This document discusses rectification of errors, trial balances, and suspense accounts. It begins by introducing accounting concepts like the business entity concept, dual aspect concept, and conventions like disclosure and consistency. It then defines a trial balance as a statement showing debit and credit balances that proves arithmetic accuracy. Errors can be clerical like wrong posting amounts, omissions, or duplications. Compensating errors offset each other. Rectification entries are passed to correct the initial wrong entry. Differences are placed in a suspense account to balance the trial balance. Examples given are rectifying salary posted incorrectly to rent and correcting a sales amount posted as a different figure.

1. 1 Rectification of Errors, Trial Balance and Suspense Account

2. GROUP MEMBERS ALISHA JATHANNA - ROLL NO.3125 JEAN D’MELLO - ROLL NO.3109 JEANELLE CARVALHO - ROLL NO.3106 JOVIAN LOPEZ - ROLL NO.3131 JWENSLY D’MELLO-ROLL NO.3161 JASON DSOUZA- ROLL NO.3158

3. 3 RULES OF ACCOUNTING, CONCEPTS AND CONVENTIONS UNDERSTANDING BASIC RULES OF ACCOUNTING, CONCEPTS AND CONVENTIONS HELPS YOU TO UNDERSTAND THE RECTIFICATION OF ERRORS BETTER.

4. 4 Concepts & Conventions Basic assumptions upon which the process of accounting is based are: Concepts a] Business entity concept b] Dual aspect concept c] Going concern concept d] Accounting period concept e] Cost concept f] Money measurement concept g] Matching Cost against Revenue concept h) Accrual Concept i) Realisation Concept Conventions Convention of Disclosure Convention of Materiality Convention of Conservatism Convention of Consistency

5. ACCOUNTING CONCEPTS (contd). a] Business entity concept- There is a difference between a business and its owner. The business and its owners have separate identities. b] Dual aspect concept – Every business transaction has a double / two side effects. Minimum two accounts should be involved. c] Going concern concept – This concept will assume that the business will continue to exist in the future. d] Accounting period concept – It is the interval of time at the end of which the financial position statement i.e. the Balance Sheet is prepared to know the profit and loss of the business. The normal accounting period is 12 months.

6. ACCOUNTING CONCEPTS (contd). e] Cost concept – Cost price is the price paid at the time of purchase or exchange. According to Cost Concept, an asset is recorded at a cost price, it is paid at the time of acquiring it. f] Money measurement concept – All business transactions are recorded in monetary value. Transactions that can be expressed in terms of money are recorded in the books of accounts. g] Matching Cost against Revenue Concept - To ascertain the profit made during a particular period, it is necessary to match revenues of the period with the expenses of that period. h] Accrual Concept – According to this concept, revenues and expenses are recorded on accrual (mercantile) basis not on cash basis i.e. without considering that they are actually paid/received or not. i] RealisationConcept – According to this concept, profit should be taken into consideration only when it is actually realised in cash.

7. ACCOUNTING CONVENTIONS (contd). Convention of Disclosure – All important information should be properly and fully disclosed in the financial statements i.e. accounting information to avoid any doubt in the mind of owners, creditors and govt. Convention of Materiality – Accounting statements should disclose all important items which would influence the decision of an informed investor or user. Convention of Conservatism – Profit should not be taken into consideration unless it is realised in cash and all possible losses must be considered. According to this principle, stock is valued at Cost or Market value whichever is less. Convention of Consistency – Accounting principles or rules should not be changed and must be followed consistently.

8. TRIAL BALANCE DEFINITION IT IS A STATEMENT SHOWING CREDIT AND DEBIT BALANCES FROM THE LEDGER. PROVES ARITHMETICAL ACCURACY AND INDICATES MISTAKES WHEN THE TOTALS OF THE TWO COLUMNS OF THE TRIAL BALANCE DIFFER. IT IS A BASIS ON WHICH FINAL ACCOUNTS OF FIRMS ARE PREPARED. SUMMARIZES THE RESULTS OF ALL TRANSACTIONS. ANY ERROR FOUND CAN BE RECTIFIED.

9. TRIAL BALANCE BASIC PRINCIPLE : SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE, ASSETS AND EXPENSES ARE DEBIT BALANCES. LIABILITIES AND INCOMES ARE CREDIT BALANCES IN CASE OF ARITHMETICAL INACCURACY IT HELPS IDENTIFY CLERICAL/PRINCIPLE ERRORS AND RECTIFY THEM.

