RECTIFICATION OF ERROR "ARNING OBJECTIVES : After studying this topic the student will beable to: ‘© Explain Types of Frrors and their examples © Rectify the Errors : Two sides ie, Errors not affecting Trial Balanee and ‘One sided i.e. Exrors which affeet Trial Balan © ToExplain Meaning and Utility of Suspense Ae © Maintain Suspense Al. INTRODUCTION In the previous chapter we have learnt that a Trial Balance is prepared (© chock the arithmatic accuracy of transactions recorded in a Journal, posting them into the ledger and balancing the ledger account, [fa Trial Balance agrees, itis assumed that recording, posting ete, have been done correctly, But this is only partially correct because even if Trial Balance agrees, there may be some errors in the accounting records. Forexampleifa credit sale is omitted tobe entered in the Sales Book, it will not- affect the trial balance because both the Debit and the Credit aspeets of this transac- ‘ion are not recorded. In other words, errors in the records may ar may not affect Trial Balance. Important : The errors whether affecting the Trial Balance or not must be detected and rectified, Need of Rectification = 1. Forthe preparation of correct Accounting Records. 2. Proparation of P & L A/c with corrected figures to ascertain correet Profit or Loss. 3. To find out the true financial postion of the firm by preparing Balance Sheet ‘with corcected figures.CLASSIFACATION OF ERRORS (on the basic of Nature) (Whenatransaction is completely or partially “omitted to be recored in the books) I1.Error of Comn (these errors are caused due towrong recording of transactions ‘wrong totalling of subsidiary books orLedger Aves, Wrong posting and wrong earty forward) ‘Sub-Types with Examples (a) Error of Complete Omi Goods sold to X on Credit but not recorded in Sales Book, *(b) Partial Omission Goods soldto X on Credit recorded in Sales Book but not posted to the A/c of X, thus sales. Alcis credited but X isnot d sdereating short debit. This error will affect Trial Balance. (a) Error of Recording in the Book Of Orr (Goods purchased from Ravi for Rs. 450, recorded as Rs. $40, in the Purchases Book. al Entry (This error will nocaffect Trial Balance as same amount will be posted in both the Ales, Purchase ‘Aleaswellas Ravi) *(b) Wrong Totalling of Subsidiary Book. Example : Purchase Book has been undercast (short totalled) by Rs, 100, Purchase Afe will be debited short by Rs. 100, decreasing the debit side of Trial Balanee by Rs. 100. (©) Error in Totalling or Balancing of Ledger AJes* Example : Creditors A’ has been balanced short by Rs. 500, then Trial Balance will Rs 500 short in Creditside.IIL, Errors of Principles. (These errors are caused duc to the violation of accounting, principlesie. allocation between Capital and Revenue Items, IV. Compersation Errors (lwo ormoreerrors committed in sucha way thatthe net effeet of these errors is nil). (@) Error of Posting *€) Posting to the wrong side but correct account, Goods sold to X for Rs. 550, entered tothe credit of X’s Al instead of posting othe debit side of hisaccount, +i) Posting with wrong amount. *Gii) Posting twice in an Ale. (>) Errorsin posting to the wrong A/e but correct side don’t affect Trial Balance, *(¢) Errorin carrying forward. Total of purchase book Rs. 2,500 is carnied forwardas Rs, 2050 Creating short debitof Rs, 450, in Purchase A/c and in turn short debit in Trial Balance, (a) Treating capital items as revenue item Example: Wages paid forthe instalation ofa new machinery charged to Wages AJ instead of Machinery Ai. (b) Treating Revenue Items as Capital Item ‘Example : Rs. 200 pad for the repairs of an old “Machinery but debited to Machinery Ave instead of Repairs Ave Example : On July, 1" 2011 esum of Rs. 2,000 paid to Mohit is posted as Rs. 200 to the Debit Of his A‘e and on July 208, 2011 asum of Rss, 200 paid to Sonil has been posted as Rs, 2,000 tothe Debit of his Ae, Net Effect will bezero. [important 1: 1, Emorsof Principlesand compensating Errors don't affect Trial Balance 2, Errors