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accounting errors are the errors committed by persons responsible for recording and maintaining accounts of a business firm in the course of accounting process.
Typology: Schemes and Mind Maps
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Notes
ACCOUNTANCY
Trial Balance and Computers
You did not take your studies seriously that is why you could not get good marks. You committed an error. You fell in some bad company. You may commit many such errors in your day to day life. Similarly, an accountant can also commit errors while recording business transactions in books of accounts, in their posting or balancing the accounts and so on. These errors should be located and corrected as soon as possible so that accounts give true and fair results of the operations of the business enterprise. You have learnt that in case Trial Balance does not agree it means there are some accounting errors. There can be some errors which do not affect the Trial Balance i.e. trial balance still tallies. In this lesson you will learn about locating, classifying and analysing accounting errors and their rectification.
After studying this lesson you will be able to :
z state the meaning of accounting error and method of location of the accounting error/errors;
z classify the accounting errors;
z explain the meaning and methods of rectification of errors and
z prepare suspense account.
In our life we make many mistakes. As soon as these are detected, he/she corrects them. In the similar manner, an accountant can also make mistakes or commit errors while recording and posting transactions. These are called ‘Accounting Errors’. So
Notes
Trial Balance and Computers
ACCOUNTANCY
accounting errors are the errors committed by persons responsible for recording and maintaining accounts of a business firm in the course of accounting process. These errors may be in the form of omitting the transactions to record, recording in wrong books, or wrong account or wrong totalling and so on.
Accounting errors can take the following forms:
z Omission of recording a business transaction in the Journal or Special purpose Books
z Not posting the recorded transactions in various books of accounts to the respective accounts in ledger
z Mistakes in totalling or in carrying forward the totals to the next page z Mistake in recording amount wrongly, writing it in a wrong account or on the wrong side of the account.
Again there may be two types of accounting errors (i) That cause the disagreement of trial balance, (ii) That do not affect the agreement of Trial Balance.
Locating Errors
It is obvious that if there are errors they must be located at the earliest. After locating the errors, they are to be rectified. In accounting also once it is established there are some accounting errors these need to be located and detected as early as possible. How to locate the errors?
Steps to be taken to locate the accounting errors can be stated as follows: (A) When the Trial Balance does not Agree
(i) Check the columnar totals of Trial Balance
(ii) Check that the balances of all accounts (including cash and bank balances) in the ledger have been written and are written in the correct column of trial balance i.e. debit balance in the debit column and credit balance in the credit column.
(iii) Find the exact figure of difference with trial balance and see that:
(a) No account of a similar balance has been omitted to be shown in the Trial Balance or
(b) A balance amount which is half of the amount of difference amount but is written on the wrong side of the trial Balance.
(iv) Recheck the totals of Special Purpose Books.
(v) Check the balancing of the various accounts in the ledger.
Errors and Their Rectification
Notes
Trial Balance and Computers
ACCOUNTANCY
(a) Errors of omission (b) Errors of commission (c) Errors of principle B. On the basis of their impact on ledger accounts (a) One sided errors (b) Two sided errors. A. On the basis of their nature
(a) Errors of omission : As a rule, a transaction is first recorded in books of accounts. However, accountant may not record it at all or record it partially. It is called an error of omission. For example, goods purchased on credit are not recorded in Purchases Book or discount allowed to a customer was not posted to Discount A/c in the ledger. In the first case it is a complete omission. Therefore, both debit and credit are affected by the same amount. Therefore, it does not affect the Trial Balance. The second example is the example of partial omission. It affects only one account i.e. Discount A/c. Therefore it affects Trial Balance. (b) Errors of commission : When the transaction has been recorded but an error is committed in the process of recording, it is called an error of commission. Error of commission can be of the following types: (i) Errors committed while recording a transaction in the Special Purpose books. It may be : z Recording in the wrong book for example purchase of goods from Rakesh on credit is recorded in the Sales Book and not in the Purchases Book. z Recording in the book correctly but wrong amount is written. For example, goods sold to Shalini of 4200 was recorded in the Sales Book as
2400 In the above two cases two accounts are affected by the same amount, debit of one and the credit of the other. Therefore, trial balance will not be affected. (ii) Wrong totalling : There may be a mistake in totalling Special Purpose Book or accounts. The totalled amounts may be less than the actual amount or more than the actual amount. First is a case of undercasting and the other of overcasting. For example, the total of Purchases Book is written as 44800 while actual total is
44300, the total of Sales Day Book is written as 52500 while it is
52900.
