Bba i ita u 2.2 rectification of errors
Download as PPTX, PDF2 likes3,818 views
This document discusses rectification of errors in accounting. It defines four types of errors: omission errors, commission errors, principle errors, and compensating errors. Omission errors occur when a transaction is not recorded, while commission errors happen during posting and balancing. Principle errors involve incorrectly classifying revenue and capital items. Compensating errors occur when incorrect entries offset each other. Errors are located through statements, audits, comparing Trial Balance debit and credit totals, and checking subsidiary books. A suspense account is used temporarily to hold differences in the Trial Balance until the error is found. Rectifying entries are passed to correct the books once an error is identified. Errors can affect profit calculation if they involve Trading, Profit and
Bba i ita u 2.2 rectification of errors
- 1. Rectification of Errors BBA I INTRODUCTION TO ACCOUNTING UNIT 2
- 2. Chapter Objectives • Understand the concept of different types of errors • Identify the procedure for locating errors • Describe the meaning and importance of suspense account • Rectify accounting errors by means of appropriate journal entries • Understand the effect of different errors on computation of business profits 2
- 3. Identification of Errors • Errors occur when some transactions are incorrectly entered in the account books. • Identification and rectification of the errors is necessary to ensure the correctness of final accounts. • Errors are classified into four categories: – Omission error: This error occurs when a transaction is not recorded in the Journal. This type of error is difficult to locate because it is not reflected in the Trial Balance as both debit and credit entries related to a transaction are missing. 3
- 4. Identification of Errors (contd.) – Commission error: This error occurs while posting and balancing of accounts in Ledger. This type of error can be easily located by analyzing the Trial Balance. – Principle error: This error occurs when the accountant fails to distinguish between revenue and capital items. This type of error is difficult to locate because it is not reflected in the Trial Balance. 4
- 5. Identification of Errors (contd.) – Compensating error: This error occurs when the entries corresponding to two transactions, which are incorrectly entered in the account books, compensate each other. It is difficult to locate this type of error because it does not affect the overall debit and credit balances of an account. 5
- 6. Location of Error • The omission, commission and compensating errors cannot be located from the Trial Balance. Location of such errors can only be determined when: – Statements of accounts are received from the suppliers, customers and other business associates – Statements of accounts are sent to the customers – Internal and external audits are performed 6
- 7. Location of Error (contd.) Errors like principle errors are easily located when there is a mismatch between the debit and credit totals of the Trial Balance. To locate such errors, an accountant performs any of the following tasks: Computes the difference between debit and credit totals in Trial Balance and performs various operations on it to determine the error entry Checks the schedules of sundry creditors and debtors Checks the total of all the subsidiary books such as Sales Book and Purchase Book Checks all the entries in Journal and their posting in Ledger 7
- 8. Suspense Account • It is a temporary account to which the difference in the Trial Balance is transferred. • It should be opened only when the accountant fails to determine the location of errors. • It is closed when the accounting entries are passed to rectify the errors that resulted in the difference in the Trial Balance. 8
- 9. Rectifying Accounting Entries • To rectify the errors in the books of accounts, special entries known as rectifying entries are passed in the books of accounts. Illustration: Sales Book overcast by Rs. 100. 9
- 10. Rectifying Accounting Entries (contd.) • The following are the rectifying entries for the given situation: – Case 1: Accountant has identified the location of error before transferring the difference in Trial Balance to Suspense account. 10 Date Particulars Dr. Cr. Sales Account Dr. (Being excess credit to Sales account, now rectified) 100
- 11. Rectifying Accounting Entries (contd.) – Case 2: Accountant has identified the location of error after transferring the difference in Trial Balance to Suspense account. 11 Date Particulars Dr. Cr. Sales account Dr. To Suspense account 100 100
- 12. Effect of Errors on Profit Errors in the books of accounts, which are associated with Trading account and Profit and Loss account, may affect the profit calculation of business for a particular period. Example of accounts that affects the profit calculation of business are Purchase, Sales, Expense and Income accounts. Accounts that should be debited are if unnecessarily credited will result in increase in the net profit. Accounts that should be credited are if unnecessarily debited will result in decrease in the net profit. 12
- 13. Summary • In this chapter, you have: – Understood the concept of different types of errors – Identified the procedure for locating errors – Described the meaning and importance of Suspense account – Rectified accounting errors by means of appropriate journal entries – Understood the effect of different errors on computation of business profits 13
- 14. References/Sources • ACCOUNTING FOR MANAGERS Dr. Sakshi Vasudeva Galgotia publishing company (Theory & Practice).Chapter no. 7 Rectification of Errors. Page no. 181
- 15. Thank you