10. TYPICAL TRIAL BALANCE N A M EDEBIT CREDIT CAPITAL X DRAWINGS X PURCHASES X SALES X EXPENSES X DEBTORS(CUSTOMRES) X CREDITORS(SUPPLIERS) X CASH X SALES RETURN X

11. PREPARATION OF TRIAL BALANCE 3 Methods of preparation are: Total Method Balance Method Compound Method Total Method – Trial Balance is prepared by taking up the total of both debits and credits of all ledger accounts. Balance Method – Trial Balance is pepared by taking up the balance of each ledger account. Compound Method – It is a combination of both the above accounts. It is also known as Total cum Balance method.

12. MEANING & EFFECTS OF ERRORS Errors are mistakes committed due to negligence, carelessness or ignorance. The errors are also committed by Accountants in recording transactions in the books of accounts. These errors affect the accuracy of books of accounts. The net profit or net loss is affected. The Balance Sheet and financial position is also affected because of these errors. 12

14. Errors of omission

15. Errors of commission

16. Errors of duplication

17. Compensating Errors

18. Errors Of Principle 2. Types of Accounting Errors Based On Disclosure By Trial Balance* Errors disclosed by trial balance* Errors not disclosed by trial balance 13

19. TYPES OF ERRORS A) CLERICAL OR TECHNICAL ERRORS ERRORS OF OMISSION --- OMISSION OF TRANSACTION FROM BOOKS --- COMPLETE OMISSION NOT AFFECTING TRIAL BALANCE --- PARTIAL OMISSION AFFECTING TRIAL BALANCE

22. Errors of Omission These are errors of not recording a transaction in the books of accounts. An omission may either be complete or partial. There is a complete omission when the transaction is not recorded at all in the books of accounts. E.g. a purchase transaction not recorded at all. 17

23. Errors of Commission These are errors of recording transactions wrongly in the books of accounts. There are errors in posting, casting, carry forward or taking out balances, etc. E.g. Posting errors may be of a wrong account, wrong amount or wrong side, such as : Amount received from X credited to Y’s account. Purchase of Rs.360 from A posted in his account as Rs.630. Casting errors are errors committed while taking the totals. Such errors affect the trial balance. Errors in Carrying Forward and errors in taking out the balances also affect the Trial Balance. 18

24. Errors of Duplication This another type of error of commission which means recording the same transaction twice in the original books of entry and also posting it to the ledgers. Such errors do not affect the agreement of Trial Balance. 19

25. Compensating Errors Whenever one error exists and another error takes place as a result of which the effect of the previous error is counter-balanced i.e. set off, there is said to be a compensating error. E.g. if the Sales Account total is undercast by Rs.1,000 and the Purchase Account total is also undercast by the same amount, there is a compensating error. 20

26. Errors of Principle These are the errors arising from not observing the accounting principles correctly. This type of error does not disturb the Trial Balance and the Trial balance will tally even after the existence of such errors. E.g. wrong capitalisation of revenue items such as, purchase of new tyres for a car debited to “Motor Car account”. This type of error does not disturb the Trial Balance i.e. the Trial Balance will tally even after existence of such errors. 21

27. RECTIFICATION OF ERRORS IS A SERIES OF STEPS PASS THE CORRECT ENTRY COMPARE THE WRONG ENTRY WITH THE CORRECT ONE PASS THE RECTIFICATION ENTRY IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENSE ACCOUNT

29. ERRORS - EXAMPLES TYPICAL ERRORS: -- CLERICAL: A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-. RECTIFICATION: CREDIT SALARY WITH 9000/-. B) SALARY PAID 1000/- BUT POSTED IN RENT A/C. RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH 1000/-. C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY RECORDED IN PURCHASE REGISTER. RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.

30. ERRORS - EXAMPLES AFTER TRIAL BALANCE IS PREPARED ONE FINDS . D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-. . RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENSE WITH 4500/-, CREDIT RENT WITH 4500/-, DEBIT SUSPENSE WITH 4500/-. E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C. RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENSE WITH 9000/-; CREDIT RENT WITH 10000/- F) A PURCHASER’S DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN. RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENSE TO THE EXTENT OF 9000/-.