shown by star in the above table affect Trial Balan usTYPES OF ERRORS FROM RECTIFICATION POINT OF VIEW From Rectification point of view, errors ae classified into the following two categories only: ‘Case | ; Errors which don’t affect the Trial Balance Two Sided Exrors Case I : Errors which affect the Trial Balance or sone Sided Errors Errors don’t Affecting Trial Balance (1) Errors of complete omission. (2) Wrong recording in the books of original entry. (3) Complete mmission from posting to the Als (4) Errors of posting to the wrong A/c but on the correct side. (5) Compensating errors. (6) Errors of principle. Errors Affecting Trial Balance. Shown by star in the table showing Errors : Types and Examples. (1) Eorsin totalling of Subsiciary books or ledger A/es i.e overcastor undercast] @) Enorin the Balancing of Ledger Ales. 3) Eimorinpostingto the comect Ac but withthe wrong amount orto the wrong side orbath. (4) Exrorsof Paitial omission (5) Omitting to show an vein the Trial Balance RECTIFICATION OF ERRORS When th errors are detected, these have to be rectified in the books of accounts. Rectification of errors depends upon ‘@ The typeof errorand fe The time of depiction of an error. “Time of Depiciation of an error means Errors detected before the preparation of ‘Trial Balance. (i) Errors detected after prepairing Trial Balance but before preparing final “Accounts, (i) Ervor detected afte preparing Final Accounts, 4Rectification of Errors detected after preparing Final Aceounts is notin the sylla- bas. Hence we will discuss only type (i) and (ii) IRECTIFICATION OF TWO SIDED ERRORS Iwo sided errors are those errors which affect two sides of Accounts. These errors don't affect Trial Balance as discussed earlier. ‘These Errors are rectified by passing a Journal entry inespective ofthe time of eficiation. In other words theirrectifyingcentry willbe same whether a) the error is depicted before preparing Trial Balance or (b) afer the preparation of Trial Balance [but before the Final A/cs are prepared. Steps for Rectification (1) Locate the effect of Error on Different Accounts (2) The Account showing excess credit should be Debited G) The Account showing excess Debit should be Credited (4) The Account showing short Debit should be Debited (5) The Account showing short Credit should be Credited. EXAMPLES (with Explanation) (® when an account has wrongly been debited in place of another Alc. ‘© Recification will be done by debiting the correct account and Crediting the Ale-which was wrongly debited. Example: Machinery purchased for Rs, 10,000 has been debited to Purchases Ne Solution : Here two Ales are affected © Machinery Ae is not debited hence its debit side is short by Rs. 10,000, whereas purchases Ae is debited by mislake purchases A/edebitside isin excess by RS. 10,000, © Whiterectifying this mistake machinery Ale willbe debited by Rs. 10,000 because it was not debited earlier and purchases A /e will be credited cause itwas weongly debited. Rectifying Entry is: Dr.®) a@ “Machinery Are Dr 10,000 ToPurchases Ale 10,000 (For purchase of machinery -wrongly debited Purchases Alc) (1) When an account has wrongly been Credited in place of another account. Example: Rs. 5,00}received from thesale of old furniture has been Credited to Sales A/e, usSolution : This error also affects the two Ales © Fumiture A/cisnot Credited hence its credit side is short by Rs, 5,000, © Sales A/cis credited by mistake its credit side isin excess of Bs. 5,000, ‘© Therefore forrectifying this mistake Sales A/c will he debited because it was wrongly Credited and Fumiture Ae which was not Credited earlier will now ‘be credited by Rs. 5,000, Hence Rectifying entry is: Dr(®) c.