Errors and Their Rectification
Notes
ACCOUNTANCY
Trial Balance and It is a case of an error affecting one account hence it affects trial balance. Computers
(iii) Wrong balancing : While closing the books of accounts at the end of the accounting period, the ledger accounts are balanced. Balance is calculated of the totals of the two sides of the account. It may be wrongly calculated. For example, the total of the debit column of Mohan’s A/c is 8,600 and that of credit column is
6,800. The balance calculated is as 1,600 while the actual balance is
1,800.
It has affected one account only, therefore, the Trial Balance gets affected.
(iv) Wrong carry forward of balances or totals : Totals or balances are carried forward to the next page. These may be carried forward incorrectly. For example, the total of one page of the Purchases Book of 35,600 is carried to next page as
36,500.
Again the error affects one account only. Therefore, Trial Balance gets affected. (v) Wrong Posting : Transactions from the journal or special purpose books are posted to the respective accounts in the ledger. Error may be committed while carrying out posting. It may take various forms such as, posting to wrong account, to the wrong side of the account or posted twice to the same account. For example goods purchased of ` 5400 from Rajesh Mohanti was posted to the debit of Rajesh Mohanti or posted twice to his account or posted to the credit of Rakesh Mohanti.
In the above examples, only one account is affected because of the error therefore, Trial Balance is also affected.
Compensating Errors
Two or more errors when committed in such a way that there is increase or decrease in the debit side due to an error, also there is corresponding decrease or increase in the credit side due to another error by the same amount. Thus, the effect on the account is cancelled out. Such errors are called compensating errors. For example, Sohan’s A/c is debited by 2500 while it was to be debited by
3500 and Mohan’s A/c is debited by 3500 while the same was to be debited by
2500. Thus, excess debit of Mohan’s A/c by 1000 is compensated by short credit of Sohan’s A/c by
1000.
As the debit amount and the credit amount are equalised, such errors do not affect the agreement of Trial Balance, but the fact remains that there is still an error.
(c) Error of Principle : Items of income and expenditure are divided into capital and revenue categories. This is the basic principle of accounting that the capital receipts and capital expenditure should be recorded as capital item and revenue
Errors and Their Rectification
Notes
ACCOUNTANCY
Trial Balance and (iv) Mohan’s A/c was to be debited by 4500 and Sohan A/c was to be debited by _Computers_
5500 while Mohon’s A/c was debited by 5500 and that of Sohan’s A/c by
By now you must have understood well that every business enterprise prepares its financial statements to provide information of profit earned or loss incurred by it during an accounting period and its financial position on the relevant date. This information will be most useful only if the information is accurate. How can the business concern achieve this objective if there are number of errors in the accounting? Your immediate response will be that errors in accounts should be detected at the earliest and be corrected before preparing the financial statements.
It should be clear in your mind that the errors should never be rectified by erasing or overwriting because it will encourage manipulations and frauds in accounts.
In accounting practice there are some definite methods to rectify the accounting errors. These are based on accounting practices and procedures. Rectification of errors using these methods is called rectification of accounting errors. So it is a process of rectification. It is generally done by passing an entry to nullify the effect of error.
Methods of rectification of accounting errors :
I. Before preparing Trial Balance
(i) instant correction (ii) correction in the affected account
II. After preparing Trial Balance
I. Before preparing Trial Balance
(i) Instant correction : If the error is detected immediately after making an accounting entry, it may be corrected by neatly crossing out the wrong entry and making the correct entry and the accountant should put his initials. For example, an amount of 3,500 is written as
5,300. This can be corrected as ` 3,500.
(ii) Correction in the affected accounts : In case error is detected on a date later than the date on which the transaction was recorded but before the Trial Balance, the rectification will be made by making a correction in the affected account. A few Illustrations of accounting errors corrected by this method are as follows :
Illustration 1
Purchases book is overcast for the month of July, 2014 by ` 8,000.
