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93, , ACCOUNTING PROCESS, , 2.93, , UNIT 6 : RECTIFICATION OF ERRORS, LEARNING OUTCOMES, After studying this unit, you would be able to, , , Understand different types of errors which may occur in course of recording transactions and, events., , , , Be familiar with the steps involved in locating errors., , , , Learn the nature of one-sided errors and two-sided errors., , , , Understand why suspense account is opened for rectification of errors., , , , Understand the technique of correcting errors of one period in the next accounting period., , UNIT OVERVIEW, , Errors of, Principal, , Errors of, Omissions, , Types of, Errors, , Compensating, Errors, , © The Institute of Chartered Accountants of India, , Erros of, Commission

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2.94, , PRINCIPLES AND PRACTICE OF ACCOUNTING, , 6.1, , INTRODUCTION, , Unintentional omission or commission of amounts and accounts in the process of recording the transactions are, commonly known as errors. These various unintentional errors can be committed at the stage of collecting, financial information/data on the basis of which financial statements are drawn or at the stage of recording this, information. Also errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies,, misinterpretation of facts, or oversight. To check the arithmetic accuracy of the journal and ledger accounts, trial, balance is prepared. If the trial balance does not tally, then it can be said that there are errors in the accounts, which require rectification thereof. Some of these errors may affect the Trial Balance and some of these do not, have any impact on the Trial Balance although such errors may affect the determination of profit or loss, assets, and liabilities of the business., Illustrative Case of Errors and their Nature, We have seen that after preparing ledger accounts a trial balance is taken out where debit and credit balances, are separately listed and totalled. If the two totals do not agree, it is definite that there have been some errors, We shall now study the types of errors which may be committed and how they may be rectified. For this purpose,, the working of the following illustrative cases should be carefully seen., Illustrative Cases of Errors, (a), , Wrong Entry: Let us start from the first phase in the accounting process. Wrong entry of the value of, transactions and events in the subsidiary books, Journal Proper and Cash Book may occur., Example 1: Credit purchases `17,270 are entered in the Purchases Day Book as `17,720. Credit sales, of `15,000 gross less 1% trade discount are wrongly entered in Sales Day Book at `15,000. Cheque, issued `19,920 are wrongly entered in the credit of bank column in the Cash Book as `19,290., , (b), , Wrong casting of subsidiary books: Subsidiary books are totalled periodically and posted to the, appropriate ledger accounts. There may arise totalling errors. Totalling errors may arise due to wrong, entry or simply these may be independent errors., Example 2: For the month of January, 2020 total of credit sales are `1,75,700, this is wrongly totalled, as `1,76,700 and posted to sales account as `1,76,700., , (c), , In case of cash book, wrong castings result in wrong calculation of the balance c/d., Example 3: The following cash transactions of M/s. Tularam & Co. occurred:, 2021, Jan. 1, , Balance - cash `1,200 bank `16,000;, , Jan. 2, , Cheque issued to M/s. Bholaram & Co., a supplier, for `22,500;, , Jan. 6, , Cheque collected from M/s. Scindia & Bros. `42,240 and deposited for clearance;, , Jan. 7, , Cash sales `27,200 paid wages `12,400;, , Jan. 8, , Cash sales ` 37,730 cash deposited to bank ` 35,000., , © The Institute of Chartered Accountants of India

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95, , ACCOUNTING PROCESS, , 2.95, , The following Cash Book entries are passed:, Cash Book, , Dr., Date, , Particulars, , 2021, Jan. 1 To Balance b/d, , Cr., , Cash, , Bank Date, , `, , ` 2021, , 1,200, , Jan. 6 To M/s. Scindia & Bros. A/c, , Particulars, , Cash, , Bank, , `, , `, , 16,000 Jan. 2, , By M/s Bholaram & Co. A/c, , 22,500, , 42,420, , By Wages A/c, , 12,200, , Jan. 7 To Sales A/c, , 27,200, , By Bank A/c, , 34,500, , Jan. 8 To Sales A/c, , 37,370, , By Balance c/d, , 19,070, , 71,420, , 65,770, , 93,920, , 34,500, , Jan. 8 To Cash A/c, , 93,920, , 65,770, , Wrong entries and wrong casting are shown in bold prints. However, errors of cash entries generally are, not carried. Usually cash balances are tallied daily. So errors are identified at an early stage. But bank, balance cannot be checked daily and thus errors may be carried until bank reconciliation is made. In the, above example, there are four wrong entries and one wrong casting. Bank and cash balances are, affected by these errors., (d), , Wrong posting from subsidiary books: In this case, the wrong amount may be posted to the ledger, account or the amount may posted to the wrong side or to the wrong account. For example, purchases, from A may be posted to B’s account., , (e), , Wrong casting of ledger balances: Likewise Cash Book, any ledger account balance may be cast, wrongly. Obviously wrong postings make the balance wrong; but that is not wrong casting of balances., Whenever there arises independent casting error as in the case of bank column in the Cash Book of, example (4), that is called wrong casting of ledger balances., Example 4: The following are the credit purchases of M/s. Ballav Bros.:, 2021, Jan. 1 Purchases from M/s. Saurabh & Co.- gross `1,00,000 less 1% trade discount., Jan. 3 Purchases from M/s. Netai & Co.- gross ` 70,000 less 1% trade discount., Jan. 6 Purchases from M/s. Saurabh & Co.- gross ` 60,000 less 1% trade discount, Let us cast M/s. Saurabh & Co.’s Account:, Dr., , M/s Saurabh & Co. Account, Date, , Particulars, , Amount ` Date, , 2021, Jan. 1, , Cr., Particulars, , Amount `, , 2021, To Balance c/d, , 1,55,400 Jan. 1, Jan. 6, 1,55,400, , By Purchases A/c, By Purchases A/c, , 99,000, 59,400, *1,55,400, , *While casting the credit side an error has been committed and so the account is wrongly balanced., , © The Institute of Chartered Accountants of India

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2.96, , PRINCIPLES AND PRACTICE OF ACCOUNTING, Example 5: Goods are purchased on credit from M/s. Saurabh & Co. for ` 27,030 and from, M/s. Karnataka Suppliers for ` 28,050. The following Day Book is prepared:, Purchases Day Book, Date, , Particulars, , Amount, `, , M/s. Saurabh & Co., , 27,050, , M/s. Karnataka Suppliers, , 28,030, 55,080, , In the Day Book both the transactions are entered wrongly but the first error has been compensated by, the second. Even if these errors are not rectified Trial Balance would tally., Trial Balance, Particulars, M/s. Saurabh & Co., M/s. Karnataka Suppliers, Purchases Account, , 6.2, , STAGES OF ERRORS, , Errors may occur at any of the following stages of the accounting process:, AT THE STAGE OF RECORDING THE TRANSACTIONS IN JOURNAL, Following types of errors may happen at this stage:, (i), , Errors of principle,, , (ii), , Errors of omission,, , (iii), , Errors of commission., , AT THE STAGE OF POSTING THE ENTRIES IN LEDGER, (i), , (ii), , Errors of omission:, (a), , Partial omission,, , (b), , Complete omission., , Errors of commission:, (a), , Posting to wrong account,, , (b), , Posting on the wrong side,, , (c), , Posting of wrong amount., , © The Institute of Chartered Accountants of India, , Dr., `, , 55,080, 55,080, , Cr., `, 27,050, 28,030, 55,080

