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Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
Rectification of errors
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Rectification of errors

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prepared by RAHUL GANDHI

prepared by RAHUL GANDHI

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  • 1. Rectification of Errors After preparing After trial balance Trading and P/L Before preparing But before Trading, Trial Balance and Balance sheet P/L and Balance sheet Hit profit or reserve or Capital{do not bother about individual/nature Of expenditure} And hit the Balance sheet Only net balanceHit the individual if it affects Balance sheet account
  • 2. Errors that will not cause the trial balance to be unequal:1. Failure to record a transaction or to post a transaction.2. Recording the same erroneous amount for both the debit and the credit parts of a transaction.3. Recording the same transaction more than once.4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.
  • 3. Correction of Errors Error Correction Procedure1. Journal entry is incorrect Draw a line through the error but not posted. and insert correct title or amount.
  • 4. Correction of Errors Error Correction Procedure1. Journal entry is incorrect2. correct Draw a line through the error but not posted. posted incorrectly. and insert correctpost or posted error and title amount. correctly.
  • 5. Correction of Errors Error Correction Procedure3. Journal entry is incorrect Journalize and post a and posted correcting entry.
  • 6. Correcting Errors – An ExampleOn May 5, a purchase of office equipment onaccount was incorrectly journalized and postedas shown.Journal – As recorded and postedDate Description Debit CreditMay 5 Supplies 12,500 Accounts Payable 12,500 What would be the necessary correcting entry?
  • 7. Correcting Errors – An ExampleOn May 5, a purchase of office equipment onaccount was incorrectly journalized and postedas shown.Journal – As recorded and postedDate Description Debit CreditMay 5 Supplies 12,500 Accounts Payable 12,500Date Description Debit CreditMay 5 Office Equipment 12,500 Supplies 12,500
  • 8. Basic rules for rectification-1• If words used ‘account’-means error only with respect to that individual account.Example: wages paid Rs 50,000 not entered into wages account.Here wages paid might have affected cash also, but the statement says that it is not entered into wages account only. It does not mention about cash account. Therefore we assume that cash account had been entered correctly.Therefore rectify wages account only. It is one side error or one account error.
  • 9. Basic rules for rectification-2• Do not make too many assumptions.• Example: wages paid to install a machinery is entered into wages account.Here you find wages account is treated as a revenue expenditure(Refer to the notes earlier) but it is a capital expenditure. “Any expenditure incurred before the asset is put into use to be capitalised”. What about cash account?We assume that cash account would have been correctly entered. (Continue in the next slide)
  • 10. You might ask which side of wage account had been entered, whether debit or credit?Normal assumption is that wages always entered in the debit side(nominal rule).Do not assume, had been entered into credit side of wages account what would have happened-It is unnecessary assumption(too much in your assumption)Ask question:whether one/ two accounts is/are affected? Here wages (wrongly entered) but you should enter in the Building account now.This is a normal assumption.
  • 11. How do you rectify wages?• Building account to be debited Rs.50,000• Wages account to be credited Rs.50000• To remove wages from the account put it in the opposite side of that account.• Every account is born in one side ie debit or credit.All assets and expenditure accounts are born in the debit side. If you want to kill it put it on the credit side.• In the same way liabilities and income accounts are born in the credit side. If you want to kill it put it on the debit side.
  • 12. Rectification rule-3• Error to be rectified before the preparation of trial balance or after trial balance or after the preparation of Balance sheet.• Before preparation of Balance sheet-Hit the individual account• After preparation on trading, profit and loss account and Balance sheet- reduce/increase profit if it is an expense and if it affects asset/liability increase/decrease the net amount only.
  • 13. Rectification of errors-Rule-4• If one side error(one account) to fulfill the double entry book keeping we open suspense account provided, trial balance is already prepared.• Example:- Salary paid to Ranganath not entered into salary account by Rs. 40,000• The mistake is only in salary debit side because salary appears on the debit side. Cash account is correct(do not assume too much as I have stated earlier).• Rectification entry: Salary a/c debit Rs.40,000 Suspense a/c credit Rs. 40,000.
  • 14. Rectification of error-Rule 5• Suspense account: Meaning When trial balance does not tally(debit is not equal to credit) in order to close the trial balance we open entirely a new account on the side of deficit.Such account is known as suspense account.Example:-next page
  • 15. Example for suspense account• Trial balance: Debit credit• Purchases 5000 -• Wages 3000 -• Sales - 10,000• Building 4000• Suspense account ??? 2000(CR) Since debit side of trial balance is more than credit side, suspense account is not a credit balance Note: here suspense account is a credit balance as trial is not an account
  • 16. Rectification of error-Rule-6Omitted from book(s )means both debit and credit of such transactions are omitted.Account means –omitted to enter into that specific account only(normally one side error)Example: purchases from Mr.Amal not entered in the purchase books Rs. 50,000Here this transaction is completely omitted as it is given the word books.To rectify pass a fresh journal entry:JE: debit purchase a/c Rs.50,000 Credit Mr.Amal a/c Rs.50,000Suppose it is stated that not entered into the purchase account how do you rectify?
  • 17. Here, the mistake is only in the purchase account. There is no mistake in Mr. Amal’s accountRectified entry is: Purchase a/c debit Rs.50,000(real rule) Suspense a/c credit Rs.50,000 (fulfill double entry)Note: normal assumption is that purchase is always debit.If it is sales it is always credit.18
  • 18. Exercise-1Rupees 1000 spent for repairs of building has been posted to building account.Identify the mistake:1. Repairs 2. Building.Repairs do not increase the capacity of building but to maintain the building. Therefore it is a revenue expenditure but treated as capital expenditure.Rectification : add to repairs and remove from buildingRectification entry: repairs a/c debit Rs.1000(real rule) Building a/c credit Rs.1000 (to remove from building a/c)
  • 19. Thank you very much

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