entry is posted in the
Ledger. Where both the aspects of Journal entry are posted to
one side of an account. Wrong totalling of subsidiary books. Posting the correct amount in one account and wrong
amount in the other account. Wrong totalling or balancing of a Ledger account.
Slide 4/33
Rectification of Errors
www.afzalur.com
9.01 TYPES OF ERRORS9.01.01 ERRORS DISCLOSED BY THE TRIAL BALANCE Omitting to post the totals of subsidiary books into the
Ledger. Omitting to write the Cash Book balances in the Trial
Balance. Omitting to write the balance of an account in the Trial
Balance. Writing a balance in the wrong column of the Trial
Balance. Totalling the Trial Balance wrongly.
Slide 5/33
Rectification of Errors
www.afzalur.com
9.01 TYPES OF ERRORSERRORS NOT DISCLOSED BY THE TRIAL BALANCE Errors of Principle, Compensating Errors Errors of complete omission. Posting the correct amount on the correct side but in the wrong account. Recording wrong amount in the books of original entry (but the recorded amount is debited and credited). Recording both aspects of a transaction twice in the books of accounts.
Slide 6/33
Rectification of Errors
www.afzalur.com
9.01 TYPES OF ERRORSBroad Classification of Errors Error of Principal Error of Omission Error of Commission Compensating Error
Slide 7/33
Rectification of Errors
www.afzalur.com
Error of Principal When a transaction is recorded in contravention of
accounting principles, it is known as an Error of Principle. Such errors do not affect the Trial Balance as amounts
are placed on the correct side but in a wrong account. An example of such an error is treating the purchase of
an asset and/or other amounts spent such as freight, etc., on its acquisition as revenue expenditure instead of as a capital expenditure.
Slide 8/33
Rectification of Errors
www.afzalur.com
Errors of Omission A transaction, if completely or partially omitted from
being recorded in the books of accounts, constitutes an Error of Omission.
Error of Complete Omission arises if a transaction is not recorded in the books of accounts or a transaction recorded in the Journal is not posted in the Ledger.
Such errors do not affect the Trial Balance. An example of such an error is not recording a purchase of furniture or not posting it into the Ledger
Slide 9/33
Rectification of Errors
www.afzalur.com
Error of Partial Omission is an error different from the error of complete omission. Such errors result in the Trial Balance not agreeing. Examples Credit sale recorded in the Sales Book but not posted
into Party Account, or the total not being carried to the next page.
Slide 10/33
Rectification of Errors
www.afzalur.com
Errors of CommissionErrors of Commission are errors which arise due to wrong recording, wrong posting, wrong carrying forward, wrong casting of subsidiary books, wrong balancing, etc.
Slide 11/33
Rectification of Errors
www.afzalur.com
Errors of Commission may be classified as follows Error of Recording Error of Casting Error in Carrying Forward Error of Posting
Slide 12/33
Rectification of Errors
www.afzalur.com
(i) Error of RecordingThis error arises when any transaction is incorrectly Recorded in the book of original entry.Example Goods of Rs.5,000 purchased on credit from Mohan are recorded in the purchases book as Rs.15,000.
Slide 13/33
Rectification of Errors
www.afzalur.com
(ii) Error of CastingThis error arises when a mistake is committed in totalling. ExamplePurchase Book is totalled as Rs.10,000 instead of Rs.1,00,000.
Slide 14/33
Rectification of Errors
www.afzalur.com
(iii) Error in Carrying ForwardThis error arises when a mistake is committed in Carrying Forward a total of one page to the next page.Example Total of Purchases Book is carried forward as Rs.10,000 instead of Rs.1,000.
Slide 15/33
Rectification of Errors
www.afzalur.com
(iv) Error of Posting This error arises when information recorded in the books of original entry are incorrectly entered in the Ledger.Examples: Posting the total of the Sales Book in the Purchases
Account instead of the Sales Account. Posting the total of the Sales Book Rs.10,505 as Rs.10,500 in the Sales Account.
Slide 16/33
Rectification of Errors
www.afzalur.com
(iv) Error of Posting Some of these errors affect the Trial Balance while others do not. Examples of errors that affect the Trial Balance are
Purchases Book being undercast by Rs.1,000 or the Sales Bookbeing overcast by Rs.1,000.
Examples of errors that do not affect the Trial Balance are purchase being recorded as Rs.10,000, instead of Rs.1,000, purchase being recorded in the Sales Book
Slide 17/33
Rectification of Errors
www.afzalur.com
4. Compensating Errors Compensating errors are those errors the effect of which is nullified by another error of equal amount.Example Shyam’s Account was debited with Rs.100 instead of
Rs.1,000 while Ram Prasad’s Account was debited with Rs.1,000 instead of Rs.100.
Slide 18/33
Rectification of Errors
www.afzalur.com
9.01.03Steps to Locate the Errors1. The two columns of the Trial Balance should be totalled
again. If in the place of a number of accounts, only one amount has been written in the Trial Balance, the list of such accounts should be checked and totalled again. For example, the list of sundry debtors.