31. Errors disclosed by Trial Balance If the transaction is recorded in the journal but by mistake it is not posted in the ledger, the Trial Balance will not agree e.g. Cash is received from Mohan Rs.200. This is entered properly in the cash book but not posted to the credit side of Mohan’s Account in ledger. As a result the credit column of the Trial Balance will fall short by Rs.200 Partial Omission of a transaction Posting of the Wrong amount If the posting is made of a wrong amount from journal to ledger, the Trial Balance will disagree e.g. Good purchased from “Z” worth Rs.120. While posting, it was recorded as Rs.102. The total on the credit column of a Trial Balance will be less than the total of the debit column on the Trial Balance by Rs.18

32. Errors disclosed by Trial Balance When a transaction is posted to the wrong side of an account in the ledger it causes disagreement in the Trial Balancee.g. Suppose cash of Rs.100 is received as interest and was entered in Cash Book correctly but debited to the Interest Account instead of crediting that account. The result will be that the credit column of the Trial Balance will be added short by Rs.200 Posting on the wrong side of an account Wrong totalling or balancing If an account in the Ledger is wrongly totalled up or wrongly balanced, the Trial Balance will not tally. Suppose the total of the debit side of Mohan’s account is Rs.1,500 and that of the credit side is Rs.1,700 Mohan’s account should show a credit balance of Rs.200.. But if it is wrongly written as Rs.300 in the credit column of the Trial Balance the credit side will be more by Rs.100.

33. Errors not disclosed by Trial Balance If any particular transaction is not recorded at all, it would not affect the agreement of a trial balance. Suppose Rs.100 is paid to “Y”. If this transaction is not entered in the Cash book, it will not be posted to “Y’s” Account in the ledger and hence there will be no difference in the Trial Balance. Complete omission of a Transaction Recording of wrong amounts on both sides If wrong amounts of the transaction are entered on both sides of ledger accounts, it would not be disclosed in the Trial Balance. Suppose goods worth Rs.570 are purchased from V.K.Trading Co. but in the purchase book and Ledger of the company the amount was written as Rs.750 instead of Rs.570. In this case the Trial Balance will tally.

34. Errors not disclosed by Trial Balance If posting from journal to the ledger is made to the wrong account, this error will not be disclosed by the Trial Balance. E.G. Furniture is purchased for cash Rs.1,200. If it is posted to the debit side of the Machinery Account, instead of the Furniture Account, the Trial Balance will not be affected because one account (i.e. Machinery Account) is debited and another account (i.e. Cash Account) is credited by the same amount. Therefore total of credit side will agree with the total of the debit side. Posting to wrong heads of accounts Compensating Errors When one mistake nullifies the wrong effect of another, it is called compensating error. They are two or more in number. The Trial Balance fails to disclose them. Suppose debit side of Rohan’s account is overcast by Rs.100. Similarly, if the debit side of the Postage Account is undercase by Rs.25 and the credit side of the Interest Account is also undercast by Rs.25 both the errors will compensate each other and there will be no effect in the Trial Balance. A wrong entry in the Original Record Such an error occurs when a transaction has been wrongly entered in a Subsidiary Book. Suppose a crredit sale of Rs.120 to M/s. Bhavya & co. has been entered in the Sales Book as Rs.102, it will be posted to the Sales Account as well as to M/s.Bhavya & Co. which will not affect the Trial Balance.

35. 30 Basic rules for rectification-1 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.

36. 31 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 but it is a capital expenditure. “Any expenditure incurred before the asset is put into use is to be capitalised”. What about cash account? We assume that cash account would have been correctly entered. You might ask which side of wage account had been entered, whether debit or credit? Normal assumption is that wages is always entered in the debit side(nominal rule). Do not assume, that if it had been entered into the credit side of wages account what would have happened. It is an unnecessary assumption.

37. 32 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 of 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.

38. 33 Rectification of Errors After trial balance But before Trading, P/L and Balance sheet After preparing Trading and P/L and Balance sheet Before preparing Trial Balance Hit profit or reserve or Capital Hit the individual account

39. 34 Rectification of errors - Rule-4 In case of a one sided error (one account) we open a 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) Rectification entry: Salary a/c debit Rs.40,000 Suspense a/c credit Rs. 40,000.

40. 35 Rectification of error-Rule 5 Suspense Account Meaning - The difference in the trial balance is put into a newly opened account called Suspense Account. Thus it is also known as Difference in Books Account. Use - It is primarily connected with the disagreement of Trial Balance. If the credit side is short, the suspense account will be credited and if the credit side is bigger, this account will be debited. With inclusion of this account in the trial balance, it will appear to have agreed. However errors which have led to the difference in trial balance still have to be found out. When the errors are found out and rectified, the Suspense Account is closed.

41. 36 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

42. Correction in the next trading period Rectification of errors is usually carried out Before the books are closed for the concerned year. However, sometimes, the rectification is carried in the next year, carrying forward the balance in the Suspense Account. Amounts relating to previous years should be shown separately. 37

43. THANK YOU