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97, , ACCOUNTING PROCESS, , 2.97, , AT THE STAGE OF BALANCING THE LEDGER ACCOUNTS, (a), , Wrong Totalling of accounts,, , (b), , Wrong Balancing of accounts., , AT THE STAGE OF PREPARING THE TRIAL BALANCE, (a), , Errors of omission,, , (b), , Errors of commission:, 1., , Taking wrong account,, , 2., , Taking wrong amount,, , 3., , Taking to the wrong side., , On the above basis, we can classify the errors in four broad categories:, 1., , Errors of Principle,, , 2., , Errors of Omission,, , 3., , Errors of Commission,, , 4., , Compensating Errors., , 6.3, , TYPES OF ERRORS, , Basically errors are of two types:, (a), , Errors of principle: When a transaction is recorded in contravention of accounting principles, like, treating the purchase of an asset as an expense, it is an error of principle. In this case there is no effect, on the trial balance since the amounts are placed on the correct side, though in a wrong account., Suppose on the purchase of a computer, the office expenses account is debited; the trial balance will, still agree., , (b), , Clerical errors: These errors arise because of mistake committed in the ordinary course of the, accounting work. These are of three types:, (i), , Errors of Omission: If a transaction is completely or partially omitted from the books of account,, it will be a case of omission. Examples would be: not recording a credit purchase of furniture or, not posting an entry into the ledger., , (ii), , Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong, side or the totals are wrong or a wrong balance is struck, it will be a case of “errors of, commission.”, , (iii), , Compensating Errors: If the effect of errors committed cancel out, the errors will be called, compensating errors. The trial balance will agree. Suppose an amount of `10 received from A, is not credited to his account and the total of the sales book is `10 in excess. The omission of, credit to A’s account will be made up by the increased credit to the Sales Account., , © The Institute of Chartered Accountants of India

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2.98, , PRINCIPLES AND PRACTICE OF ACCOUNTING, From another point of view, error may be divided into two categories:, (a), , (b), , Those that affect the trial balance - because of these errors, trial balance does not agree; these, are the following:, (i), , Wrong casting of the subsidiary books., , (ii), , Wrong balancing of an account., , (iii), , Posting an amount on the wrong side., , (iv), , Posting the wrong amount., , (v), , Omitting to post an amount from a subsidiary book., , (vi), , Omitting to post the totals of subsidiary book., , (vii), , Omitting to write the cash book balances in the trial balance., , (viii), , Omitting to write the balance of an account in the trial balance., , (ix), , Writing a balance in wrong column of the trial balance., , (x), , Totalling the trial balance wrongly., , The errors that do not affect the trial balance are the following:, (i), , Omitting an entry altogether from the subsidiary book., , (ii), , Making an entry with the wrong amount in the subsidiary book., , (iii), , Posting an amount in a wrong account but on the correct side, e.g., an amount to be, debited to A is debited to B, the trial balance will still agree., , © The Institute of Chartered Accountants of India

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99, , ACCOUNTING PROCESS, , 2.99, , 6.4 STEPS TO LOCATE ERRORS, Even if there is only a very small difference in the trial balance, the errors leading to it must be located and, rectified. A small difference may be the result of a number of errors. The following steps will be useful in locating, errors :, (i), , The two columns of the trial balance should be totalled again. If in 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. List of Trade receivables is the example from which Trade receivable balance is derived., , (ii), , It should be seen that the cash and bank balances have been written in the trial balance., , (iii), , The exact difference in the trial balance should be established. The ledger should be gone through; it is, possible that a balance equal to the difference has been omitted from the trial balance. The difference, should also be halved; it is possible that balance equal to half the difference has been written in the, wrong column., , (iv), , The ledger accounts should be balanced again., , (v), , The casting of subsidiary books should be checked again, especially if the difference is, ` 1, ` 100 etc., , (vi), , If the difference is very big, the balance in various accounts should be compared with the corresponding, accounts in the previous period. If the figures differ materially the cases should be seen; it is possible, that an error has been committed. Suppose the sales account for the current year shows a balance of, ` 32,53,000 whereas it was ` 36,45,000 last year; it is possible that there is an error in the Sales, Account., , (vii), , Postings of the amounts equal to the difference or half the difference should be checked. It is possible, that an amount has been omitted to be posted or has been posted on the wrong side., , (viii), , If there is still a difference in the trial balance, a complete checking will be necessary. The posting of all, the entries including the opening entry should be checked. It may be better to begin with the nominal, accounts., , 6.5 RECTIFICATION OF ERRORS, Errors should never be corrected by overwriting. If immediately after making an entry it is clear that an error has, been committed, it may be corrected by neatly crossing out the wrong entry and making the correct entry. If, however the errors are located after some time, the correction should be made by making another suitable entry,, called rectification entry. In fact the rectification of an error depends on at which stage it is detected. An error can, be detected at any one of the following stages:, (a), , Before preparation of Trial Balance., , (b), , After Trial Balance but before the final accounts are drawn., , (c), , After final accounts, i.e., in the next accounting period., , © The Institute of Chartered Accountants of India

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2.100, , PRINCIPLES AND PRACTICE OF ACCOUNTING, , 6.5.1 Before preparation of Trial Balance, There are some errors which affect one side of an account or which affect more than one account in such a way, that it is not possible to pass a complete rectification entry. In other words, there are some errors which can be, corrected, if detected at this stage, by making rectification statement in the appropriate side(s) of concerned, account(s). It is important to note here that such errors may involve only one account or more than one account., Read the following illustrations:, (i), , The sales book for November is undercast by ` 200. The effect of this error is that the Sales Account, has been credited short by ` 200. Since the account is posted by the total of the sales book, there is no, error in the accounts of the customers since they are posted with amounts of individual sales. Hence, only the Sales Accounts is to be corrected. This will be done by making an entry for ` 200 on the credit, side: “By undercasting of Sales Book for November ` 200”., , (ii), , While posting the discount column on the debit side of the cash book the discount of, ` 10 allowed to Ramesh has not been posted. There is no error in the cash book, the total of discount, column presumably has been posted to the discount account on the debit side. The error is in not, crediting Ramesh by ` 10. This should now be done by the entry “By omission of posting of discount on, ----- `10”., , (iii), , ` 200 received from Ram has been entered by mistake on the debit side of his account. Since the cash, book seems to have been correctly written, the error is only in the account of Ram - he should have been, credited and not debited by ` 200. Not only is the wrong debit to be removed but also a credit of ` 200, is to be given. This can be done now by entering ` 400 on the credit side of his account. The entry will, be “By Posting on the wrong side - ` 400”., , (iv), , ` 50 was received from Mahesh and entered on the debit side of the cash book but was not posted to, his account. By the error, which affects only the account of Mahesh, ` 50 has been omitted from the, credit side of his account. The rectification will be by the entry. “By Omission of posting on the ` 50.”, , (v), , ` 51 paid to Mohan has been posted as `15 to the debit of his account. Mohan has been debited short, by ` 36. The rectifying entry is “To mistake in posting on ` 36”., , (vi), , Goods sold to Ram for `1,000 was wrongly posted from sales day book to the debit of purchase account., Ram has however been correctly debited. Here the error affects two accounts, viz., purchases account, and sales account but we cannot pass a journal entry for its rectification because both the accounts need, to be credited. The rectification will be by the entry “By wrong posting on ` 1,000” in the credit of, purchases account and also “By omission of posting on - ` 1,000” in the credit sales account., , (vii), , Bills receivable from Mr. A of ` 500 was posted to the credit of Bills payable Account and also credited, to A account. Here also although two accounts are involved we cannot pass a complete journal entry for, rectification. The rectification will be by the entry “To wrong posting on ` 500” in debit of Bills payable, Account and also “To omission of posting on ` 500” in the debit of Bills Receivable Account., , (viii), , Goods purchased from Vinod for ` 1,000 was wrongly credited to Vimal account by ` 100. Again we, cannot pass a complete journal entry for rectification even though two accounts are involved. The, rectification will be done by the entry “To wrong posting on `100” in the debit of Vimal account and “By, omission of posting on ` 1,000” in the credit of Vinod account., , © The Institute of Chartered Accountants of India

