ICAI Notes 2.8, Rectification of Errors- 2 - CA Foundation PDF Download

5.2 AFTER TRIAL BALANCE BUT BEFORE FINAL ACCOUNTS

The method of correction of error indicated so far is appropriate when the errors have been located before the end of the accounting period. After the corrections the trial balance will agree. Sometimes the trial balance is artificially made to agree inspite of errors by opening a suspense account and putting the difference in the trial balance to the account - the suspense account will be debited if the total of the credit column in the trial balance exceeds the total of the debit column; it will be credited in the other case.

One must note that such agreement of the trial balance will not be real. Effort must be made to locate the errors.

The rule of rectifying errors detected at this stage is simple. Those errors for which complete journal entries were not possible in the earlier stage of rectification (i.e., before trial balance) can now be rectified by way of journal entry(s) with the help of suspense account, for it these errors which gave rise to the suspense account in the trial balance. The rectification entry for other type of error i.e. error affecting more than one account in such a way that a complete journal entry is possible for its rectification, can be rectified in the same way as in the earlier stage (i.e. before trial balance).

In a nutshell, it can be said that each and every error detected at this stage can only be corrected by a complete journal entry. Those errors for which journal entries were not possible at the earlier stage will now be rectified by a journal entry(s), the difference or the unknown side is being taken care of by suspense account. Those errors for which entries were possible even at the first stage will now be rectified in the same way.

Suppose, the sales book for November, 2010 is cast 100 short; as a consequence the trial balance will not agree. The credit column of the trial balance will be 100 short and a Suspense Account will be credited by 100. To rectify the error the Sales Account will be credited (to increase the credit to the right figure. Since now one error remains, the Suspense Account must be closed- it will be debiting the Suspense Account. The entry will be :

Illustration 4 Correct the following errors (i) without opening a Suspense Account and (ii) opening a Suspense Account :

(a) The Sales Book has been totalled 100 short.
(b) Goods worth 150 returned by Green & Co. have not been recorded anywhere.
(c) Goods purchased  250 have been posted to the debit of the supplier Gupta & Co.
(d) Furniture purchased from Gulab & Bros,  1,000 has been entered in Purchases Day Book.
(e) Discount received from Red & Black 15 has not been entered in the Discount Column of the Cash Book.
(f) Discount allowed to G. Mohan & Co. 18 has not been entered in the Discount Column of the Cash Book. The account of G. Mohan & Co. has, however, been correctly posted.

Solution If a Suspense Account is not opened.

(a) Since sales book has been cast  100 short, the Sales Account has been similarly credited 100 short. The correcting entry is to credit the Sales Account by 100 as “By wrong totalling of the Sales Book 100”.
(b) To rectify the omission, the Returns Inwards Account has to be debited and the account of Green & Co. credited. The entry :

(c) Gupta & Co. have been debited ` 250 instead of being credited. This account should now be credited by 500 to remove the wrong debit and to give the correct debit. The entry will be on the credit side... “By errors in posting ` 500”.

(d) By this error Purchases Account has to be debited by ` 1,000 whereas the debit should have been to the Furniture Account. The correcting entry will be :

(e) The discount of ` 15 received from Red & Black should have been entered on the credit side of the cash book. Had this been done, the Discount Account would have been credited (through the total of the discount column) and Red & Black would have been debited. This entry should not be made :

(f) In this case the account of the customer has been correctly posted; the Discount Account has been debited 18 short since it has been omitted from the discount column on the debit side of the cash book. The discount account should now be debited by the entry; “To Omission of entry in the Cash Book 18.” If a Suspense Account is opened :

Note : (i) One should note that the opening balance in the Suspense Account will be equal to the difference in the trial balance.

(ii) If the question is silent as to whether a Suspense Account has been opened, the student should make his assumption, state it clearly and then proceed.

Illustration 5 Correct the following errors found in the books of Mr. Dutt. The Trial Balance was out by 493 excess credit. The difference thus has been posted to a Suspense Account.

(a) An amount of 100 was received from D. Das on 31st December, 2011 but has been omitted to enter in the Cash Book.

(b) The total of Returns Inward Book for December has been cast  100 short.

(c) The purchase of an office table costing 300 has been passed through the Purchases Day Book.

(d) 375 paid for Wages to workmen for making show-cases had been charged to “Wages Account”.

(e) A purchase of  67 had been posted to the trade payables’ account as 60.

(f) A cheque for  200 received from P. C. Joshi had been dishonoured and was passed to the debit of “Allowances Account”.

(g)  1,000 paid for the purchase of a motor cycle for Mr. Dutt had been charged to “Miscellaneous Expenses Account”.

(h) Goods amounting to  100 had been returned by customer and were taken in to Inventory, but no entry in respect there of, was made into the books.

(i) A sale of  200 to Singh & Co. was wrongly credited to their account.

