Accounting errors and adjustment, Slides of Cost Accounting

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Accounting Errors and

Adjustments

Presented By- Pratyash Singh (2K20/DMBA/093) Rachita Aggarwal (2K20/DMBA/094) Raj Kumar(2K20/DMBA/095) Rashi Rathi (2K20/DMBA/096) Ravi (2K20/DMBA/097)

What is an Accounting Error

• (^) An accounting error is an error in an accounting entry that was not intentional.
• (^) When spotted it is immediately fixed and if not than an investigation into the error is conducted.
• (^) It should not be confused with a fraud as fraud is something intentional i.e. an act to hide and alter entries for the benefit of the firm.
• (^) An accounting error can include duplicating the same entry or an account is recorded correctly but to wrong customer or vender.

Types of Errors

Error of Omission

● (^) These errors may be committed at the time of recording the transaction in the books of original entry. ● (^) These can be of two types:-

1. Error of complete omission ● (^) For example,credit sales to Mohan Rs 10,000, not entered in the sales book.
2. Error of partial omission ● (^) For example, credit sales to Mohan Rs.10, recorded in sales book but posting from sales book to Mohan’s account has not been made.

Error of original entry

• (^) It means that the amount of the transaction has been wrongly recorded in the journal and the same wrong amount was also posted in the ledger.
• (^) For example, Goods sold to Amit for Rs. 5,000 was wrongly recorded in the journal at Rs. 500 and the same amount of Rs. 500 is posted in Amit account.

Errors of principle' are those errors which are committed at the time of recording transactions against the accounting principle. Here are the examples of Errors of Principle Eg. (i) Expenses Paid for Installation of Machinery Debited to Expenses Account In this transaction, expenses paid for the installation of machinery which is a capital expenditure and should be debited to machinery account has been treated as revenue expenditure and wrongly debited sundry expenses account. Principle Error

STAGES OF rectification of errors

1. BEFORE PREPARING TRIAL BALANCE

If the errors are located before the preparation of trial balance,correction can be carried out directly by means of a rectifying entry which may be a Single corrective entry or a rectifying journal entry. Whether a rectifying journal entry should be passed or not depends on the nature of the mistake.

example, sales book is undercast by $1,000. This can be corrected by crediting sales account directly with $1,000. No rectifying journal entry is required. Suppose, the sale of old furniture for $5,000 is credited to sales account, this error cannot be corrected directly by crediting furniture account with $5,000. This requires a rectifying journal entry to carry out the correction in both sales account and furniture account. Thus, the rectifying journal entry will be as follows:

STAGES

• (^) 3. AFTER PREPARING FINAL ACCOUNT if the errors are located after the preparation of the final accounts, the errors will have had their impact on the profit or loss of the business. Hence, the rectification should be carried out through profit and loss adjustment account. above example of sales book being undercast by will be corrected with a rectifying entry as follows: As the sales figure increases the profit, it is necessary to credit the profit and loss adjustment account to rectify this mistake. By debiting the same amount to a suspense account, the balance of the suspense account is reduced to that extent.

SUSPENSE ACCOUNT

• (^) An anticipation account is a record utilized

briefly or forever to convey suspicious

passages and errors forthcoming their

examination and lasting order. It tends to

be a storehouse for financial exchanges

(money receipts, money distributions and

diary passages) entered with invalid

record numbers.

EXAMPLES:

• (^) Rectify the following accounting errors through Suspense Account by making journal entries :
• (^) 1. Purchase of goods from Mohit for Rs2500 was entered in the Sales Book, however Mohit’s Account was correctly credited.
• (^) 2. Cash received from Anil a debtor Rs3200 was correctly entered in the Cash Book but was omitted to be posted to his account.
• (^) 3. Sales Book was overcast by Rs1500.
• (^) 4. Cash of Rs4000 paid to Hanif was credited to Rafique A/c as Rs1400.
• (^) 5. The total of Purchase Returns Book of Rs3150 was carried forward as Rs1530.
• (^) 6. Namita was paid cash Rs 6500 but Sumita was debited by Rs6000.

SOLUTION:

1. Purchase A/c Dr 2500 Sales A/c Dr 2500 To Suspense A/c 5000 (Purchase of good was entered in the the sale book now corrected) 2. Suspense A/c Dr 3200 To Anil A/c 3200 (Anil’s account omitted to be credited now rectified

2. Sales A/c Dr 1500 To Suspense A/c 1500 (Sales Book overcast is corrected)

3. Hanif A/c Dr 4000 Rafique A/c Dr 1400 To Suspense A/c 5400 (Cash paid to Hanif was wrongly credited to Rafique the error is now rectified) 5. Suspense A/c Dr 1620 To Purchase Returns A/c 1620 (Purchase Return Book is undercast is now rectified)

4. Namita A/c Dr 6500 To Sumita A/c 6000 To Suspense A/c 500 (Cash paid to Namita Rs 6500 was debited to Sumita by Rs 6000 is the error is rectified)