CPT Fundamentals Of Accounting Chapter 2 Unit 8 CA.V.K.Jain

Different types of errors. One sided and two sided errors. Suspense account. Steps involved in locating errors : Before preparation of TB After TB but before final accounts After final accounts – in the next year

Unintentional omission or mistake in the process of recording transactions.

May be due to Mathematical mistakes ,

At the time of applying principles and policies ,

Misinterpretation of facts or Oversight

Wrong entry.

Wrong posting from cash and subsidiary books.

Wrong casting of subsidiary book.

Wrong casting of ledger balances.

Credit purchases of Rs. 5,000 has been entered in purchase day book as Rs. 6,000.

Total of sales book has been under casted by Rs. 1,000.

Furniture purchased has been entered in Purchase Day Book. Salary paid 10,000 has been posted to Salary account as 1,000.

Goods sold to Mr.David has been omitted to be recorded in the Books of Account. Goods purchased from Mr. Smith Rs. 10,000 was correctly entered in Purchase Day Book but was omitted to be posted in Mr. Smith a/c.

Debit side total of Cash Book was under/over

casted by Rs. 1,000.

Errors of Principle.

Clerical errors :

Errors of Omission

Errors of Commission

Compensating Errors

Contravention or violation of accounting principles.

No discrimination of Capital or Revenue expenditure.

Capital expenditure has been treated as Revenue

expenditure or vice versa.

TB will agree.

Errors of Omission : Full omission - Omitted to record an entry completely from subsidiary books. TB will agree. Partial omission - Omitting to post account in the Account from cash book or subsidiary books . TB will not agree.

Errors of Commission – Wrong amount in Primary Books (TB will agree) Wrong casting (TB will not agree) Posting wrong side (TB will not agree) Posting wrong amount (TB will not agree) Wrong balancing of account (TB will not agree)

Compensating errors :

Two or more errors.

One side of error is compensated by other side intotality.

TB will agree

To check arithmetic accuracy – TB is prepared . If it does nottally ,it can be said that there might be some errors whichrequires rectification thereof . Tallying of TB can not give guarantee about correctness of accounts .

There may still some errors after matching TB .

TB total again

Ledger balances again

Casting should be checked again

Posting of amounts equal to half of the

difference to be checked again

Rectification means correction and is to be

made if and only if there is some error.

In accounting omission is also considered as

an error and treatment is done accordingly.

Before preparation of TB.

After preparation of TB but before final Accounts.

After preparation of final accounts i.e. in the Next year.

Some errors which affect one side of account or more than one account in such a way that it is not possible to pass a complete rectification entry.

These can be corrected by making rectification statement in the appropriate side of concerned account.

Purchase book for December is under cast by Rs. 10,000.

Implications :

There is no error in supplier a/c hence no questionof correction in supplier account.

Only purchase a/c is to be corrected.

Purchase account debit side :

“To under casting of purchases for December”by Rs. 10,000

Rs 10,000 received from Mr. David has been entered

on Dr side of his account.

Implications:

Cash book is correctly written.

Wrong debit in Mr. David a/c Rs. 10,000 is to be removed and also credit is to be given Rs. 10,000.

Total difference would be of Rs. 20,000

Credit side : By posting on wrong side ………..

Bills receivable received from Mr . A Rs. 10,000 was posted to the credit side of Bills payable. However it was correctly posted in A a/c. Implications : B/R account was not debited by 10,000 B/P account was wrongly credited by 10,000 A’s account was correctly posted Dr side of B/P – “To wrong posting ” Rs. 10,000 Dr side of B/R – “ To omission of posting” Rs. 10,000

While posting Discount column Dr side of cash book , discount of 300 allowed to Ankit has not been posted.

There is no error in Cash book . Total of discount column presumably been posted to discount on debit side.

Error is not crediting Ankit account by 300.

It should be done by making an entry:

“By omission of posting of discount …….300”

Rs.150 paid to Prateek has been posted as 15 to the debit of his account.

There is no error in cash book.

Prateek has been debited short by 135.

