rectification of errors
TRANSCRIPT
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Rectification Of Errors
Submitted to:- Submitted by:-Chandan Gupta Group No :- 8
Abhinandan SinghJasleen KaurNaman GoyalZuweriya Rao
18-Oct-2016 MBA, 1st Year
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What is Accounting Errors ?
• Accounting Errors are unintentional mistakes that occur in the process of accounting at the time of recording the transaction in journal or at the time of posting them in the ledger.
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Errors
• Errors not affecting “trial balance”• Errors affecting “trial balance”
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Errors not affecting trial balance
• Errors of commission• Errors of principle• Errors of original entry• Errors of omission• Compensating errors• Complete reversal of entries
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Errors affecting trial balance
• Suspense account
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Correcting entry
1. Asset2. Purchases3. Expenses4. Returns Inwards5. Drawings
Increase – DebitDecrease - Credit
Examples of account
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Correcting entry
1. Liabilities/Capital2. Sales3. Income4. Returns Outwards
Increase – CreditDecrease – Debit
Examples of account
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Errors Not Affecting Trial Balance
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Errors of Commission
• The correct amount is entered but in a wrong personal account
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Example
• A purchase of goods from Salman has been posted to the credit side of Subin’s account in error, amounting to Rs. 500. The correcting entries should be:
Original entry:
Wrong entry:
Purchase A/c Dr 500 To Salman’s A/c 500
Purchase A/c Dr 500 To Subin’s A/c 500
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Subin’s A/c Dr 500
To Salman’s 500
Purchases entered in wrong personal account, now corrected.
Journal Entry
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To Salman 500
Subin
By Purchases 500
Salman
By Subin 500
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Errors of Principle
• An item is entered in the wrong type of account due to misunderstanding of the nature of the item.
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Example
• Office equipment purchased for Rs. 1,000 in cash has been debited to an office expenses account. The correcting entries should be:
Original entry:
Wrong entry:
Office Equipment A/c Dr 1,000 To Cash 1,000
Office Expenses A/c Dr 1,000 To Cash 1,000
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Office Equipment A/c Dr 1,000
To Office Expenses 1,000
Purchase of office equipment wrongly entered in the office expenses account, now corrected.
Journal Entry
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To Cash 1,000
Office Expenses
By Office Equipment 1,000
Office Equipment
To Office Expenses 1,000
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Errors of Original Entry
• Wrong original figure is entered in the journals, and hence posted incorrectly to the accounts.
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Example
• A payment of Rs. 1,200 to a creditor, Mehir, has been entered as both a debit and credit as Rs. 1,000. The correcting entries should be:
Original entry:
Wrong entry:
Mehir’s A/c Dr 1,200 To Bank A/c 1,200
Mehir’s A/c Dr 1,000 To Bank A/c 1,000
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Mehir’s A/c (1,200-1,000) Dr 200
To Bank A/c 200
Payment of Rs.1,200 incorrectly entered as Rs.1,000, now corrected.
Journal Entry
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Mehir
By Bank 1,000By Bank 200
Bank
To Mehir 1,000To Mehir 200
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Errors of Omission
• A transaction has been completely omitted from the accounts.
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Example
• A sale of Rs. 4,000 to Prashanjeet has been completely omitted from the accounts. The correcting entries should be:
Original entry:
Wrong entry:
Prashanjeet’s A/c Dr. 4,000 To Sales 4,000
No entry
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Prashanjeet’s A/c Dr. 4,000
To Sales A/c 4,000
A sale of Rs. 4,000 was omitted, now corrected.
Journal Entry
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Sales
By Prashanjeet 4,000
Prashanjeet
To Sales 4,000
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Compensating Errors
• Debit side errors are equal to credit side errors.
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Example
• The purchases account was undercast by Rs. 20,000, and the sales account was also undercast by Rs. 20,000. The correcting entries should be:
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Purchases A/c Dr. 20,000
To Sales A/c 20,000
Purchases and sales accounts were undercast by Rs. 20,000, now corrected.
Journal Entry
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Purchases
To Sales 20,000
Sales
By Purchases 20,000
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Complete Reversal of Entries
• The correct amounts are entered in the wrong sides of the two appropriate accounts.
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Example
• The purchase of goods on credit from Mr. Amjad for Rs. 6,000 was entered on the debit side of Mr. Amjad’s account and the credit side of the purchases account. The correcting entries should be:
Original entry:
Wrong entry:
Purchase A/c Dr 6,000 To Mr. Amjad’s A/c 6,000
Mr. Amjad’s A/c Dr 6,000 To Purchase A/c 6,000
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Purchases A/c Dr. 12,000
To Mr. Amjad’s A/c (6000*2) 12,000
Purchases from Mr. Amjad incorrectly debited to his account and credited to the purchases account, now corrected.
