Presentation on Rectification of errors

1. Rectification Of
ErrorsSubmitted to:- Submitted by:-
Chandan Gupta Group No :- 8
Abhinandan Singh
Jasleen Kaur
Naman Goyal
Zuweriya Rao
18-Oct-2016 MBA, 1st
Year

2. 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.

3. Errors
• Errors not affecting “trial balance”
• Errors affecting “trial balance”

4. Errors not affecting trial balance
• Errors of commission
• Errors of principle
• Errors of original entry
• Errors of omission
• Compensating errors
• Complete reversal of entries

5. Errors affecting trial balance
• Suspense account

6. Correcting entry
1. Asset
2. Purchases
3. Expenses
4. Returns Inwards
5. Drawings
Increase – Debit
Decrease - Credit
Examples of account

7. Correcting entry
1. Liabilities/Capital
2. Sales
3. Income
4. Returns Outwards
Increase – Credit
Decrease – Debit
Examples of account

8. Errors Not Affecting Trial
Balance

9. Errors of Commission
• The correct amount is entered but in a wrong
personal account

10. 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

11. Subin’s A/c Dr 500
To Salman’s 500
Purchases entered in wrong personal account, now corrected.
Journal Entry

12. To Salman 500
Subin
By Purchases 500
Salman
By Subin 500

13. Errors of Principle
• An item is entered in the wrong type of
account due to misunderstanding of the
nature of the item.

14. 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 1,0
Office Expenses A/c Dr 1,000
To Cash 1,0

15. 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

16. To Cash 1,000
Office Expenses
By Office Equipment 1,000
Office Equipment
To Office Expenses 1,000

17. Errors of Original Entry
• Wrong original figure is entered in the
journals, and hence posted incorrectly to the
accounts.

18. 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

19. 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

20. Mehir
By Bank 1,000
By Bank 200
Bank
To Mehir 1,000
To Mehir 200

21. Errors of Omission
• A transaction has been completely omitted
from the accounts.

22. 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

23. 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

24. Sales
By Prashanjeet 4,000
Prashanjeet
To Sales 4,000

25. Compensating Errors
• Debit side errors are equal to credit side
errors.

26. 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:

27. 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

28. Purchases
To Sales 20,000
Sales
By Purchases 20,000

29. Complete Reversal of Entries
• The correct amounts are entered in the wrong
sides of the two appropriate accounts.

30. 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

31. 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

32. To Mr. Amjad 12,000
Purchases
By Mr. Amjad 6,000
To Purchases 6,000
Mr. Amjad
By Purchases 1,2000

33. Errors Affecting Trial Balance

34. 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

35. • (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

36. Suspense Account
• When the trial balance does not agree, the
amount of the difference is entered in a
suspense account.

37. Total balances extracted 9,000 10,000
Suspense account 1,000
10,000 10,000
Trial Balance as on 31 March 2015

38. Suspense Account
Mar 31 Difference as per trial
balance 1,000
2015

39. How To Show a Suspense
Account on the Balance Sheet

40. Debit Balance of the
Suspense Account

41. T form
Fixed Assets X
Current Assets X
Suspense Account X
X
Balance Sheet

42. Credit Balance of the
Suspense Account

43. T form
Capital X
Long-term Liabilities X
Current Liabilities X
Suspense Account X
X
Balance Sheet

44. Correction of Errors
• To correct the errors, we should make
correcting entries in the ledger accounts first,
and hence clear the suspense accounts.

45. Example
Original entry:
Wrong entry:
Mr. Subham’ A/c Dr 1,500
To Sales A/c 1,500
----------- Dr
To Sales 1,50
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 1,5

46. Example
Original entry:
Wrong entry:
Rahul’s A/c Dr. 2,300
To Sales A/c 2,300
Rahul’s A/c Dr. 3,200
To Sales A/c 2,300
Correct entry:Suspense A/c Dr. 900
To 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.

47. Original entry:
Wrong entry:
Roopendra’s A/c Dr. 9,700
To Sales 9,700
To Roopendra’s A/c 9,700
To Sales A/c 9,700
Correct entry: Roopendra’s A/c Dr. 19,400
To Suspense A/c 19,400
Example
A credit sale of Rs. 9,700 has been
credited to Roopendra’s account.

48. Correct entry:Sales A/c Dr. 2,000
To Suspense A/c 2,000
 Sales day book was overcast by Rs.
2,000.
Example

49. Correct entry:Suspense A/c Dr. 4,000
To Sales A/c 4,000
 Sales day book was undercast by
Rs.4,000.
Example

50. 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.

51. Trading account:
Sales - Cost of good sold = Gross Profit
Sales - (Opening stock + Purchases – Closing stock) = Gross
Profit
Sales - Opening stock - Purchases + Closing stock = Gross Profit

52. 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

53. Profit and loss account:
Gross Profit + Income (e.g. Rent received) – Expenses (e.g.
Motor expenses) = Net Profit
1st
order
Income
increase
Cr. Income Increase in Net
Profit
Expenses
Increase
Dr. Expenses Decrease in Net
Profit
2nd
order 3rd
order

54. Example of errors Action
required on
the profit
Action required
on the balance
sheet
Purchases undercast Subtract -
Purchases overcast Add -
Sales undercast Add -
Sales overcast Subtract -
Income undercast Add -
Income overcast Subtract -
Expenses undercast Subtract -
Expenses overcast Add -

55. Example of errors Action
required on
the profit
Action required
on the balance
sheet
Opening stock
undervalued
Subtract -
Opening stock
overvalued
Add -
Closing stock
undervalued
Add Increase closing
stock
Closing stock
overvalued
Subtract Decrease closing
stock

56. Example of errors Action
required on
the profit
Action required
on the balance
sheet
Prepayments of
expenses omitted
Add Increase
prepayments
(current assets)
Accruals of expenses
omitted
Subtract Increase
accruals (current
liabilities)
Fixed/current assets
undervalued
- Increase fixed/
current asset
Liabilities understated - Increase
liabilities

57. THANK
YOU
For Listening