Errors and Their Rectification
Notes
Trial Balance and Computers
ACCOUNTANCY
Solution Accounts Affected : The total of the Purchase Book is posted to the debit of Purchase A/c. Therefore Purchase A/c is affected. Rectification : To nullify the effect of the error, the entry of 8,000 will be made on the credit side of the Purchase A/c. With the words written as. “The amount of Purchase Book is overcast for the month of July 2014.” **Purchase A/c** Dr Cr **_Date Particulars F Amount Date Particulars F Amount (_** `` ``` **_) (_** `` ``` **_)_** Amount as per Purchase Book for the month of July, 2014 8, **Illustration 2** A sum of
1,200 paid to Ashok has been wrongly credited to his account. Solution Accounts Affected : Ashok A/c is affected because his account has been credited instead of being debited. Rectification : In this case Ashok A/c is to be debited to nullify the effect of its being wrongly credited at the same time it is to be debited for cash payment. Rectification is done as under : Ashok A/c Dr Cr Date Particulars F Amount Date Particulars F Amount ( `` ``` ) Amount paid Cash A/c 1, wrongly credited 2, Illustration 3
Purchase of furniture of ` 5,000 was entered in the Purchases Book. Solution Accounts Affected : Furniture Account and Purchases account have been affected. Furniture Account has been omitted to be debited while Purchases account is wrongly debited.
Errors and Their Rectification
Notes
Trial Balance and Computers
ACCOUNTANCY
Rectification entry in Journal is : Har Govind’s A/c Dr 15, To Govind’s A/c 15, (Amount received from Govind wrongly credited to Har Govind is now rectified.) Illustration 5 Following are some accounting errors. Rectify them by making journal entries : (i) Sales for 20,000 made to Malvika was not entered in the Sales Book. (ii) Salary of
7,500 paid to Accountant Raman was debited to his personal account
(iii) Old furniture sold for 2,800 was entered in the Sales Book. (iv) Carriage paid
500 on purchase of a Machine was debited to Carriage A/c (v) Cash ` 50,000 paid to the creditor Atulya Ghosh was debited to Praful Ghosh’s A/c Solution Journal Date Particulars L.F. Amount Amount (i) Malvika Dr 20, To Sales A/c 20, (Sale to Malvika omitted to be entered in Sales Book is corrected) (ii) Salary A/c Dr 7, To Raman 7, (Salary paid to Raman was debited to his personal account is now corrected)
(iii) Sales A/c Dr 2, To Furniture A/c 2, (Old furniture sold was entered in the sales Book is now corrected) (iv) Machine A/c Dr 500 To Carriage A/c 500 (Amount paid for carriage on purchase of machine is debited to carriage A/c is now corrected)
Errors and Their Rectification
Notes
ACCOUNTANCY
Trial Balance and (v) Atulya Ghosh Dr 50,000 Computers To Praful Ghosh 50, (Amount paid to Atulya Ghosh was debited to Praful Ghosh is corrected)
i. Cash received from Ashok 2,500 were posted to his account as
5,200. Accountant erased amount of 5,200 and wrote
2,500 in its place. Is he justified in doing so?
ii. Accountant corrected an error of writing 7,200 instead of
5,200 in the following manner, is he justified to do so?
7,
5,
iii. Total of the Sales Book was overcast by ` 1,000. Accountant corrected the error in the following manner :
Amount as per Sales Book ` 1, On which side of the Sales A/c he should write the above amount?
iv. Wages paid ` 1,200 were omitted to be recorded in the Cash Book. What journal entry will be made to rectify the error?
You have learnt that the Trial Balance prepared at the end of a period by the business concern must agree. It means the sum of its debit column and sum of credit column should agree. But if the totals do not agree the difference amount is written in a new account. This account is called Suspense Account. If the total of the debit side of the Trial Balance is more than the total of its credit side, the difference amount will be written in Suspense A/c on its credit side i.e. Suspense A/c is credited and vice-versa. You have also learnt that the two sides of the Trial Balance do not agree because there is some error or errors in the accounts, which is reflected in the Suspense Account. Thus, Suspense A/c is a summarised account showing net effect of errors.