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101, , ACCOUNTING PROCESS, , 2.101, , Thus, from the above illustrations we are convinced that the general rule that errors affecting two accounts can, always be corrected by a journal entry is not always valid., ILLUSTRATION 1, How would you rectify the following errors in the book of Rama & Co.?, 1., , The total to the Purchases Book has been undercast by ` 100., , 2., , The Returns Inward Book has been undercast by ` 50., , 3., , A sum of ` 250 written off as depreciation on Machinery has not been debited to Depreciation Account., , 4., , A payment of ` 75 for salaries (to Mohan) has been posted twice to Salaries Account., , 5., , The total of Bills Receivable Book ` 1,500 has been posted to the credit of Bills Receivable Account., , 6., , An amount of `151 for a credit sale to Hari, although correctly entered in the Sales Book, has been, posted as ` 115., , 7., , Discount allowed to Satish ` 25 has not been entered in the Discount Column of the Cash Book. the, amount has been posted correctly to the credit of his personal account., SOLUTION, , 1., , The Purchases Account should receive another debit of `100 since it was debited short previously:, “To Undercasting of Purchases Book for the month of --- `100.”, , 2., , Due to this error the Returns Inward Account has been posted short by ` 50 : the correct entry will be:, “To Undercasting of Returns Inward Book for the month of --- `50.”, , 3., , The omission of the debit to the Depreciation Account will be rectified by the entry:, “To Omission of posting on ` 250”., , 4., , The excess debit will be removed by a credit in the Salaries Account by the entry:, “By double posting on ` 75”., , 5., , `1,500 should have been debited to the Bills Receivable Account and not credited. To correct the, mistake, the Bills Receivable Account should be debited by ` 3,000 by the entry:, “To Wrong posting of B/R received on ` 3,000”, , 6., , Hari’s personal A/c is debited ` 36 short. The rectification entry will be:, “To Wrong posting ` 36”., , 7., , Due to this error, the discount account has been debited short by ` 25. The required entry is :, “To Omission of discount allowed to Satish on ` 25.”, , So far we have discussed the correction of errors which affected only one Account or more than one account but, for which rectifying entries were not complete journal entries. We shall now take up the correction of errors which, affect more than one account in such a way that complete journal entries are possible for their rectification. Read, the following illustrations:, , © The Institute of Chartered Accountants of India

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2.102, (i), , PRINCIPLES AND PRACTICE OF ACCOUNTING, The purchase of machinery for ` 2,000 has been entered in the purchases book. The effect of the entry, is that the account of the supplier Ram & Co. has been credited by ` 2,000 which is quite correct. But, the debit to the Purchases Account is wrong : the debit should be to Machinery Account. To rectify the, error, the debit in the purchases Account has to be transferred to the Machinery Account. The correcting, entry will be to Credit Purchases Account and debit the Machinery Account. Please see the three entries, made below: the last entry rectifies the error:, Wrong Entry:, Purchases Account, , `, Dr., , `, , 2,000, , To Ram & Co., , 2,000, , Correct Entry:, Machinery Account, , Dr., , 2,000, , To Ram & Co., , 2,000, , Rectifying Entry:, Machinery Account, , Dr., , 2,000, , To Purchases Account, (ii), , 2,000, , `100 received from Kamal Kishore has been credited in the account of Krishan Kishore. The error is that, there is a wrong credit in the account of Krishan Kishore and omission of credit in the account of Kamal, Kishore; Krishan Kishore should be debited and Kamal Kishore be credited. The following three entries, make this clear:, Wrong Entry:, Cash Account, , `, Dr., , `, , 100, , To Krishan Kishore, , 100, , Correct Entry:, Cash Account, , Dr., , 100, , To Kamal Kishore, , 100, , Rectifying Entry:, Krishan Kishore, , Dr., , 100, , To Kamal Kishore, (iii), , 100, , The sale of old machinery, `1,000 has been entered in the sales book. By this entry the account of the, buyer has been correctly debited by `1,000. But instead of crediting the Machinery Account. Sales, Account has been credited. To rectify the error this account should be debited and the Machinery, Account credited. See the three entries given below:, Wrong Entry:, Buyer’s Account, To Sales Account, Correct Entry:, , © The Institute of Chartered Accountants of India, , `, Dr., , `, , 1,000, 1,000

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103, , ACCOUNTING PROCESS, Buyer’s Account, , Dr., , 2.103, 1,000, , To Machinery Account, , 1,000, , Rectifying Entry:, Sales Account, , Dr., , 1,000, , To Machinery Account, , 1,000, , ILLUSTRATION 2, The following errors were found in the book of Ram Prasad & Sons. Give the necessary entries to correct them., (1), , ` 500 paid for furniture purchased has been charged to ordinary Purchases Account., , (2), , Repairs made were debited to Building Account for ` 50., , (3), , An amount of `100 withdrawn by the proprietor for his personal use has been debited to Trade Expenses, Account., , (4), , `100 paid for rent debited to Landlord’s Account., , (5), , Salary ` 125 paid to a clerk due to him has been debited to his personal account., , (6), , ` 100 received from Shah & Co. has been wrongly entered as from Shaw & Co., , (7), , ` 700 paid in cash for a typewriter was charged to Office Expenses Account., SOLUTION, Journal, , (1), , (2), , (3), , (4), , (5), , Particulars, , L.F., , Furniture A/c, To Purchases A/c, (Correction of wrong debit to Purchases A/c for furniture purchased), Repairs A/c, To Building A/c, (Correction of wrong debit to building A/c for repairs made), Drawings A/c., To Trade Expenses A/c, (Correction of wrong debit to Trade Expenses A/c for cash withdrawn, by the proprietor for his personal use), Rent A/c, To Landlord’s Personal A/c, (Correction of wrong debit to landlord’s A/c for rent paid), Salaries A/c, To Clerk’s (Personal) A/c, (Correction of wrong debit to Clerk’s personal A/c for salaries paid), , Dr., , Dr., `, 500, , Dr., , 50, , Dr., , 100, , Dr., , 100, , Dr., , 125, , © The Institute of Chartered Accountants of India, , Cr., `, 500, , 50, , 100, , 100, , 125

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2.104, (6), , (7), , PRINCIPLES AND PRACTICE OF ACCOUNTING, Shaw & Co., To Shah & Co., (Correction of wrong credit to Shaw & Co. Instead of Shah & Co.), Typewriter A/c, To Office Expenses A/c, (Correction of wrong debit to Office Expenses A/c for purchase of, typewriter), , Dr., , 100, , Dr., , 700, , 100, , 700, , ILLUSTRATION 3, Give journal entries to rectify the following:, (1), , A purchase of goods from Ram amounting to `150 has been wrongly entered through the Sales Book., , (2), , A Credit sale of goods amounting `120 to Ramesh has been wrongly passed through the Purchase, Book., , (3), , On 31st December, 2020 goods of the value of ` 300 were returned by Hari Saran and were taken, inventory on the same date but no entry was passed in the books., , (4), , An amount of ` 200 due from Mahesh Chand, which had been written off as a Bad Debt in a previous, year, was unexpectedly recovered, and had been posted to the personal account of Mahesh Chand., , (5), , A Cheque for ` 100 received from Man Mohan was dishonoured and had been posted to the debit of, Sales Returns Account., SOLUTION, Journal, , (1), , Particulars, , L.F., , Dr., `, , Purchases A/c, , Dr., , 150, , Sales A/c, , Dr., , 150, , To Ram, , Cr., `, , 300, , (Correction of wrong entry in the sales Book for a purchases of goods from Ram), (2), , Ramesh, , Dr., , 240, , To Purchases A/c, , 120, , To Sales A/c, , 120, , (Correction of wrong entry in the Purchases Book of a credit sale of goods to, Ram), (3), , Returns Inwards A/c, , Dr., , 300, , To Hari Saran, , 300, , (Entry of goods returned by him and taken in inventory omitted from records), (4), , Mahesh Chand, , © The Institute of Chartered Accountants of India, , Dr., , 200

