Unit 6: Rectification of Errors Chapter Notes | Accounting for CA Foundation PDF Download

Unit Overview

Introduction

• Errors in accounting refer to unintentional mistakes made during the recording of financial transactions, which can involve either omitting or inaccurately including amounts and accounts.
• These errors can occur at different stages, such as during the collection of financial data or the actual recording of this information.
• Various factors can contribute to these errors, including mathematical miscalculations, incorrect application of accounting policies, misinterpretation of facts, or simple oversight.
• To ensure the arithmetic accuracy of journal and ledger accounts, a trial balance is prepared. If the trial balance does not match, it indicates the presence of errors that need to be rectified.
• Errors can be categorized based on their impact on the trial balance: some errors affect the trial balance, while others do not, even though they may influence the determination of profit or loss, assets, and liabilities of the business.

Illustrative Case of Errors and their Nature 

•  After creating ledger accounts, a trial balance is prepared, which lists both debit and credit balances separately. 
•  The totals for debit and credit must match. If they do not, it indicates that there are some errors present. 
•  We will now explore the different types of errors that can occur and how to fix them. 
•  To understand this better, we should carefully examine the examples provided in the following cases. 

Illustrative Cases of Errors
(a) Wrong Entry: Let us start from the first phase of the accounting process. Where wrong amount of transactions and events are recorded in the subsidiary books, Journal Proper and Cash Book.

Example 1: Credit purchases ₹17,270 are entered in the Purchases Day Book as ₹17,720. Credit sales of ₹15,000 gross less 1% trade discount are wrongly entered in Sales Day Book at ₹15,000. Cheque issued ₹19,920 are wrongly entered in the credit of bank column in the Cash Book as ₹19,290.

(b) Wrong casting of subsidiary books: Subsidiary books are totalled periodically and posted to the appropriate ledger accounts. There may be totalling errors. Totalling errors may arise due to wrong entry or simply these may be independent errors.

Example 2: For the month of January, 2022 total of credit sales are ₹1,75,700, this is wrongly totalled as ₹1,76,700 and posted to sales account as ₹1,76,700.

(c) In case of cash book, wrong castings will result in wrong calculation of the balance c/d.

Example 3: The following cash transactions of M/s. Tularam & Co. occurred: 
2023

The following Cash Book entries are passed:

Wrong entries and wrong casting are shown in bold prints. However, errors of cash entries generally are not carried. Usually cash balances are tallied daily. So errors are identified at an early stage. But bank balance cannot be checked daily and thus errors may be carried until bank reconciliation is done. In the above example, there are four wrong entries and one wrong casting. Bank and cash balances are affected by these errors.

(d) Wrong posting from subsidiary books: In this case, the wrong amount may be posted to the ledger account or the amount may posted to the wrong side or to the wrong account. For example, purchases from A may be posted to B’s account.

(e) Wrong casting of ledger balances: Likewise Cash Book, any ledger account balance may be casted wrongly. Obviously wrong postings make the balance wrong; but that is not wrong casting of balances. Whenever there arises independent casting error as in the case of bank column in the Cash Book of example (4), that is called wrong casting to ledger balances.

Example 4: The following are the credit purchases of M/s. Ballav Bros.:
2023
Jan. 1 Purchases from M/s. Saurabh & Co.- gross ₹1,00,000 less 1% trade discount.
Jan. 3 Purchases from M/s. Netai & Co.- gross ₹ 70,000 less 1% trade discount.
Jan. 6 Purchases from M/s. Saurabh & Co.- gross ₹` 60,000 less 1% trade discount
Let us cast M/s. Saurabh & Co.’s Account:

*While casting the credit side, an error has been committed and so the account is wrongly balanced.

Example 5: Goods are purchased on credit from M/s. Saurabh & Co. for ₹ 27,030 and from M/s. Karnataka Suppliers for ₹ 28,050. The following Purchase Day Book is prepared:

In the above Purchase Day Book, both the transactions are entered wrongly but the first error has been compensated by the second. Even if these errors are not rectified Trial Balance would tally.

[Intext Question]

Stages of Errors

At the Stage of Recording Transactions in the Journal
During this stage, the following types of errors may occur: 

• Errors of Principle: These occur when a fundamental accounting principle is not followed while recording a transaction. For example, recording a capital expenditure as a revenue expenditure. 
• Errors of Omission: These happen when a transaction is completely omitted from the books. For instance, failing to record a sale made during the period. 
• Errors of Commission: These errors occur when a transaction is recorded incorrectly, but not omitted. This could involve recording the wrong amount or using the wrong account. 