2. It should be seen that the cash and bank balances have also been written in the Trial Balance.
3. The exact difference in the Trial Balance should be established. The Ledger should be perused; it is possible that a balance equal to the difference has been omitted from the Trial Balance.
Slide 19/33
Rectification of Errors
www.afzalur.com
9.01.03Steps to Locate the Errors4. The Ledger accounts should be balanced again.5. The casting of subsidiary books should be checked
again, especially if the difference is Re. 1, Rs.10,
Rs.100, Rs.1,000, etc.
Slide 20/33
Rectification of Errors
www.afzalur.com
9.01.03Steps to Locate the Errors6. If the difference is big, the balance in the various accounts should be compared with the corresponding
accounts in the previous period. If the figures differ materially, the causes should be seen; it is possible
that an error has been committed. ExampleThe sales account for the current year shows a balance of Rs.32,53,000 whereas it was Rs.36,45,000 last year; it is possible that there is an error in the Sales Account.
Slide 21/33
Rectification of Errors
www.afzalur.com
9.01.03Steps to Locate the Errors7. Posting of amounts equal to half the difference should
be checked. It is possible that an amount has not been posted or has been posted on the wrong side.
8. If there is still a difference in the Trial Balance, a complete checking will be necessary. The
posting of all entries including the opening entry should be checked. It may be better to begin with the Nominal Accounts.
Slide 22/33
Rectification of Errors
www.afzalur.com
9.01.03Steps to Locate the Errors9. If it is not possible to locate the errors, the difference
in the Trial Balance is temporarily transferred to a Suspense Account. Whenever any one-
sided error is detected, it is subsequently rectified through the Suspense Account.
Slide 23/33
Rectification of Errors
www.afzalur.com
9.02 RECTIFICATION OF ERRORS Errors, whether affecting the Trial Balance or not must
be detected and corrected. The procedure followed to rectify the errors
committed and to set right accounting records is called Rectification of Errors.
Slide 24/33
Rectification of Errors
www.afzalur.com
9.02 RECTIFICATION OF ERRORSObjectives Preparing correct accounting records. Ascertaining correct net profit or loss for the accounting period by preparing the Profit and Loss Account with the correct figures. Exhibiting a true financial position of the concern on a
particular date by preparing the Balance Sheet with the correct accounting data.
Slide 25/33
Rectification of Errors
www.afzalur.com
9.02 RECTIFICATION OF ERRORSRectification of errors depends upon the time of their detection and the types of errors. In the following way1. Rectification of Errors before the Preparation of Trial Balance
(i) One-sided Errors (Errors affecting the Trial Balance)(ii) Two-sided Errors (Errors not affecting the Trial Balance)
2. Rectification of Errors after Preparation of the Trial Balance but before the Preparation of Final Accounts
(i) One-sided Errors (Errors affecting Trial Balance)(ii) Two-sided Errors (Errors not affecting Trial Balance)
3. Rectification of Errors in the Next Accounting Year
Slide 26/33
Rectification of Errors
www.afzalur.com
9.03 SUSPENSE ACCOUNTSometimes, when the accountant is not in a position to locate the
difference in the Trial Balance and has to close the books of accounts, he may then, put the Trial Balance difference to a newly opened account known as the Suspense Account.
Slide 27/33
Rectification of Errors
www.afzalur.com
A Suspense Account is an account to which the difference in the Trial Balance
has been put temporarily. If the credit side is short, the Suspense Account will be
credited and if the credit side is bigger, this account will be debited.
With the inclusion of this account in the Trial Balance, it will appear to agree.
The suspense account will be closed as and when error will rectified.
Slide 28/33
Rectification of Errors
www.afzalur.com
Utility (Objective) of Suspense Account.Apart from using the Suspense Account to make up the difference in the Trial Balance, the amounts are debited or credited in this account when the exact treatment of the amount is uncertain.ExampleGoods valued at Rs.1,000 were sold to Manmohan but the trader forgot the name of the purchaser. In such a situation, the entry for this will be passed by opening a Suspense Account.
Slide 29/33
Rectification of Errors
www.afzalur.com
Suspense Account is Used for Rectifying all One-sided Errors. Only those errors which affect the Trial Balance are rectified by passing
their double entry in the debit or credit side of the Suspense Account.
Errors that do not affect the Trial Balance are not rectified by opening a Suspense Account.
Slide 30/33
Rectification of Errors
www.afzalur.com
Disposal of a Suspense Account: Suspense Account represents the net effect of the one-
sided errors. when such errors are corrected by placing the correct
amount to the debit of the proper account, the credit is placed in the Suspense Account. Similarly, when the proper account is credited with the
correct amount, the debit is placed in the Suspense Account.
Slide 31/33
Rectification of Errors
www.afzalur.com
When all one- sided errors are corrected, there should be no balance left in the Suspense Account and this account should stand closed.
But if the Suspense Account cannot be closed, the balance in it is taken to the Balance Sheet on the assets side if there is a debit balance, or the liability side if there is a credit balance.
Slide 32/33
Rectification of Errors
www.afzalur.com
Visit www.afzalur.com for more content and MCQ questions
Thank You
Slide 33/33