@, ‘Sales Ale Dr. 5,000 To Fumiture Alc 5,000 {Galeofoldfumiture wrongly Credited o Sales A/c) (II1)_ When thereis a short debitin one A/eand a short Credit in another Ale. Example : Goods sold to Seema for Rs, 540 was entered in the Sales Book as Rs. 450. Solution fe Here Seema’s A/cis debited by Rs. 90 shortand Sales A/cis credited by Rs. ‘90 short. (lnstead of Rs. 540 by Rs. 450) fe Therefore rectification will be done by Debiting Seema’s A/eand Crediting ‘Sales Alc. Hence Rectifying entry is @) g) Seema Dr 90 To Sales Ale 90 (For Goods sold to Seema for % 540 wrongly entered as 7450) (V)_ When thereisan Excess Debit in onc Ale and Excess Credit in another Ae. Example : Goods purchased from Mohan for Rs. 300 was recorded in Purchase Book as Rs. 3000. Solution - @ Hore Purchases A'cis Debited by Rs. 3000, instead of Rs. 300, ie. Rs.2700, ‘more. (© Mohan’s A/cisalso Credited by Rs. 2700 more. fe Rectification will be done by debiting Mohan’s A/c and Crediting purchases Avcby Rs. 2700, ie, the entry in the reverse direction, Reetifying Entry @) @) ‘Mohan Dr 2100 To Purchases Ale 2700 (For Purchase of oods from Mohan for Rs. 300 wrongly entered as Rs. 3000) 116Problem: Rectify the following errors : 1 2 3. So ‘Complete Solution Creditpurchases from Amit not recorded for Rs. 8,000 (Error of Complete commission). ‘Wages paid Rs, $00 forthe installation of new Machinery were recorded in vwagesAlc. — (EmorofPrinciple) Credit sales to Anil for Rs, 5,000 were posted to Amit’s Afe (Error of Com sisson) Goods purchased from Ram for Rs. 9X} were recorded in Sales Book (Error of Commission) Goods returned to Amit for Rs.1,000 enterodas Rs. 100 (Error of Cmmission) Rent paid Rs. 400 wrongly debited to Landlord's Ae (Error of Principle) Rs. 500, paid for the proprictor's medical bill were debited to “Sundry Expenses A/c” [Error of Principle] Rs, 2,500, received from Anil were recorded in the Cash Book as Rs. 5,200 [Emor of Commission] Note that InErvor No, 4. more than two Account are affected, (@) Wrong Entry done Ram De 900 ToSales Ale 900 () Correct Entry Required Purchases Ave Dr, 900 ToRam 900 Here to cance the effect of wrong entry we have todothe entry (©) Sales Ale De 900 ToRam 500 Now the Reetifying entry will be Eniry(b)+Emry(c)ie, [PurchasesAle Dr. 900) SalesAe De 900 ToRam 1,800 Date? | Particular LF Dr Cr Error @. ©) 1 PurchasesAVe De 8,000 | 8.000 ToAmit 8,000 (For the credit purchases to Amit omitted to be recorded) uy2. Machinery Ale Dr 300 ‘To Wages Ale 500 {for Wages paid for the installation ‘ofanew machinery wrongly sichited vo wages Alc) 3. An Di 5,000 “ToAmit 5,000 {or Credit sale to Anil wrongly sichited to Amit's A/c) 4 Purchases Ave Dr 900 Sales Ave Dr 900 ‘ToRam 1,800 {for Credit purchase from Ram wrongly passed through sales book.) 5. “Amit Dr 900 “To Purchase Returns Ale 900 {for Goods retuned to Amit entered short by Rs.900) 6 Rent Ale Dr 400 ‘To Landlord 400 {for Rent paid wrongly debited tolandlord's Alc) 2. Drawings Ave Dr 300 “To Sundry Expenses Ale 500 {for Proprietor’s personal expenses wrongly debited to S. Expenses) 8. “Al Dr 2,700 “ToCash Ave 2,700 {or Cash reesived fom Aci ‘was recorded in excess by Rs. 2,700) (5,200-2,500) important | _ Rectification of double sided errors can easily be understood by the students. | These are rectified by passing the joumal entries. as given above imespective ofthe time of detection ofthe errors, RECTIFICATION OF ONE SIDED ERRORS, ‘These errors affect only one side ofan Account either debit or credit. Therefore these errors affect the Trial Balanee. usRectification ofthese errarsis done differently, in these two cases ice. () Before preparing the Trial Balance (i After praparing the Trial Balance Casse I : Rectification of one sided errors before preparing Trial Balance. When there errors are recified before preparing Trial Balance i.e transfering the difference in the Trial Balance tothe Suspense Account. (Which willbe explained later on), then itis done directly by debiting or crediting the concemed ledger account. For short Debit -» Concemed Alc is Debited For Excess Credit -» Concerned. Alc is Debited For Short Credit -» Concemed A/cis Credited For Excess Debit -» Concerned A/c is Credited ) Purchases Book undercast by €150 ‘tmeans thatthe total ofthe Purchases. Book is & 150-short. ‘@ Thistotal is posted to purchases A/c Debit side fe Hencepurchases