At the Stage of Posting Entries in the Ledger
Errors at this stage can include: 

• Errors of Omission:
• Partial Omission: When only a part of the transaction is posted. For example, posting a sale but omitting the corresponding entry in the accounts receivable. 
• Complete Omission: When the entire transaction is omitted from the ledger. 
• Errors of Commission:
• Posting to Wrong Account: When an entry is posted to the wrong account entirely. 
• Posting on the Wrong Side: When an entry is posted on the wrong side of the account (debit instead of credit or vice versa). 
• Posting of Wrong Amount: When an incorrect amount is posted, even if the account and side are correct. 

At the Stage of Balancing the Ledger Accounts
Errors at this stage may involve: 

• Wrong Totalling of Accounts: When the totals of the accounts are calculated incorrectly. 
• Wrong Balancing of Accounts: When the balances of the accounts are computed incorrectly. 

At the Stage of Preparing the Trial Balance
Errors during this stage can include: 

• Errors of Omission: When an account is omitted from the trial balance. 
• Errors of Commission:
• Taking Wrong Account: When an incorrect account is included in the trial balance. 
• Taking Wrong Amount: When an incorrect amount is taken for an account in the trial balance. 
• Taking to Wrong Side: When an account is placed on the wrong side of the trial balance. 

Broad Categories of Errors

Based on the above stages, errors can be classified into four broad categories: 

• Errors of Principle: Fundamental mistakes in applying accounting principles. 
• Errors of Omission: Failing to record transactions either partially or completely. 
• Errors of Commission: Incorrect recording of transactions without omission. 
• Compensating Errors: Errors that offset each other, leading to no overall impact on the financial statements. 

Types of Errors 

Clerical Errors: These errors arise from mistakes made during the ordinary course of the accounting process and can be classified into three types: 

• Errors of Omission: These occur when a transaction is completely or partially omitted from the books of account. For instance, failing to record a credit purchase of furniture or not posting an entry into the ledger constitutes an error of omission. 
• Errors of Commission: These errors involve posting an amount in the wrong account, writing it on the wrong side, making incorrect totals, or striking a wrong balance. For example, if an amount meant to be debited to account A is mistakenly debited to account B, it is an error of commission. 
• Compensating Errors: These errors occur when the effects of multiple errors cancel each other out, resulting in an agreement in the trial balance. For instance, if an amount of `10 received from A is not credited to his account but the total of the sales book is `10 in excess, the errors will compensate each other, and the trial balance will agree. 

 Errors Affecting the Trial Balance 

• Wrong Casting of Subsidiary Books: Mistakes in adding up the figures in subsidiary books can lead to discrepancies in the trial balance. 
• Wrong Balancing of an Account: If an account is incorrectly balanced, it will affect the trial balance. 
• Posting an Amount on the Wrong Side: If an amount is posted on the incorrect side of an account, it will cause the trial balance to be unbalanced. 
• Posting the Wrong Amount: Errors in the amount posted can lead to differences in the trial balance. 
• Omission of Posting from Subsidiary Book: Failing to post an amount from a subsidiary book can cause the trial balance to be incorrect. 
• Omission of Subsidiary Book Totals: Not posting the totals of subsidiary books can lead to errors in the trial balance. 
• Omission of Cash Book Balances: Not including cash book balances in the trial balance can cause discrepancies. 
• Omission of Account Balances: Failing to include account balances in the trial balance can lead to errors. 
• Incorrect Column in Trial Balance: Posting a balance in the wrong column of the trial balance can cause it to be unbalanced. 
• Incorrect Totaling of Trial Balance: Errors in totaling the trial balance can lead to discrepancies. 

 Errors Not Affecting the Trial Balance 

• Omission from Subsidiary Book: Not making an entry in the subsidiary book does not affect the trial balance. 
• Wrong Amount in Subsidiary Book: Making an entry with the wrong amount in the subsidiary book does not impact the trial balance. 
• Wrong Account Posting: Posting an amount to the wrong account but on the correct side does not affect the trial balance. For example, debiting account B instead of account A will still result in an agreement in the trial balance. 