Rectifying entry will be :

“To mistake in posting 135”

Goods sold to Rohit 3,000 was wrongly posted from Sales book to the debit of purchase account . However Rohit has been correctly debited.

Error affects two accounts namely Sales and Purchase accounts. No error in Rohit account.

Journal entry can not be passed for rectification because both accounts need to be credited.

Rectifying entry will be :

“By wrong posting 3,000” in credit of purchase and also “By omission of posting 3,000”in credit side of sales.

1,000 written off as Depreciation on Furniture has not been posted to depreciation.

No mistake in Furniture account.

Depreciation has been less debited by 1,000.

Rectifying entry will be :

“To omission of posting 1,000” in depreciation account.

Discount allowed to Rohan 200 has not been entered in discount column of Cash book. However it has correctly posted to Rohan account.

No error in Rohan account.

Discount allowed has been short debited by 200.

Rectifying entry will be :

“To omission of discount allowed to Rohan 200” in

discount account

So far we have discussed where rectifying entries were not complete journal entries . In fact rectifying entry is made directly in the account concerned.

Now we will take up correction which affect more than one account in such a way that complete journal entry is possible for rectification.

First right entry – what ought to be or should

have been passed .

Wrong entry – what has been passed .

Now compare the two and pass rectification entry.

Testing – Combined effect of wrong entry passed

earlier and rectification entry passed later will be

equal to the right entry .

Furniture Dr 5,000 To Mr. Rahul 5,000

Purchase Dr 5,000 To Mr. Rahul 5,000

Furniture Dr 5,000

To Purchase 5,000

Right Entry Wrong Entry

Rectification Entry

Purchases Dr 5,000 To A 5,000

A Dr 5,000 To Sales 5,000

Purchases Dr 5,000 Sales Dr 5,000 To A 10,000

Right Entry Wrong Entry

Rectification Entry

Sales Return Dr 1,000 To Mr. Ankit 1,000

No entry has been passed

Sales Return Dr 1,000 To Mr. Ankit 1,000

Right Entry

Rectification Entry

Wrong Entry

Cash Dr 500 To Bad Debt Recovered 500

Cash Dr 500 To Mr.Prateek 500

Mr. Prateek Dr 500 To Bad Debt Recovered 500

Wrong Entry Right Entry

Rectification Entry

Repairs Dr 5,000 To cash 5,000

Furniture Dr 5,000 To cash 5,000

Repairs Dr 5,000 To furniture 5,000

Right Entry Wrong Entry

Rectification Entry

Drawings Dr 2,000 To cash 2,000

Office expenses Dr 2,000 To cash 2,000

Drawings Dr 2,000 To office expenses 2,000

Right Entry Wrong Entry

Rectification Entry

Sales Return Dr 1,000 To Mohan 1,000

No entry has been passed

Sales Return Dr 1,000 To Mohan 1,000

Right Entry Wrong Entry

Rectification Entry

Pradeep Dr 4,000 To Bank 4,000

Sales Return Dr 4,000 To Bank 4,000

Pradeep Dr 4,000 To Sales Return 4,000

Right Entry Wrong Entry

Rectification Entry

If originallyTB not agreed, it might have been artificially tallied by

incorporating suspense account at the side where total was lower.

While passing rectification entry, suspense a/c to be considered.

First right entry – what ought to be or should have been passed.

Wrong entry – what has been done.

Now compare the two and pass rectification entry.

Testing – Net effect of earlier wrong entry and later on rectification

entry will be equal to right entry what should have been passed.

Rectification entry Purchase Dr 1,000 To Suspense 1,000

After TB but before Final Accounts – difference in Suspense Account

Purchase a/c was less totalled by 1,000 whereas individual debtors were correctly posted. Debit side of TB would have been less by 1,000. Since we have already prepared our TB ,it means this difference would have been taken at the debit side of suspense account .

Furniture Dr 1,000 To Cash 1,000

Wages Dr 100 Suspense Dr 900 (By default) To Cash 1,000 ( Difference would haven been taken in suspense Dr side since TB has been prepared.)