A/cis debited short by €150 fe Noeffecton any other Are ‘© Therefore purchases Ale will be debited by € 150 to rectify this error as givenbelow. Dr Purchases A/e @ Date] Particular TE [© [Datel Particular TO. To Undercast of 150 purchase: boak Here debit side of the Purchases Ale was short therefore the rectifeation Is done by debiting the Ase. Example 2~ Purchase Book is avercast by €300 Analysis {@ Means otal of the purchase Book isin excess by € 300 whichis posted to the debit side of purchases Ave fe Hence purchases A/c is debited in excess by & 300 fe Noeffecton any other A, fe Therefore to rectify this error £300 will be credited to purchases Ae (ie. “oppositeside) Dr Purchases Ae G Daie [Particular | JF |) [Datel Particular TFT @ By Overcast 300 of Purchases Book 9‘© Here debit side ofthe purchases A‘ewas in exces, therefore the recification is, doneby entering the amount on the opposite sidei.c Credit side ofthe Purchases Vc Case Il : Rectification of one Sided Error after Preparing Trial Balance When the errors are detected after the preparction of Trial Balance then every single sided error istectified by passing aJoumal entry through the Suspense Account ‘e Forshort Debit in oneAccount -» Debit that Account and Credit the Sus- pense Ale Excess Credit in one Account Debit that Account and Credit the Suspense Ae Short Credit in one Account -> Credit that A’e and Debit the Suspense A/c Excess Debitinone Account > Creditthat A/cand Debit the Suspense A/c Example 3 : Hence for the same error as given in example No in case I, the following Journal Entry will be passed. & @ Purchases Alc De] 150 ToSuspense Ale 150 (Forundereast of purchase book, now corrected) Example 4 Sales Book was undereast By Rs, 200, Analysis ‘@ Sales book totaled short by Rs. 200 which is posted tothe credit side of ales ‘© Therefore sales A/c credit side is short by Rs, 200, ‘@ Hence rectification will be done by crediting the sales A/c and Debiting the Suspense Ave by Rs. 200. (Rs) (Rs) ‘SuspenseATe De 200 To Sales Ale 200 (For the undercastof Sales Book, now corrected) Note: ‘When nothingis mentioned in the question about the time of detection of an error, the students are advised to rectify one sided errors through Suspense Ac PROBLEM Reetify the following ears (A) Without opening a Suspense Alc (B) By passing Joumal entries through: 120(1) Rs. 400 Paid toX were entered in the Cash Book but omitted to be posted to the Ledger. (2) Rs. 400 Paid to X were debited tohis A/c as Rs. 40 (8) Rs, 400 paid to X were debited to his A/c as Rs, 4000 (for Thousand) (4) Rs.400 Paid To X were Credited tohis Ale (5) Rs.400 Paid To X were Credited to his Aveas Rs. 40 (@ Sales Book was overcast by Rs. 200 () Sales Return Book undereast by Rs. 400 (8) Purchase Return Book undercast by Rs, $00, ion : (A) Without opening a Suspense Ae Asexplained earlier ifthe errors (single side) are detected before preparing Trial Balance then these are rectified by directly the amount in the concerned Ledger Accounts, Solution Sol 1. X's Alewill be debited by Rs. 400s itis case of partial omission 2. X's.Alewas debited show by Rs. 360 (400-40) therefore the rectification will be done by debiting X's Alc by Rs. 360. 3. X'sAlewas debited in excess by Rs. 3600 (4000-400) therefore rectifica- tion will be done by Crediting the X's A/eby Rs. 3,600, 4, X's Ale was Credited by Rs. 400 instead of debiting by Rs. 400, therefore rectification witl be done by debiting the X's A/e by Rs, 400+400 ie. Rs. 800 (Rs, 400-to cancel the effect of wrong credit and Rs. 400 for actually debiting the A/c). 5. X's is wrongly Credited by Rs. 40 instead of Debiting it by Rs. 400. Hence rectification will be done by Debiting the x's A/e by Rs. 440, 6. Sales Book overcast means Sales A/c is Credited is excess by Rs. 200 ‘here as customer's have been debited by the correct amount. Hence rectificaion willl done by debiting- Sales Ave by Rs. 200, 7. Sales Return Book total Undreast by Rs. 400 means Sales Return Ac is debited short by Rs. 400, Hence Rectification will be doneby debiting the Sales Return Ale by Rs. 400. 