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105, , ACCOUNTING PROCESS, , 2.105, , To Bad Debts Recovered A/c, , 200, , (Correction of wrong credit to Personal A/c in respect of recovery of previously, written off bad debts), (5), , Man Mohan, , Dr., , 100, , To Sales Return A/c, , 100, , (Correction of wrong debit to Sales Returns A/c for dishonour of cheque, received from Man Mohan), Thus, it can be said that errors detected before the preparation of trial balance can be rectified either through, rectification statements (not entries) or through rectification entries., , 6.5.2 After Trial Balance but before Final Accounts, The method of correction of error indicated so far is appropriate when the errors have been located before the, end of the accounting period. After the corrections the trial balance will agree. Sometimes the trial balance is, artificially made to agree inspire of errors by opening a suspense account and putting the difference in the trial, balance to the account - the suspense account will be debited if the total of the credit column in the trial balance, exceeds the total of the debit column; it will be credited in the other case., One must note that such agreement of the trial balance will not be real. Effort must be made to locate the errors., The rule of rectifying errors detected at this stage is simple. Those errors for which complete journal entries were, not possible in the earlier stage of rectification (i.e., before trial balance) can now be rectified by way of journal, entry(s) with the help of suspense account, for it these errors which gave rise to the suspense account in the trial, balance. The rectification entry for other type of error i.e. error affecting more than one account in such a way, that a complete journal entry is possible for its rectification, can be rectified in the same way as in the earlier, stage (i.e. before trial balance)., In a nutshell, it can be said that each and every error detected at this stage can only be corrected by a complete, journal entry. Those errors for which journal entries were not possible at the earlier stage will now be rectified by, a journal entry(s), the difference or the unknown side is being taken care of by suspense account. Those errors, for which entries were possible even at the first stage will now be rectified in the same way., Suppose, the sales book for November, 2019 is cast `100 short; as a consequence the trial balance will not, agree. The credit column of the trial balance will be `100 short and a Suspense Account will be credited by `100., To rectify the error the Sales Account will be credited (to increase the credit to the right figure. Since now one, error remains, the Suspense Account must be closed- it will be debiting the Suspense Account. The entry will be:, Suspense Account, To Sales Account, , Dr., , `100, `100, , (Correction of error of undercasting the sales Book for November 2019), ILLUSTRATION 4, Correct the following errors (i) without opening a Suspense Account and (ii) opening a Suspense Account:, (a), , The Sales Book has been totalled `100 short., , © The Institute of Chartered Accountants of India

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2.106, , PRINCIPLES AND PRACTICE OF ACCOUNTING, , (b), , Goods worth `150 returned by Green & Co. have not been recorded anywhere., , (c), , Goods purchased `250 have been posted to the debit of the supplier Gupta & Co., , (d), , Furniture purchased from Gulab & Bros, `1,000 has been entered in Purchases Day Book., , (e), , Discount received from Red & Black `15 has not been entered in the Discount Column of the Cash Book., , (f), , Discount allowed to G. Mohan & Co. `18 has not been entered in the Discount Column of the Cash, Book. The account of G. Mohan & Co. has, however, been correctly posted., SOLUTION, , If a Suspense Account is not opened., (a), , Since sales book has been cast `100 short, the Sales Account has been similarly credited `100 short., The correcting entry is to credit the Sales Account by `100 as “By wrong totalling of the Sales Book, `100”., , (b), , To rectify the omission, the Returns Inwards Account has to be debited and the account of Green & Co., credited. The entry:, Returns Inward Account, , Dr., , `150, , To Green & Co., , `150, , (Goods returned by the firm, previously omitted from the Returns Inward Book), (c), , Gupta & Co. have been debited `250 instead of being credited. This account should now be credited by, 500 to remove the wrong debit and to give the correct debit. The entry will be on the credit side... “By, errors in posting `500”., , (d), , By this error Purchases Account has to be debited by `1,000 whereas the debit should have been to the, Furniture Account. The correcting entry will be:, Furniture Account, , Dr., , `1,000, , To Purchases Account, , `1,000, , (Correction of the mistake by which of the Furniture Account), (e), , The discount of `15 received from Red & Black should have been entered on the credit side of the cash, book. Had this been done, the Discount Account would have been credited (through the total of the, discount column) and Red & Black would have been debited. This entry should not be made:, Red & Black, To Discount Account, , Dr., , `15, `15, , (Rectification of the error by which the discount allowed by the firm was not, entered in Cash Book), (f), , In this case the account of the customer has been correctly posted; the Discount Account has been, debited `18 short since it has been omitted from the discount column on the debit side of the cash book., The discount account should now be debited by the entry; “To Omission of entry in the Cash Book `18.”, , © The Institute of Chartered Accountants of India

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107, , ACCOUNTING PROCESS, , 2.107, , If a Suspense Account is opened :, Particulars, (a), , L.F., , Suspense Account, , Dr., , Dr., `, , Cr., `, , 100, , To Sales Account, , 100, , (Being the correction arising from under- casting of Sales Day, Book), (b), , Return Inward Account, , Dr., , To Green & Co, , 150, , ., , 150, , (Being the recording of unrecorded returns), (c), , Suspense Account, , Dr., , 500, , To Gupta & Co., , 500, , (Being the correction of the error by which Gupta & Co. was, debited instead of being credited by ` 250)., (d), , Furniture Account, , Dr., , 1,000, , To Purchases Account, , 1,000, , (Being the correction of recording purchase of furniture as, ordinary purchases), (e), , Red & black, , Dr., , 15, , To Discount Account, , 15, , (Being the recording of discount omitted to be recorded), (f), , Discount Account, , Dr., , To Suspense Account, , 18, 18, , (Being the correction of omission of the discount allowed from, Cash Book customer’s account already posted correctly)., Suspense Account, Dr., Date, , Particulars, To Sales A/c, To Gupta & Co., , Amount Date, `, 100, 500, 600, , Particulars, By Difference in, Trial Balance, By Discount A/c, , Cr., Amount`, 582, 18, 600, , Notes:, (i), , One should note that the opening balance in the Suspense Account will be equal to the, difference in the trial balance., , © The Institute of Chartered Accountants of India

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2.108, , PRINCIPLES AND PRACTICE OF ACCOUNTING, (ii), , If the question is silent as to whether a Suspense Account has been opened, the student should, make his assumption, state it clearly and then proceed., , ILLUSTRATION 5, Correct the following errors found in the books of Mr. Dutt. The Trial Balance was out by ` 493 excess credit., The difference thus has been posted to a Suspense Account., (a), , An amount of `100 was received from D. Das on 31st December, 2020 but has been omitted to enter in, the Cash Book., , (b), , The total of Returns Inward Book for December has been cast `100 short., , (c), , The purchase of an office table costing ` 300 has been passed through the Purchases Day Book., , (d), , ` 375 paid for Wages to workmen for making show-cases had been charged to “Wages Account”., , (e), , A purchase of ` 67 had been posted to the trade payables’ account as ` 60., , (f), , A cheque for ` 200 received from P. C. Joshi had been dishonoured and was passed to the debit of, “Allowances Account”., , (g), , ` 1,000 paid for the purchase of a motor cycle for Mr. Dutt had been charged to “Miscellaneous Expenses, , (h), , Goods amounting to `100 had been returned by customer and were taken in to inventory, but no entry, in respect there of, was made into the books., , (i), , A sale of ` 200 to Singh & Co. was wrongly credited to their account. Entry was made correctly made, in sales book., , Account”., , SOLUTION, (a), , Journal Entries, Particulars, (a), , Cash Account, , L.F., , `, , Dr., , 100, , To D. Das, , `, 100, , (Being the amount received), (b), , Returns Inward Account, , Dr., , 100, , To Suspense Account, , 100, , (Being the mistake in totalling the Returns Inward Book, corrected), (c), , Furniture Account, To Purchases Account, (Being the rectification of mistake by which purchase of, furniture was entered in Purchases book and hence debited to, Purchases Account), , © The Institute of Chartered Accountants of India, , Dr., , 300, 300