Furniture Dr 1,000 To Wages 100 To Suspense 900

Right Entry

Rectification Entry

Wrong Entry

Sales return Dr 1,000 To Mr. Rahul 1,000

Suspense Dr 2,000 (by default) To Sales 1,000 To Mr. Rahul 1,000

Sales Return Dr 1,000 Sales Dr 1,000 To Suspense 2,000

Right Entry

Rectification Entry

Wrong Entry

Cash Dr 1,000 To Furniture 1,000

Cash Dr 1,000 To Sales 1,000

Sales Dr 1,000 To Furniture 1,000

Right Entry Wrong Entry

Rectification Entry

Should have been posted to The debit side of Discount Account by mentioning:

While 6not posting,debit side of TB would have been short by 500 and Suspense Account would have been created in debit side .

Discount Dr 500 To Suspense 500

Wrong Entry Right Entry

Rectification Entry

To sundries as per cash book….

Ramesh Dr 2,500 To Sales 2,500

Mahesh Dr 500 Suspense Dr 2,000 (by default) To sales 2,500

Ramesh Dr 2,500 To Mahesh 500 To Suspense 2,000

Right Entry Wrong Entry

Rectification Entry

Purchase Dr 5,000 To David 5,000

Purchase Dr 5,000 David Dr 5,000 To Suspense 10,000 (by default )

Suspense Dr 10,000 To David (creditor) 10,000

Right Entry

Rectification Entry

Wrong Entry

Rectification Entry Salary Dr 10,000 To Suspense 10,000

Last year Prepaid salary account must have been debited.

By not brought forwarded in current year, prepaid salary was not transferred to Salary a/c and debit side of TB has been short and this short has been tallied by incorporating Suspense account.

Since it is a representative personal account , it should have been brought forwarded .

Debtors Dr 1,000 To Sales 1,000

Suspense Dr 2,000 (by default) To Sales 1,000 To Debtors 1,000

Debtors Dr 2,000 To Suspense 2,000

Right Entry Wrong Entry

Rectification Entry

Drawings Dr 10,000 To Insurance Co. 10,000

No entry has been passed

Drawings Dr 5,000 To Insurance Co. 5,000

Right Entry Wrong Entry

Rectification Entry

Prior period items are income or expenses

which arise in current period as a result of

errors or omissions in previous years.

These should be separately disclosed in current

statement of P&L together with their nature

and amount in a manner that their impact on

current profit /loss can be perceived.

Since effects of Nominal accounts must have

been considered in either Trading or P&L

account and net result of P&L might have been

transferred in Capital account in last year.

Hence net balance of P&L Adjustment or

Prior Period Items will be transferred to

Capital account , not in current years P&L.

Just to be rectified like earlier method. All nominal accounts or accounts closed by transferring to either Trading or P & L a/c –

instead of particular head – to be debited / credited to P&L Adjustment or Prior Period Items . It may also be transferred to Capital a/c directly

with a suitable disclosure. Net result would be the same.

Right Entry Wrong Entry Correction Entry

Mr.Ankit Dr 5,000 To Sales 5,000

Suspense Dr 10,000 (by default) To Sales 5,000 To Mr. Prateek 5,000

Since no nominal account is there in this entry. same rectification entry will be passed.

Mr. Ankit Dr 5,000 Mr. Prateek Dr 5,000 To Suspense 10,000

Right Entry Wrong Entry

Rectification Entry Rectification Entry Normal

Sales Return Dr 2,000 To Debtors 2,000

Suspense Dr 2,000 (by default) To Debtors 2,000

Sales Return Dr 2,000 To Suspense 2,000

P&L Adjustment Dr 2,000 To Suspense 2,000 (Sales Return is a Nominal account and it must have been transferred to Trading and P&L last year)

Right Entry Wrong Entry

Rectification Entry Rectification Entry Normal

Cash Dr 1,000 To Mr. Nimit 1,000

Cash Dr 1,000 Mr. Ankit Dr 1,000 To Suspense 2,000 (by default)

Suspense Dr 2,000 (by default) To Nimit 1,000 To Mr. Ankit 1,000

Since no Nominal account is there in the entry, hence same rectification entry will be passed.