Opening of a Suspense Account is a temporary arrangement. As soon as the errors that has led to creation of Suspense Account are rectified, this account will disappear. One point needs to be noted that balance shown in Suspense Account is the net result of one sided errors. So one sided errors are corrected through Suspense A/c. Completing
Errors and Their Rectification
Notes
ACCOUNTANCY
Trial Balance and (ii) Accounting Effect : Manohar A/c has been debited by ` 2,500 instead of it Computers being credited by the same amount.
Rectification : Manohar A/c is credited by ` 5, Journal Entry Suspense A/c Dr 5, To Manohar A/c 5, (Goods purchased from Manohar wrongly debited to his account now rectified)
(iii) Accounting Effect : Manish A/c is credited by 4,500 while Manish A/c was to be debited by the same amount. **_Rectification :_** Manish A/c is to be debited by
4,500 and Manish A/c is also be debited by 4,500 and Suspense A/c to be credited by
9, Journal Entry Manish Dr 4, Manish Dr 4, To Suspense A/c 9, (Cash paid to Manish was wrongly credited to Manish, now corrected)
(iv) Accounting Effect : Discount A/c is omitted to be debited by ` 100. This account is debited and Suspense A/c is credited. Journal Entry Discount A/c Dr 100 To Suspense A/c 100 (Discount allowed is not debited to discount A/c.)
Illustration 7
Rectify the following accounting errors through Suspense Account by making journal entries :
Errors and Their Rectification
Notes
Trial Balance and Computers
ACCOUNTANCY
4,000 paid to Hanif was credited to Rafique A/c as
1,400.3,150 was carried forward as
1,530.6,500 but Sumita was debited by
6,000. SolutionDate Particulars L.F. Amount Amount Dr. ( **_) Cr. (_**
)
6,500 was debited to Sumita by
6,000 the error is rectified)Rectification of Two Sided Errors Error which affects two different accounts on the same sides or different sides is called two sided error.
Errors and Their Rectification
Notes
Trial Balance and Computers
ACCOUNTANCY
z On the basis of impact on ledger accounts errors can be : (a) one sided errors (b) two sided errors
z Errors should never be rectified by erasing or overwriting. z Methods of rectification of errors are
(a) Before preparing trial balance, instant correction and correction in the affected account. (b) After preparing trial balance through passing a rectifying journal entry.
(b) Compensating errors (c) Error of principle
(ii) Purchase Returns Book is overcast by 1,000. (iii) Salary of
3,200 paid to Gopal the accountant was debited to his personal account
(iv) Sales to Shakila of 2,400 was posted to her account (v) Cash received from Suresh
2,000 was not entered in the books.
(i) Purchases Book is undercast by 1, (ii) Sales Return Book is overcast by
1,
(iii) Sales Book is added short by ` 100
Errors and Their Rectification
Notes
ACCOUNTANCY
Trial Balance and (iv) The total of Purchases journal of 7,580 has been posted to Purchases _Computers_ Account as
5,
(v) The total of the page of Sales journal of 24,750 was carried to next page as
27,
(i) Sale of an old machine for ` 4,500 was posted to Sales account
(ii) Rent of proprietors residence of ` 12,000 was posted to Rent Account.
(iii) A credit to Brij Mohan of 6,750 was posted to his account as
4,
(iv) Furniture purchased from M/s Decorates for ` 22,500 was entered in the Purchases Book
(v) Salary paid to the accountant Sushil Gupta of ` 6,500 was debited to his personal Account.
total exceeded the debit total by ` 2,850. He placed the amount in Suspense A/c and subsequently found the following errors.
(i) A credit item of 3,490 has been debited to his personal Account as
4,390.
(ii) A sum of ` 2,650 written off as depreciation on machine has not been posted to Depreciation A/c.
(iii) Goods of ` 5,300 sold were returned by the customer and were taken into stock before closing the books but were not entered in the books.
(iv) ` 4,800 due from Lakhan Pal which had been written off as bad debt in a previous year was unexpected recorded and had been posted to the personal account of Lakhan Pal.
(v) Sales Book is undercast by ` 1,500.
(vi) ` 4,000 withdrawn for domestic use by the proprietor was debited to General Expenses A/c.
(vii) Machine Purchased from Machine Mart for ` 18,000 were entered in the Purchases Book.
(viii) Cash paid 1,200 to Lakshman was credited to Ram as
2,100.
Errors and Their Rectification