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109, , ACCOUNTING PROCESS, (d), , Furniture Account, , Dr., , 2.109, 375, , To Wages Account, , 375, , (Being the wages paid to workmen for making show-cases, which should be capitalised and not to be charged to Wages, Account), (e), , Suspense Account, , Dr., , 7, , To Creditors (personal) Account, , 7, , (Being the mistake in crediting the Trade payables Account less, by ` 7, now corrected), (f), , P.C. Joshi, , Dr., , 200, , To Allowances Account, , 200, , (Being the cheque of P.C. Joshi dishonoured, previously, debited to Allowances Account), (g), , Drawings Account, , Dr., , 1,000, , To Miscellaneous Expenses, , 1,000, , (Being the motor cycle purchased for Mr. Dutt debited to his, Drawings Account instead of Miscellaneous Expenses Account, as previously done by mistake), (h), , Returns Inward Account, , Dr., , 100, , To Debtors (Personal) Account, , 100, , (Correction of the omission to record return of goods by, customers), (i), , Singh & Co., , Dr., , To Suspense Account, , 400, 400, , (Being the correction of mistake by which the account of Singh, & Co. was credited by ` 200 instead of being debited), Suspense Account, Dr., Date, , Cr., Particulars, , Amount Date, , 2020, Dec.31, , ` 2020, To Difference in, Trial Balance, , ““, , Particulars, , To Trade Payables A/c, , Dec. 31, 493, 7 ““, 500, , © The Institute of Chartered Accountants of India, , Amount, `, , By Returns, Inwards A/c, , 100, , By Singh & Co., , 400, 500

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2.110, , PRINCIPLES AND PRACTICE OF ACCOUNTING, ILLUSTRATION 6, , The following errors, affecting the account for the year 2020 were detected in the books of Jain Brothers, Delhi:, (1), , Sale of old Furniture ` 150 treated as sale of goods., , (2), , Receipt of ` 500 from Ram Mohan credited to Shyam Sunder., , (3), , Goods worth ` 100 brought from Mohan Narain have remained unrecorded so far., , (4), , A return of ` 120 from Mukesh posted to his debit., , (5), , A return of ` 90 to Shyam Sunder posted as ` 9 in his account., , (6), , Rent of proprietor’s residence, ` 600 debited to rent A/c., , (7), , A payment of ` 215 to Mohammad Sadiq posted to his credit as `125., , (8), , Sales Book added ` 900 short., , (9), , The total of Bills Receivable Book ` 1,500 left unposted., , You are required to pass the necessary rectifying entries and show how the trial balance would be affected by, the errors., SOLUTION, Journal, Particulars, , (1), , Sales Account, , L.F., , Dr., , Dr., Amount, `, , Cr., Amount, `, , 150, , To Furniture Account, , 150, , (Rectification of sales of furniture treated as sales of goods), (2), , Shyam Sunder, , Dr., , 500, , To Rama Mohan, , 500, , (Rectification of a receipt from Ram Mohan credited to Shyam, Sunder), (3), , Purchases Account, , Dr., , 100, , To Mohan Narain, , 100, , (Purchases of goods from Mohan Narain unrecorded), (6), , Drawing Account, To Rent Account, , Dr., , 600, 600, , (Rectification of Payment of rent of proprietor’s residence, treated as payment of office rent), N.B. : For 4, 5, 7, 8, 9 no journal entry can be passed as they affect a single account. The correction will be as, under:, , © The Institute of Chartered Accountants of India

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111, , ACCOUNTING PROCESS, (4), , Credit Mukesh’s Account with ` 240., , (5), , Debit the account of Shyam Sunder by ` 81., , (7), , Debit the account of Mohammad Sadiq by ` 340., , (8), , Credit Sales Account by ` 900., , (9), , Debit Bills Receivable Account with `1,500., , 2.111, , Effect of the Errors on Trial Balance, 1., , No effect, , 2., , No effect, , 3., , No effect, , 4., , Trial Balance credit total short by, , `, , 240., , 5., , Trial Balance debit total short by, , `, , 81., , 6., , No effect, , 7., , Trial Balance debit total short by, , `, , 340., , 8., , Trial Balance credit total short by, , `, , 900., , 9., , Trial Balance debit total short by, , `, , 1,500., , ILLUSTRATION 7, Write out the Journal Entries to rectify the following errors, using a Suspense Account., (1), , Goods of the value of ` 100 returned by Mr. Sharma were entered in the Sales Day Book and posted, therefrom to the credit of his account;, , (2), , An amount of `150 entered in the Sales Returns Book, has been posted to the debit of Mr. Philip, who, returned the goods;, , (3), , A sale of ` 200 made to Mr. Ghanshyam was correctly entered in the Sales Day Book but wrongly posted, to the debit of Mr. Radheshyam as ` 20; and, , (4), , The total of “Discount Allowed” column in the Cash Book for the month of September, 2020 amounting, to ` 250 was not posted., SOLUTION, Journal, Particulars, , (1), , Sales Account, Sales Returns Account, To Suspense Account, (The value of goods returned by Mr. Sharma wrongly, posted to Sales and omission of debit to Sales Returns, Account, now rectified), , © The Institute of Chartered Accountants of India, , L.F., Dr., Dr., , Dr., `, , Cr., `, , 100, 100, 200

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2.112, (2), , PRINCIPLES AND PRACTICE OF ACCOUNTING, Suspense Account, , Dr., , 300, , To Mr. Philip, , 300, , (Wrong debit to Mr. Philip for goods returned by him, now, rectified), (3), , Mr. Ghanshyam, , Dr., , 200, , To Mr. Radheshyam, , 20, , To Suspense Account, , 180, , (Omission of debit to Mr. Ghanshyam and wrong credit, to Mr. Radhesham for sale of ` 200, now rectified), (4), , Discount Account, , Dr., , To Suspense Account, , 250, 250, , (The total of Discount allowed during September, 2020, not posted from the Cash Book; error now rectified), , 6.5.3 Correction in the next Accounting Period, Rectification of errors discussed so far assumes that it was carried out before the books were closed for the, concerned year. However, sometimes, the rectification is carried out in the next year, carrying forward the balance, in the Suspense Account or even transferring it to the Capital Account. Suppose, the Purchase Book was cast, short by `1,000 in December, 2020 and a Suspense Account was opened with the difference in the trial balance., If the error is rectified next year and the entry passed is to debit Purchase Account (and credit Suspense Account),, it will mean that the Purchases Account for year 2021 will be `1,000 more than the amount relating to year 2021, and thus the profit that year 2021 will be less than the actual for that year. Thus, correction of errors in this, manner will ‘falsify’ the Profit and Loss Account., To avoid this, correction of all amounts concerning nominal accounts, i.e., expenses and incomes should be, through a special account styled as “Prior Period Items” or “Profit and Loss Adjustment Account”. The balance in, the account should be transferred to the Profit and Loss Account. However, these Prior Period Items should be, charged after deriving net profit of the current year. ‘Prior Period items’ are material income or expenses which, arise in the current period as a result of errors or omissions in the preparation of the financial statements of one, or more periods. Prior Period Items should be separately disclosed in the current statement of profit and loss, together with their nature and amount in a manner that their impact on current profit or loss can be perceived., ILLUSTRATION 8, Mr. Roy was unable to agree the Trial Balance last year and wrote off the difference to the Profit and Loss Account, of that year. Next Year, he appointed a Chartered Accountant who examined the old books and found the, following mistakes:, (1), , Purchase of a scooter was debited to conveyance account `3,000., , (2), , Purchase account was over-cast by `10,000., , (3), , A credit purchase of goods from Mr. P for ` 2,000 was entered as a sale., , © The Institute of Chartered Accountants of India