8, Purchase Retum Book wndereast by Rs, 500 means Purchase Return A/c is credited short by Rs. 500. Hence rectification willbe done by Creditingthe Purchase Return Ave by Rs.500, 121Exact Solution : Inthis example the rectification in X's Ale from Error No, | to4 will beshown as follows: Dr X'sAccount Cr. Error] Particular LF] @ [Date] Particular [LF] @® Date (1). [Toommission of 400 |(@) | ByEror 3,600 posting of Cash Paid inPosting Q)_ | ToErorinPosting 360 Withthe with the Wrong ‘wrong Amount Amount (4) | ToErorinPosting 300 tothe Wrong side (B) By opening Suspense A/c only Rectifying Journal Entries are done. Datel] Particulars LF] Debit | Credit Error Amount | Amount 3) ee) wo fx Dr +400 To Suspense Are 400 (lor Cash paid to X omitted to be posted to X’sA/e) @ | x Dr 360 To Suspense A‘e 360 {Gor Cash paid to X was debited to his -Ale-with the lesser amount) 3) | Suspenseare Dr 3,600 To X 3,600 (for X's Ale was debiteed with excess amount) 122“ (5) o a @) x Dr 800 ‘ToSuspense Ale 800 (For posting toX account was done onthe wrong side (Cr) by Rs. 400) x Dr 440 ToSuspense Alc 440 (For posting made wtih the wrong, ‘amount on the wrong side, now corrected) ‘Sales Ale Dr 200 To Suspense Ale 200 (for Overcast of Sales Book rectified) SalesRewmAe Dr 400 ‘To Suspenes A/c 400 (For the undercast of sales retum book, rectified) Suspense Ale Dr 500 ‘To Purchase Return Ale 500 (for therectification of undercast cof purchase peturn book) ‘Suspense Account and its Disposal : Inthe chapter of Trial Balance we have leamt about the Suspense A/c Insportant: . ‘When inspite of all the efforts the Trial Balance does not tally, the difference is put to a newly opened account named Suspense Aie. Suspense Ale is an imaginary account, opened temporarily for the purpose of reconciling a Trial Balance. Later on when the errors affecting the Trial Balance are located, rectification entries are passed through the Suspense AVC. ‘When all the errors are located and rectified, the Suspense A/c will be auto ‘matically closed i, it will show zeto balance.‘@ Butifsuspense Ale still shows a balance it will indicate that some errors arestilltobe discoveredand rectified, Problem ‘There was an exeess cre accountant ofa trading concem could not agree the Trial Balance. ‘of Rs, 100 which he transferred to the suspense A/c ‘The following errors were subsequently discovered (1) Received Rs. $50 from X, were posted to the debit of his account (2) Rs. 100 being purchase retum were posted to the debit of purchases Alc. G) Discountreceived Rs. 200 Correctly entered in the Cash Book but posted to the debit ofthe discount Ale () Salary paid Rs. 3,500 to Xwere posted tothe salary A/eas Rs, 2,500, (5) A purchase af Rs. 400 has been passed through Sales Book. However the customer's account hasten correctly credited. Give Rectifying entries and Suspense Alc Rectifying Journal Etries Date | Particulars LE| Debit | Credit Amount} Amount @ © (| SuspenseAle Dr 1,100 ToX 1,100 (Amount received from x was posted to the wrong side now comected) | SuspenseAle Dr 200 ToPurchase Ale 100 To Purchase Returns A/c 100 (For the purchase return wrongly posted to the purchases A/e) @) | Suspenseae Dr 400 ‘ToDiscountAve 400 (Discount received was pasted tothe wrong side of discount Ale) 124@ Salary Ale Dr 1,000) Ta Suspense Ale 1,000 (Salary paid was posted to salary Ale with lesser amount) 6) PurchasesAle Dr 400 Sales Ave Dr 400 To Suspense Ale 800 (Purchases has been passed through sales book but the customer's Ale hasbeen correctly credited) Dr Suspense Ale ce Date] Particular [JE] @ Date [Particular i] @ Error ToDefierencein 100] @)_ [By SalayyAle 7,000 the Trial Balance (5)() | By Purchases Ale 400 i) By Sales Ale 400 (y |tex 1,100 2) |ToPurchase Ale 100 Balancee/d Ni G) |ToRewmare 100 (4) | ToDiscout re 400 7,800 [1,800 | Since the Balance of the suspense A/c nil, itindicates that all the errorshave been rectified Suggested Methodology Discussion and Explanation method is suggested, 1s