Right Entry Wrong Entry

Rectification Entry Rectification Entry Normal

Scooter Dr 5,000 To Cash 5,000

Conveyance Dr 5,000 To Cash 5,000

Scooter Dr 5,000 To Conveyance 5,000

Scooter Dr 5,000 To P&L Adjustment 5,000

(Conveyance is a Nominal account and it must have been transferred to Trading and P & L last year)

Right Entry Wrong Entry

Rectification Entry Rectification Entry Normal

Mr.Rohit Dr 5,000 To Sales 5,000

No entry was passed

Mr.Rohit Dr 5,000 To Sales 5,000

Mr.Rohit Dr 5,000 To P&L Adjustment 5,000 (Sales is a Nominal account and it must have been

transferred to Trading and P & L last year)

Right Entry

Rectification Entry

Wrong Entry

Rectification Entry Normal

Classification of Errors Errors of Principle. Errors of Omission Errors of Commission Compensating Errors Stages of Rectification Before preparation of TB. After preparation of TB but before final Accounts. After preparation of final accounts i.e. in the Next year.

Fundamental rule for Rectification First right entry – what ought to be or should have been passed . Wrong entry – what has been passed . Now compare the two and pass rectification entry. Testing – Combined effect of wrong entry passed earlier and rectification entry passed later will be equal to the right entry .

Goods purchased from Ramesh for 10,000 passed through sales book . The error will result in : (A)Increase in gross profit

(B)Decrease in gross profit

(C)No effect on gross profit

(D)Either (a) or (b)

ANSWER : A

If posting is in the wrong account or it is written in the wrong side , it is called: (A)error of omission

(B)error of principle

(C)error of commission

(D)either of the three

ANSWER : C

Goods worth 5,000 given as charity should be debited to :

(A)purchases account

(B)sales account

(C)charity account

(D)cash account

ANSWER : C

Rs 1,000 paid as wages for erecting a machine should be debited to :

(A)wages account

(B)machine account

(C) furniture account

(D)capital account

ANSWER : B

Goods worth of 5,000 taken by proprietor should be credited to :

(A) sales account

(B) purchases account

(C) office expense account

(D) none of the above

ANSWER : B

Preparation of TB is for :

(A)locating clerical errors

(B)locating errors of principle

(C)locating errors of commission

(D)all of the above

ANSWER : A

1,000 received from David whose account was written off a bad, should be debited to:

(A)bad debts recovered account

(B)cash account

(C)David account

(D)bad debts account

ANSWER : B

Purchases of office furniture 2,000 has been debited to office expense account . It is :

(A)a clerical error

(B)an error of principle

(C)an error of omission

(D)compensating error

ANSWER : B

Sale of office furniture should be credited to :

(A)purchase account

(B)sales account

(C)furniture account

(D)cash account

ANSWER : C

Which of the following error will not be revealed by TB : (A)Error of Principle

(B)Error of Omission

(C)Compensating Error

(D)All of the above

ANSWER : D

Classify the following errors under :

(A)Error of Omission

(B)Error of Commission

(C)Error of Principle

(D)Compensating Errors

For questions - Please see next slides

1-Repairs of newly purchased second hand car debited to repairs account.

Answer - (C)Error of Principle 2-Total of purchase book was not posted to ledger. Answer - (A)Error of Omission 3 – Sales to Ram was posted to credit side of Shyam. Answer – (B)Error of commission

4 – Goods taken away by proprietor for personal use was not recorded any where.

Answer – (A) Error of Omission 5 – Total of a folio in Purchase book 1,000 was carried

forward as 10,000. Answer (B) Error of Commission Purchase of 10,000 was written in Sales book. Answer – (B) Error of Omission 7- Salary to Sohan debited to his account Answer - (C) Error of Principle

8 – Freight paid on machinery debited to Freight account.

Answer – (C) Error of Principle 9 – Amount of dishonored bill has been debited to

general expense account. Answer - (C) Error of Principle 10 – Discount column of cash book was not posted. Answer - (A) Error of Commission

Thanks for your attention

Thank you

Presented by

CA V.K.JAIN