Errors Error of principle (Treating a revenue expenses as capital expenditure or vice versa or the sale of a fixed asset as ordinary sale) Trial Balance will agree Clerical Errors Errors of Omission Errors of Commission Compensating Errors Trial Balance will agree Omitting an Entry completely from the subsidiary books Omitting to post the ledger account from the subsidiary books. Trial Balance will agree Trial Balance will not agree Writing the wrong amount in the subsidiary books Trial Balance will agree Wrong casting of Subsidiary books Posting the Wrong amount in the ledger Posting an amount on the wrong side Wrong balance of an account Trial Balance will not agree

[Intext Question]

Steps to Identify Errors in the Trial Balance 

(i) Recheck the Totals:

• Verify the totals of both columns in the trial balance. 

• If only one amount is written instead of multiple accounts, check and total the list of such accounts again, like the Trade Receivables list from which the Trade Receivable balance is derived. 

(ii) Check Cash and Bank Balances:

• Ensure that cash and bank balances have been included in the trial balance. 

(iii) Determine the Exact Difference:

• Establish the exact difference in the trial balance. 

• Review the ledger again; a balance equal to the difference may have been omitted from the trial balance. 

• Also, consider halving the difference; an amount equal to half the difference might have been recorded in the wrong column. 

(iv) Re-Balance Ledger Accounts:

• Balance the ledger accounts again to ensure accuracy. 

(v) Check Subsidiary Books:

• Recheck the casting of subsidiary books, especially if the difference is small, like ` 1 or ` 100. 

(vi) Compare with Previous Period:

• If the difference is large, compare the balances in various accounts with the corresponding accounts from the previous period. 

• If there are significant differences, investigate those cases further as an error may have occurred. 

• For example, if the sales account for the current year shows ` 32,53,000 compared to ` 36,45,000 last year, there may be an error in the Sales Account. 

(vii) Check Postings:

• Review the postings of amounts equal to the difference or half the difference. 

• An amount may have been omitted or posted on the wrong side. 

(viii) Complete Checking:

• If there is still a difference in the trial balance, a thorough checking of all entries, including the opening entry, will be necessary. 

• It may be more efficient to start with the nominal accounts. 

[Intext Question]

Rectification of Errors

• Errors in accounting should not be corrected by simply overwriting them. Instead, a rectification entry should be made to correct the mistake. 
• The method of rectifying an error depends on when it is detected during the accounting process. 

 Errors can be detected at various stages, including: 

• Before the preparation of the Trial Balance: At this stage, errors can be corrected before the trial balance is prepared. 
• After the Trial Balance but before the final accounts are drawn: Errors detected after the trial balance but before the final accounts can be rectified at this stage. 
• After the final accounts, i.e., in the next accounting period: If errors are found after the final accounts have been prepared, they can be rectified in the next accounting period. 

Before Preparing the Trial Balance

•  There are some errors that impact either one account or multiple accounts in a way that makes it impossible to fix them completely with one entry. These errors can be corrected at this stage by making adjustments on the appropriate side(s) of the relevant account(s). 

 It is important to note that these errors may involve one account or more than one account. Here are some examples: 

• The sales book for November is underreported by ₹ 200. This means the Sales Account has been credited less by ₹ 200. Since the customer accounts are based on individual sales, there are no errors there. The correction will be made by adding an entry of ₹ 200 on the credit side: “By undercasting of Sales Book for November ₹ 200.” 
• A discount of ₹ 10 given to Ramesh was not recorded in the cash book's debit side. There is no issue with the cash book itself, as the total discount has likely been posted to the discount account. The error lies in not crediting Ramesh by ₹ 10. This should be corrected with the entry “By omission of posting of discount on ----- ₹ 10.” 
• An amount of ₹ 200 received from Ram was incorrectly entered on the debit side of his account. The cash book is correct, but Ram should have been credited instead of debited. To fix this, we need to remove the wrong debit and add a credit of ₹ 200. This can be done with an entry of ₹ 400 on the credit side: “By Posting on the wrong side - ₹ 400.” 
• An amount of ₹ 50 received from Mahesh was recorded on the debit side of the cash book but was not posted to his account. This error affects only Mahesh's account, as ₹ 50 is missing from the credit side. The correction will be made with the entry: “By omission of posting on ₹ 50.” 
• A payment of ₹ 51 to Mohan was incorrectly posted as ₹ 15 on his debit account. This means Mohan has been shorted by ₹ 36. The rectifying entry will be: “To mistake in posting on ₹ 36.” 
• Goods sold to Ram for ₹ 1,000 were mistakenly recorded in the purchase account. Ram's account was credited correctly. This error involves both purchases and sales accounts, but we cannot make a complete journal entry for correction since both need to be credited. The correction will include: “By wrong posting on ₹ 1,000” in the credit of the purchases account and “By omission of posting on - ₹ 1,000” in the credit of the sales account. 
• A bill receivable of ₹ 500 from Mr. A was wrongly posted to the credit of the Bills Payable Account and also credited to A's account. Although two accounts are involved, we can't make a full journal entry for rectification. The correction will be: “To wrong posting on ₹ 500” in the debit of the Bills Payable Account and “To omission of posting on ₹ 500” in the debit of the Bills Receivable Account. 
• Goods purchased from Vinod for ₹ 1,000 were incorrectly credited as ₹ 100 to Vimal's account. Again, we cannot create a full journal entry for correction despite involving two accounts. The rectification will be: “To wrong posting on ₹ 100” in the debit of Vimal's account and “By omission of posting on ₹ 1,000” in the credit of Vinod's account. 