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113, , ACCOUNTING PROCESS, (4), , Receipt of cash from Mr. A was posted to the account of Mr. B ` 1,000., , (5), , Receipt of cash from Mr. C was posted to the debit of his account, ` 500., , (6), , ` 500 due by Mr. Q was omitted to be taken to the trial balance., , (7), , Sale of goods to Mr. R for ` 2,000 was omitted to be recorded., , (8), , Amount of ` 2,395 of purchase was wrongly posted as ` 2,593., , 2.113, , Mr. Roy used 10% depreciation on vehicles. Suggest the necessary rectification entries., SOLUTION, Journal Entries in the books of Mr. Roy, Date, , Particulars, , (1), , Motor Vehicles Account, , Dr., `, Dr., , Cr., `, , 2,700, , To Profit and Loss Adjustment A/c, , 2,700, , (Purchase of scooter wrongly debited to conveyance, account now rectified-capitalisation of ` 2,700, i.e.,, ` 3,000 less 10% depreciation), (2), , Suspense Account, , Dr., , 10,000, , To Profit & Loss Adjustment A/c, , 10,000, , (Purchase Account overcast in the previous year;, error now rectified)., (3), , Profit & Loss Adjustment A/c, , Dr., , 4,000, , To P’s Account, , 4,000, , (Credit purchase from P ` 2,000, entered as sales, last year; now rectified), (4), , B’s Account, , Dr., , 1,000, , To A’s Account, , 1,000, , (Amount received from A wrongly posted to the, account of B; now rectified), (5), , Suspense Account, , Dr., , 1,000, , To C’s Account, , 1,000, , (` 500 received from C wrongly debited to his, account; now rectified), (6), , Trade receivables, To Suspense Account, (` 500 due by Q not taken into trial balance; now, rectified), , © The Institute of Chartered Accountants of India, , Dr., , 500, 500

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2.114, (7), , PRINCIPLES AND PRACTICE OF ACCOUNTING, R’s Account, , Dr., , 2,000, , To Profit & Loss Adjustment A/c, , 2,000, , (Sales to R omitted last year; now adjusted), (8), , Suspense Account, , Dr., , 198, , To Profit & Loss Adjustment A/c, , 198, , (Excess posting to purchase account last year,, ` 2,593, instead of ` 2,395, now adjusted), (9), , Profit & Loss Adjustment A/c, , Dr., , 10,898, , To Roy’s Capital Account, , 10,898, , (Balance of Profit & Loss Adjustment A/c transferred, to Capital Account), (10), , Roy’s Capital Account, , Dr., , 10,698, , To Suspense Account, , 10,698, , (Balance of Suspense Account transferred to the, Capital Account), Note : Entries No. (2) and (8) may even be omitted; but this is not advocated., Profit and Loss Adjustment Account, (Prior Period Items), `, To P, To Roy’s Capital (transfer), , `, , 4,000 By Motor Vehicles A/c, 10,898 By Suspense A/c, By R, By Suspense Account, 14,898, , 2,700, 10,000, 2,000, 198, 14,898, , Suspense Account, `, To Profit & Loss Adjustment Account, To C, To Profit & Loss Adjustment Account, , 10,000 By Trade Receivables (Q), 1,000 By Roy’s Capital Account (Transfer), , `, 500, 10,698, , 198, 11,198, , © The Institute of Chartered Accountants of India, , 11,198

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115, , ACCOUNTING PROCESS, , 2.115, , SUMMARY, , , Unintentional omission or commission of amounts and accounts in the process of recording the, transactions are commonly known as errors., , , , Accounting errors are generally of four types(a), , Errors of Principle;, , (b), , Errors of Omission;, , (c), , Errors of Commission;, , (d), , Compensating Errors., , , , Some errors may affect the Trial Balance and some of these do not., , , , The method of rectification of errors depends on the stage at which the errors are detected. If the error, is detected before the preparation of trial balance, rectification is carried out by making the statement in, the appropriate side of the concerned account., , , , In case of the errors detected after the preparation of the trial balance, we open a suspense account, with the amount of difference in the trial balance. Then complete journal entries can be passed for, rectifying the errors., , , , For rectifying the errors detected in the next accounting period, a special account ‘Profit and Loss, Adjustment Account’ is opened for correction of amounts relating to expenses and incomes., , TEST YOUR KNOWLEDGE, True and False, 1., , The method of rectification of errors depends on the stage at which the errors are detected., , 2., , In case of error of complete omission, the trial balance does not tally., , 3., , When errors are detected after preparation of trial balance, suspense account is opened., , 4., , When purchase of an asset is treated as an expense, it is known as error of principle., , 5., , Trial balance agrees in case of compensating errors., , 6., , When amount is written on wrong side, it is known as an error of principle., , 7., , On purchase of furniture, the amount spent on repairs should be debited to repairs account., , 8., , ‘Profit & Loss adjustment account’ is opened to rectify the errors detected in the current accounting, period., , 9., , Rent paid to land lord of the proprietors house, must be debited to ‘Rent account’., , 10., , If the errors are detected after preparing trial balance, then all the errors are rectified through suspense, account., , © The Institute of Chartered Accountants of India

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2.116, , PRINCIPLES AND PRACTICE OF ACCOUNTING, , Multiple Choice Questions, 1., , 2., , 3., , 4., , 5., , 6., , 7., , Goods purchased from A for `10,000 passed through the sales book. The error will result in, (a), , Increase in gross profit., , (b), , Decrease in gross profit., , (c), , No effect on gross profit., , If a purchase return of `1,000 has been wrongly posted to the debit of the sales returns account, but, has been correctly entered in the suppliers’ account, the total of the, (a), , Trial balance would show the debit side to be `1,000 more than the credit., , (b), , Trial balance would show the credit side to be ` 1,000 more than the debit., , (c), , The debit side of the trial balance will be ` 2,000 more than the credit side., , If the amount is posted in the wrong account or it is written on the wrong side of the account, it is called, (a), , Error of omission., , (b), , Error of commission., , (c), , Error of principle., , ` 200 paid as wages for erecting a machine should be debited to, (a), , Repair account., , (b), , Machine account., , (c), , Capital account., , On purchase of old furniture, the amount of `1,000 spent on its repair should be debited to, (a), , Repair account., , (b), , Furniture account., , (c), , Cash account., , Goods worth `50 given as charity should be credited to, (a), , Charity account., , (b), , Sales account., , (c), , Purchase account., , Goods worth `100 taken by proprietor for domestic use should be credited to, (a), , Sales account., , (b), , Proprietor’s personal expenses., , (c), , Purchases account., , © The Institute of Chartered Accountants of India

