Cpt accounts-rectification of errors
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Rectification of errors involves correcting mistakes made in recording accounting transactions. Errors can occur during recording in journals or ledgers. A trial balance is prepared to check for errors, as errors will cause it to be out of balance. There are different types of errors such as errors of principle, omission, commission, and compensating errors. Errors are rectified through journal entries, with a suspense account used if needed to balance entries. Errors found after accounts are finalized still require rectification, which impacts the previous year's profit and capital.
Cpt accounts-rectification of errors
- 1. RECTIFICATION OF ERRORS Rectification of Errors Unintentional omission or commission of amounts in the process of recording the transactions are commonly known as errors . To check the arithmetic accuracy of the journal and the ledger accounts , trial balance is prepared . If trial balance does not tally, then it can be said that there are errors in the accounts which requires rectification therof. Some errors may affect the Trial Balance and some of these do not have impact on the Trial Balance although such errors may affect the determination of Profit or Loss, Assets & Liabilities of the business . Errors of Principle : Treating a revenue expenses as capital expenditure or vice versa. Trial Balance will agree. eg: Treating sale of Fixed Asset as Oridinary Sale. Errors of Omission : a Errors of Omission : Omitting an entry completely from subsidiary books. Trial Balance will agree. b Errors of Partial Omission : Omitting to post the Ledger account from subsidiary books. Trial Balance will not agree. Errors of Commission : a Writing the Wrong amount in the Subsidiary book . Trial Balance will agree . b Posting an amount in the Wrong account but on the correct side . Trial Balance will agree . c Wrong casting of subsidiary books. Trial Balance will not agree. d Posting the Wrong amount in the Ledger. Trial Balance will not agree . e Posting an amount on the Wrong side of Ledger account . Trial Balance will not agree . f Wrong balancing of Ledger account . Trial Balance will not agree . Compensating Errors : If the effect of an error is cancelled by the effect of some other error, Trial Balance will agree . eg: Suppose an amount of Rs.10 received from " A" is not credited to his account and the total of Sales book is Rs. 10 excess. The omission of credit to "A" account will be made up the increase of credit to Sales Account. The Trial Balance will agree . VXplain 2 score more-post your doubtsto us at vxplain@gmail.com
- 2. RECTIFICATION OF ERRORS Rectification of Errors can be done : 1 Before preparation of Trial Balance 2 After preparation of Trial Balance but before Final Accounts are drawn 3 After preparation of Final Accounts (i.e next Financial Year) . Before preparation of Trial Balance : One sided errors can be rectified by recording a statement . eg: Purchase of Machinery for cash for Rs. 10,000 correctly posted in Cash account, but not posted in Machinery Account . Rectification: On the debit side of the Machinery account a statement will be recorded as " To Error of Partial Omission " as Rs.10,000 . After Trial Balance : All errors will be rectified by recording a Journal entry. In case of unbalanced entry the help of Suspense account should be taken to balance the same . eg: Purchase of Machinery for Rs. 5,000 was recorded in Purchase book . The following 3 entries will make the rectification clear Wrong entry : Purchase a/c. -------- Dr. 5,000 To Creditor 5,000 Correct entry : Machinery a/c. -------- Dr. 5,000 To Creditor 5,000 Rectification entry : Machinery a/c. -------- Dr. 5,000 To Purchase a/c. 5,000 Note : Only Rectification entry is required but for better understanding both wrong & correct entries are given . eg: A paymemt of Rs. 1500 for Salaries has been posted twice to Salaries Account . Rectification entry : Suspense a/c. -------- Dr. 1,500 To Salariese a/c. 5,000 1,500 VXplain 2 score more-post your doubtsto us at vxplain@gmail.com
- 3. RECTIFICATION OF ERRORS After final Accounts : If the errors are not rectified before the preparation of Final Accounts then they should be rectified in the next accounting period. Since these errors are related to the previous year the rectification of these errors will affect the profit of the previous year ultimately affecting the Capital Account as profit of the year is transferred to the Capital A/c. All those entries affecting the Profit / Loss of the last year i.e. all accounts appearing in Trading & Profit & Loss A/c should be replaced with Profit & Loss Adjustment A/c. After all rectifications balance in Profit & Loss Adjustment A/c should be transferred Capital A/C . eg: Purchase of Machinery for Rs. 5,000 was recorded in Purchase book . The following 3 entries will make the rectification clear Rectification entry : Machinery a/c. -------- Dr. 5,000 To Profit & Loss ADJUSTMENT a/c. 5,000 Errors not revealed even by tallied Trial Balance : 1 Errors of Principle . 2 Compensatory Errors 3 Error of Complete Omission 4 Error of Recording in the books of Original entry 5 Error of Posting involving to Wrong Account on Correct Side with Correct Amount . Errors revealed by Trial Balance : 1 Error of Partial Omission 2 Error of Commission other than error of recording and error of Posting involving to Wrong Account on Correct Side with Correct Amount. Note : Read all the MCQ's given in ICAI-Book from pg: 2.140 to 2.142 VXplain 2 score more-post your doubtsto us at vxplain@gmail.com