Journal Entry
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To Mr. Amjad 12,000
Purchases
By Mr. Amjad 6,000
To Purchases 6,000
Mr. Amjad
By Purchases 1,2000
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Errors Affecting Trial Balance
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Errors affecting trial balance may occur when
• (i) recording transactions in the accounts:– (1) omitting a debit or credit entry– (2) posting a wrong amount to one of the
accounts– (3) recording an entry on the wrong side
• E.g. a debit entry entered as a credit or a credit entry as a debit
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• (ii) Balancing of accounts:Incorrect calculation of a balance– E.g. overcast or undercast
(iii) Drawing up a trial balance: (1) omitting a balance from the trial
balance (2) incorrectly posting an amount to the
trial balance (3) incorrectly posting a balance to the
wrong side of the trial balance
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Suspense Account
• When the trial balance does not agree, the amount of the difference is entered in a suspense account.
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Total balances extracted 9,000 10,000
Suspense account 1,000
10,000 10,000
Trial Balance as on 31 March 2015
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Suspense Account
Mar 31 Difference as per trial
balance 1,000
2015
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How To Show a Suspense Account on the Balance Sheet
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Debit Balance of the Suspense Account
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T form
Fixed Assets X
Current Assets X
Suspense Account X
X
Balance Sheet
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Credit Balance of the Suspense Account
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T form
Capital X
Long-term Liabilities X
Current Liabilities X
Suspense Account X
X
Balance Sheet
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Correction of Errors
• To correct the errors, we should make correcting entries in the ledger accounts first, and hence clear the suspense accounts.
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Example
Original entry:
Wrong entry:
Mr. Subham’ A/c Dr 1,500 To Sales A/c 1,500
----------- Dr To Sales 1,500
A credit sale of Rs.1,500 to Mr. Subham has been omitted from his account.
Correct entry:Mr. Subham’ A/c Dr. 1,500 To Suspense A/c 1,500
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Example
Original entry:
Wrong entry:
Rahul’s A/c Dr. 2,300To Sales A/c 2,300
Rahul’s A/c Dr. 3,200To Sales A/c 2,300
Correct entry:Suspense A/c Dr. 900To Rahul’s 900
A sale to Rahul for Rs. 2,300 was correctly entered in the sales book but entered in Rahul’s account as Rs. 3,200.
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Original entry:
Wrong entry:
Roopendra’s A/c Dr. 9,700To Sales 9,700
To Roopendra’s A/c 9,700To Sales A/c 9,700
Correct entry: Roopendra’s A/c Dr. 19,400 To Suspense A/c 19,400
ExampleA credit sale of Rs. 9,700 has been credited to Roopendra’s account.
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Correct entry:Sales A/c Dr. 2,000 To Suspense A/c 2,000
Sales day book was overcast by Rs. 2,000.
Example
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Correct entry:Suspense A/c Dr. 4,000 To Sales A/c 4,000
Sales day book was undercast by Rs.4,000.
Example
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Correction of Errors and Effects on the Profit and Balance Sheet
• For errors affecting the final accounts (I.e. profit calculation and balances carried down)
• Corrections are also required for the profit/loss and balances in the balance sheet.
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Trading account:
Sales - Cost of good sold = Gross Profit
Sales - (Opening stock + Purchases – Closing stock) = Gross ProfitSales - Opening stock - Purchases + Closing stock = Gross Profit
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1st order
Sale increase Cr. Sales Increase in Net Profit
Opening stock increase
Dr. Stock Decrease in Net Profit
Purchases increase
Dr. Purchases Increase in Net Profit
Closing stock increase
Dr. Stock Increase in Net Profit
2nd order 3rd order
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Profit and loss account: Gross Profit + Income (e.g. Rent received) – Expenses (e.g. Motor expenses) = Net Profit
1st orderIncome increase
Cr. Income Increase in Net Profit
Expenses Increase
Dr. Expenses Decrease in Net Profit
2nd order 3rd order
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Example of errors Action required on
the profit
Action required on the balance
sheetPurchases undercast Subtract -
Purchases overcast Add -
Sales undercast Add -
Sales overcast Subtract -
Income undercast Add -
Income overcast Subtract -
Expenses undercast Subtract -
Expenses overcast Add -
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Example of errors Action required on
the profit
Action required on the balance
sheetOpening stock undervalued
Subtract -
Opening stock overvalued
Add -
Closing stock undervalued
Add Increase closing stock
Closing stock overvalued
Subtract Decrease closing stock
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Example of errors Action required on
the profit
Action required on the balance
sheetPrepayments of
expenses omittedAdd Increase
prepayments (current assets)
Accruals of expenses omitted
Subtract Increase accruals (current
liabilities)Fixed/current assets
undervalued- Increase fixed/
current assetLiabilities understated - Increase
liabilities
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THANKYOU
For Listening