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117, , ACCOUNTING PROCESS, 8., , 2.117, , Sales of office furniture should be credited to, , 9., , (a), , Sales Account., , (b), , Furniture Account., , (c), , Purchase Account., , The preparation of a trial balance is for:, , 10., , 11., , (a), , Locating errors of commission., , (b), , Locating errors of principle., , (c), , Locating clerical errors., , ` 200 received from Smith whose account, was written off as a bad debt should be credited to:, (a), , Bad Debts Recovered account., , (b), , Smith’s account., , (c), , Cash account., , Purchase of office furniture `1,200 has been debited to General Expense Account. It is:, (a), , A clerical error., , (b), , An error of principle., , (c), , An error of omission., , Theory Questions, 1., , How does errors of omission differ from errors of commission?, , 2., , What is error of principle and how does it affect Trial Balance?, , 3., , When and how is Suspense account used to rectify errors?, , Practical Questions, 1., , The trial balance of Mr. W & H failed to agree and the difference `20,570 was put into suspense pending, investigation which disclosed that:, (i), , Purchase returns day book had been correctly entered and totalled at `6,160, but had not been, posted to the ledger., , (ii), , Discounts received `1,320 had been debited to discounts allowed., , (iii), , The Sales account had been under added by `10,000., , (iv), , A credit sale of `1,470 had been debited to a customer account at `1,740., , (v), , A vehicle bought originally for `7,000 four years ago and depreciated to `1,200 had been sold, for `1,500 in the beginning of the year but no entries, other than in the bank account had been, passed through the books., , (vi), , An accrual of `560 for telephone charges had been completely omitted., , © The Institute of Chartered Accountants of India

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2.118, , PRINCIPLES AND PRACTICE OF ACCOUNTING, (vii), , A bad debt of `1,560 had not been written off and provision for doubtful debts should have been, maintained at 10% of Trade receivables which are shown in the trial balance at `23,390 with a, credit provision for bad debts at `2,320., , (viii), , Tools bought for `1,200 had been inadvertently debited to purchases., , (ix), , The proprietor had withdrawn, for personal use, goods worth `1,960. No entries had been made, in the books., , You are required to give rectification entries without narration to correct the above errors before, preparing annual accounts., 2., , On going through the Trial balance of Ball Bearings Co. Ltd. you find that the debit is in excess by `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 beeen cast in excess by ` 50., , (2), , The “Sales Account” has been totalled in short by `100., , (3), , Supplier account has been overcast by 225., , (4), , The sale return of `100 from a party has not been posted to that account though the Party’s, account has been credited., , (5), , A cheque of `500 issued to the Suppliers’ account (shown under Trade payables) towards his, dues has been wrongly debited to the purchases., , (6), , A credit sale of `50 has been credited to the Sales and also to the Trade receivables Account., , You are required to, , 3., , (i), , Pass necessary journal entries for correcting the above;, , (ii), , Show how they affect the Profits; and, , (iii), , Prepare the “Suspense Account” as it would appear in the ledger., , Mr. A closed his books of account on September 30, 2020 in spite of a difference in the trial balance., The difference was `830 the credits being short; it was carried forward in a Suspense Account. In 2021, following errors were located:, (i), , A sale of `2,300 to Mr. Lala was posted to the credit of Mrs. Mala., , (ii), , The total of the Returns Inward Book for July, 2020 `1,240 was not posted in the ledger., , (iii), , Freight paid on a machine `5,600 was posted to the Freight Account as `6,500. 10%, Depreciation is charge on this machines., , (iv), , White carrying forward the total in the Purchases Account to the next page, `65,590 was written, instead of `56,950., , (v), , A sale of machine on credit to Mr. Mehta for `9,000 on 30th sept. 2020 was not entered in the, books at all. The book value of the machine was `6,750., , Pass journal entries to rectify the errors. Have you any comments to make?, , © The Institute of Chartered Accountants of India

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119, , ACCOUNTING PROCESS, 4., , 2.119, , A merchant’s trial balance as on June 30, 2020 did not agree. The difference was put to a Suspense, Account. During the next trading period, the following errors were discovered:, (i), , The total of the Purchases Book of one page, `4,539 was carried forward to the next page as, `4,593., , (ii), , A sale of `573 was entered in the Sales Book as `753 and posted to the credit of the customer., , (iii), , A return to a creditor, `510 was entered in the Returns Inward Book; however, the creditor’s, account was correctly posted., , (iv), , Cash received from C. Dass, `620 was posted to the debit of G. Dass., , (v), , Goods worth `840 were despatched to a customer before the close of the year but no invoice, was made out., , (vi), , Goods worth `1,000 were sent on sale or return basis to a customer and entered in the Sales, Book. At the close of the year, the customer still had the option to return the goods. The sale, price was 25% above cost., , You are required to give journal entries to rectify the errors in a way so as to show the current year’s, profit or loss correctly., , ANSWERS/HINTS, True and False, 1., , True: There are 3 different stages when the mistakes are identified and then the rectification depends, on the stage of identification of errors., , 2., , False: In case of error of complete omission, the trial balance tallies., , 3., , True: In order to balance the difference of balances in the trial balance suspense account is opened., , 4., , True: Where the accounts being debited is principally incorrect it is termed as error of principle., , 5., , True: Compensating errors cancel out each other when Trial balance is prepared as the mistake pertains, to the same amount being credited and later debited on account of two different mistakes., , 6., , False: When amount is written on wrong side, it is known as an error of commission., , 7., , False: On purchase of furniture, the amount spent on repairs should be debited to furniture account as, it is a capital expense., , 8., , False: ‘Profit & Loss adjustment account’ is opened to rectify the errors detected in the next accounting, period., , 9., , False: Rent paid to land lord of the proprietors house, must be debited to ‘Drawings account’., , 10., , False: If the errors are detected after preparing trial balance, then all the errors are not rectified through, suspense account. There may be principal errors, which can be rectified without opening a suspense, account., , © The Institute of Chartered Accountants of India

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2.120, , PRINCIPLES AND PRACTICE OF ACCOUNTING, , Multiple Choice Questions, 1., , (a), , 2., , (c), , 3., , (b), , 4., , (b), , 5., , (b), , 7., , (c), , 8., , (b), , 9., , (c), , 10., , (a), , 11., , (b), , 6., , (c), , Theoretical Questions, 1., , 2., , (i), , Errors of Omission: If a transaction is completely or partially omitted from the books of account,, it will be a case of omission. Examples would be: not recording a credit purchase of furniture or, not posting an entry into the ledger., , (ii), , Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong, side or the totals are wrong or a wrong balance is struck, it will be a case of “errors of, commission.”, , Errors of principle: When a transaction is recorded in contravention of accounting principles, like, treating the purchase of an asset as an expense, it is an error of principle. In this case there is no effect, on the trial balance since the amounts are placed on the correct side, though in a wrong account., Suppose on the purchase of a typewriter, the office expenses account is debited; the trial balance will, still agree., The method of correction of error indicated so far is appropriate when the errors have been located, before the end of the accounting period. After the corrections the trial balance will agree. Sometimes the, trial balance is artificially made to agree inspite of errors by opening a suspense account and putting, the difference in the trial balance to the account - the suspense account will be debited if the total of the, credit column in the trial balance exceeds the total of the debit column; it will be credited in the other, case. Each and every error detected can only be corrected by a complete journal entry. Those errors for, which journal entries were not possible at the earlier stage will now be rectified by a journal entry(s), the, difference or the unknown side is being taken care of by suspense account. Those errors for which, entries were possible even at the first stage will now be rectified in the same way., , Practical Questions, Answer 1, Particulars, (i), , Suspense Account, , Dr., Dr., , Cr., 6,160, , To Return Outward A/c, (ii), , (iii), , Suspense Account, , 6,160, Dr., , 2,640, , To Discount Allowed Account, , 1,320, , To Discount Received Account, , 1,320, , Suspense Account, To Sales Account, , © The Institute of Chartered Accountants of India, , Dr., , 10,000, 10,000