Solution (a) Journal Entries

Illustration 6 The following errors, affecting the account for the year 2011 were detected in the books of Jain Brothers, Delhi:

(1) Sale of old Furniture  150 treated as sale of goods.
(2) Receipt of  500 from Ram Mohan credited to Shyam Sunder.
(3) Goods worth  100 brought from Mohan Narain have remained unrecorded so far.
(4) A return of 120 from Mukesh posted to his debit.
(5) A return of  90 to Shyam Sunder posted as  9 in his account.
(6) Rent of proprietor’s residence,  600 debited to rent A/c.
(7) A payment of 215 to Mohammad Sadiq posted to his credit as  125.
(8) Sales Book added  900 short.
(9) The total of Bills Receivable Book 1,500 left unposted.
You are required to pass the necessary rectifying entries and show how the trial balance would be affected by the errors.

Solution

N.B. : For 4, 5, 7, 8, 9 no journal entry can be passed as they affect a single account. The correction will be as under:

(4) Credit Mukesh’s Account with  240.

(5) Debit the account of Shyam Sunder by  81.

(7) Debit the account of Mohammad Sadiq by 340.

(8) Credit Sales Account by  900.

(9) Debit Bills Receivable Account with 1,500.

Effect of the Errors on Trial Balance

1. No effect
2. No effect
3. No effect
4. Trial Balance credit total short by 240.
5. Trial Balance debit total short by 81.
6. No effect
7. Trial Balance debit total short by 340.
8. Trial Balance credit total short by 900.
9. Trial Balance debit total short by 1,500.

Illustration 7 The trial balance of Mr. W & H failed to agree and the difference 20,570 was put into suspense pending investigation which disclosed that :

(i) Purchase returns day book had been correctly entered and totalled at 6,160, but had been posted to the ledger.

(ii) Discounts received  1,320 had been debited to discounts allowed.

(iii) The Sales account had been under added by 10,000.

(iv) A credit sale of 1,470 had been debited to a customer account at 1,740.

(v) A vehicle bought originally for 7,000 four years ago and depreciated to 1,200 had been sold for 1,500 in the beginning of the year but no entries, other than in the bank account had been passed through the books.

(vi) An accrual of560 for telephone charges had been completely omitted.

(vii) A bad debt of 1,560 had not been written off and provision for doubtful debts should have been maintained at 10% of Trade receivables which are shown in the trial balance at 23,390 with a credit provision for bad debts at 2,320.

(viii) Tools bought for1,200 had been inadvertently debited to purchases.

(ix) The proprietor had withdrawn, for personal use, goods worth 1,960. No entries had been made in the books.

Required : 

(i) Pass rectification entries without narration to correct the above errors before preparing annual accounts.

(ii) Prepare a statement showing effect of rectification on the reported net profit before correction of these errors.

Solution

Illustration 8 Show by means of Journal entries how the following matters should be adjusted when preparing the Annual Accounts of a firm for the year ended 30th September, 2011.

(a) Goods sold and recorded as sales for 4,000, were packed. However, Inventory taking intervened and the parcel of goods was not despatched but was included in Inventories. The title of goods has not been transferred to the buyer.

(b) Several employees took their salary in advance in the month of September, 2011 which was payable to them in October, 2011 amounting to  2,500.

(c) A cheque of 2,500 received for a loss of Inventory sustained by fire has been paid by the proprietor into his private bank account and not recorded in the business books.

(d) A cheque for 1,250 received as Insurance claim for loss of goods in transit at the time of import was recorded in the books. However, the same was deposited by the proprietor into his private bank account. The full value of the invoice was passed through the purchase book.

(e) A purchase was made for a staff member of 1,000 and the cost was included in purchases. A deduction of similar amount was made from his salary and the net payment to him posted to salaries account.

(f) Bill received from Mr. Anup for repairs to furniture 300 and new furniture supplied for 1,000 was entered in the invoice book as 1,100.

(g) Furniture which stood in the books at  500 was sold for 275 in part exchange of new furniture costing 875 and the new invoice of ` 600 was passed through the purchase book.

Solution
                                                          JOURNAL
                                                 Adjustment Entries

Illustration 9 On going through the Trial balance of Ball Bearings Co. Ltd. you find that the debit is in excess by  150. This was credited to “Suspense Account”. On a close scrutiny of the books the following mistakes were noticed:

(1) The totals of debit side of “Expenses Account” have been cast in excess by  50.

(2) The “Sales Account” has been totalled in short by  100.

(3) One item of purchase of 25 has been posted from the day book to ledger as  250.

(4) The sale return of 100 from a party has not been posted to that account though the Party’s account has been credited.

(5) A cheque of 500 issued to the Suppliers’ account (shown under Trade payables) towards his dues has been wrongly debited to the purchases.

(6) A credit sale of 50 has been credited to the Sales and also to the Trade receivables Account.

(i) Pass necessary journal entries for correcting the above;

(ii) Show how they affect the Profits; and

(iii) Prepare the “Suspense Account” as it would appear in the ledger.

JOURNAL ENTRIES

Suspense Account

Since the Suspense Account does not balance, it is clear that all the errors have not been traced. As a result of the above corrections the Net Profit will be :

As a result of these adjustments, the Profits will be increased by 550.