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121, , ACCOUNTING PROCESS, (iv), , Suspense Account, , 2.121, , Dr., , 270, , To Customer Account, (v), , 270, , Suspense Account, , Dr., , 1,500, , To Vehicle Account, , 1,200, , To Profit on Sale of Vehicle Account, (vi), , 300, , Telephone Charges Account, , Dr., , 560, , To Outstanding Expenses Account, (vii), , 560, , Bad Debts Account, , Dr., , 1,560, , To Trade receivables Account, , 1,560, , Provision for Doubtful Debts Account, , Dr., , 164, , To Profit and Loss Account, (viii), , 164, , Loose Tools Account, , Dr., , 1,200, , To Purchases Account, (ix), , 1,200, , Drawings Account, , Dr., , 1,960, , To Purchases Account, , 1,960, , 1., , Bad debts will be debited in the profit and loss account., , 2., , Provision @ 10% of `21,560 i.e. 2,156; Excess provision `164 (2320 - 2156 = 164)., , Working Notes :, (i), , Trade receivables as per books, , 23,390, , Deduction vide item (iv) 270, , 270, , Bad Debts, , 1,560, , 1,830, 21,560, , (ii), , Suspense Account, `, To Return outward Account, , 6,160, , To Discount allowed Account, , 1,320, , To Discount Received Account, , 1,320, , To Sales Account, , `, By balance b/d, , 20,570, , 10,000, , To Customers Account, , 270, , To Vehicles Account, , 1,200, , To Profit on Sale of Vehicle, , 300, 20,570, , © The Institute of Chartered Accountants of India, , 20,570

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2.122, , PRINCIPLES AND PRACTICE OF ACCOUNTING, , Answer 2, Journal Entries, Particulars, , L.F., , Suspense Account, , Dr., , Dr., `, 50, , To Expenses Account, (Being the mistake in totalling of Expenses Account,, rectified), Suspense Account, , Cr., `, 50, , Dr., , 100, , To Sales Account, , 100, , (Being the mistake in totalling of Sales Accounts rectified), Supplier*, To Suspense Account, , Dr., , 225, 225, , (Being the mistake in posting from Day Book to Ledger, rectified), Sales Returns Account, To Suspense Account, , Dr., , 100, 100, , (Being the sales return from a party not posted to “Sales, Returns” now rectified), Trade payables Account, To Purchases Account, , Dr., , 500, 500, , (Being the payments made to supplier wrongly posted to, purchases now rectified), Trade receivables Account, To Suspense Account, , Dr., , 100, 100, , (Being the sales wrongly credited to Customer’s Account, now rectified), Suspense Account, Dr. `, To Expenses Account, To Sales Account, To Balance c/d, , Cr. `, , 50 By Difference in Trial Balance, , 150, , 100 By Trade payables, 425 By Sales Returns Account, , 225, 100, , By Trade receivables, , 100, , 575, , 575, By Balance b/d, , 425, , Since the Suspense Account does not balance, it is clear that all the errors have not been traced. As a result of, the above corrections the Net Profit will be:, , © The Institute of Chartered Accountants of India

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123, , ACCOUNTING PROCESS, , 2.123, , Increased by, `, Mistake in totalling in “Expenses”, , Decreased by, `, , 50, , Mistake in totalling in “Sales”, , 100, , Mistake in posting from day book to Ledger under, “Purchases”, , 500, , Omission in posting under “Sales Returns”, , 100, 650, , Net Increase, , 100, , 550, , As a result of these adjustments, the Profits will be increased by `550., Answer 3, Journal of Mr. A, Date, 2021 (i), , Particulars, , L.F., , Dr., , Cr., , `, , `, , Mrs. Mala, , Dr., , 2,300, , Mr. Lala, , Dr., , 2,300, , To Suspense A/c, , 4,600, , (Correction of error by which a sale of ` 2,300, to Mr. Lala was posted to the Credit of Mrs. Mala), (ii), , Profit and Loss Adjustment A/c, , Dr., , 1,240, , To Suspense A/c, , 1,240, , (Rectification of omission to post the total of, Returns Inward Book for July, 2020), (iii), , (a) Machinery A/c, , Dr., , 5,600, , Suspense A/c, , Dr., , 900, , To Profit & Loss Adjustment A/c, , 6,500, , (Correction of error by which freight paid for, a machine ` 5,600 was posted to Freight, Account at ` 6,500 instead of capitalising it), (b) Profit & Loss Adjustment A/c, To Plant and Machinery A/c, (Depreciation @ 10% charged on freight paid on, a machine capitalised), , © The Institute of Chartered Accountants of India, , Dr., , 560, , 560

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2.124, (iv), , PRINCIPLES AND PRACTICE OF ACCOUNTING, Suspense A/c, , Dr., , 8,640, , To Profit & Loss Adjustment A/c, , 8,640, , (Correction of wrong carry forward of total in the, purchase Account to the next page ` 65,590, instead of ` 56,950), (v), , Mr. Mehta, , Dr., , 9,000, , To Plant & Machinery A/c, , 6,750, , To Profit & Loss Adjustment A/c, , 2,250, , (Correction of omission of a sale of machine on, credit to Mr. Mehta for ` 9,000 ), Comments, The Suspense Account will now appear as shown below:, Suspense Account, Dr., Date, 2021, , Particulars, , Amount Date, `, 2020, 900 Oct. 1, , To Profit and Loss, Adjustment A/c, To Profit and Loss, Adjustment A/c, , 8,640, , Particulars, By Balance b/d, By Sundries, Mrs. Mala, Mr. Lala, By Profit and Loss, Adjustment A/c, By balance c/d, , 9,540, , Cr., Amount, `, 830, 2,300, 2,300, 1,240, 2,870, 9,540, , Since the Suspense Account still shows a balance, it is obvious that there are still some errors left in the books., Profit & Loss Adjustment A/c, (For Prior Period Items), Dr., Date, 2021, , Particulars, To Suspense A/c, To Plant and Machinery A/c, To Balance c/d, , Amount Date, ` 2021, , Particulars, , Cr., Amount, `, , 1,240, , By Machinery A/c, , 5,600, , 560, , By Suspense A/c, , 900, , 15,590, , By Suspense A/c, , 8,640, , By Mr. Mehta, , 2,250, , 17,390, , © The Institute of Chartered Accountants of India, , 17,390

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125, , ACCOUNTING PROCESS, , 2.125, , Answer 4, Journal Entries, Particulars, (i), , Suspense Account, , L.F., Dr., , Dr., `, , Cr., `, , 54, , To Profit and Loss Adjustment A/c, , 54, , (Correction of error by which Purchase Account was over debited, last year- `4,593 carried forward instead of `4,539), (ii), , Profit & Loss Adjustment A/c, , Dr., , 180, , Customer’s Account, , Dr., , 1,326, , To Suspense Account, , 1,506, , (Correction of the entry by which (a) Sales A/c was over credited, by `180 (b) customer was credited by `753 instead of being, debited by `573), (iii), , Suspense Account, , Dr., , 1,020, , To Profit & Loss Adjustment A/c, (Correction of error by which Returns Inward Account was, debited by `510 instead of Returns Outwards Account being, credited by ` 510), (iv), , Suspense Account, To C. Dass, , 1,020, , Dr., , 1,240, 620, , To G. Dass, (Removal or wrong debit to G. Dass and giving credit to C. Dass, from whom cash was received)., (v), , Customer’s Account, , 620, , Dr., , 840, , To Profit & Loss Adjustment A/c, , 840, , (Rectification of the error arising from non- preparation of invoice, for goods delivered), (vi), , Profit & Loss Adjustment A/c, , Dr., , 200, , Inventory Account, To Customer’s Account, , Dr., , 800, 1,000, , (The Customer’s A/c credited with `1,000 for goods not yet, purchased by him; cost of the goods debited to inventory and, “Profit” debited to Profit & Loss Adjustment Account), (vii), , Profit & Loss Adjustment A/c, To Capital Account, (Transfer of Profit & Loss Adjustment A/c balance to the Capital, Account), , © The Institute of Chartered Accountants of India, , Dr., , 1,534, 1,534