Thus, from the above illustrations, it is clear that the general rule of errors affecting two accounts can be corrected by a journal entry does not hold true always.

ILLUSTRATION 1

1.  The total to the Purchases Book has been undercast by ₹ 100. 
2.  The Returns Inward Book has been undercast by ₹ 50. 
3.  A sum of ₹ 250 written off as depreciation on Machinery has not been debited to Depreciation Account. 
4.  A payment of ₹75 for salaries (to Mohan) has been posted twice to Salaries Account. 
5.  The total of Bills Receivable Book ₹ 1,500 has been posted to the credit of Bills Receivable Account. 
6.  An amount of ₹ 151 for a credit sale to Hari, although correctly entered in the Sales Book, has been posted as ₹ 115. 
7. Discount allowed to Satish ₹ 25 has not been entered in the Discount Column of the Cash Book. The amount has been posted correctly to the credit of his personal account. 

SOLUTION

1. The Purchases Account should receive another debit of 100 since it was debited short previously: 
   “To Undercasting of Purchases Book for the month of --- 100.”
2. Due to this error the Returns Inward Account has been posted short by 50: the correct entry will be: 
   “To Undercasting of Returns Inward Book for the month of --- 50.”
3. The omission of the debit to the Depreciation Account will be rectified by the entry: 
   “To Omission of posting on 250.”
4. The excess debit will be removed by a credit in the Salaries Account by the entry: 
5. 1,500 should have been debited to the Bills Receivable Account and not credited. To correct the mistake, the Bills Receivable Account should be debited by 3,000 by the entry: 
   “To Wrong posting of B/R received on 3,000.”
6. Hari’s personal A/c is debited 36 short. The rectification entry will be: 
   “To Wrong posting 36.”
7. Due to this error, the discount account has been debited short by 25. The required entry is: 
   “By double posting on 75.”
   “To Omission of discount allowed to Satish on 25.”

So far we have discussed the correction of errors which affected only one Account or more than one account but for which rectifying entries were not complete journal entries. We shall now take up the correction of errors which affect more than one account in such a way that complete journal entries are possible for their rectification. Read the following illustrations: 

(i) The purchase of machinery for 2,000 has been entered in the purchases book. The effect of the entry is that the account of the supplier Ram & Co. has been credited by 2,000 which is quite correct. But the debit to the Purchases Account is wrong: the debit should be to Machinery Account. To rectify the error, the debit in the purchases Account has to be transferred to the Machinery Account. The correcting entry will be to Credit Purchases Account and debit the Machinery Account. Please see the three entries made below: the last entry rectifies the error: 

(ii) ₹100 received from Kamal Kishore has been credited in the account of Krishan Kishore. The error is that there is a wrong credit in the account of Krishan Kishore and omission of credit in the account of Kamal Kishore; Krishan Kishore should be debited and Kamal Kishore be credited. The following three entries make this clear:

(iii) The sale of old machinery, ₹1,000 has been entered in the sales book. By this entry the account of the buyer has been correctly debited by ₹1,000. But instead of crediting the Machinery Account. Sales Account has been credited. To rectify the error this account should be debited and the Machinery Account credited. See the three entries given below:

[Intext Question]

ILLUSTRATION 2
The following errors were found in the book of Ram Prasad & Sons. Give the necessary entries to correct them.

1. ₹ 500 paid for furniture purchased has been charged to ordinary Purchases Account.
2. Repairs made were debited to Building Account for ₹ 50.
3. An amount of ₹ 100 withdrawn by the proprietor for his personal use has been debited to Trade Expenses Account.
4. ₹ 100 paid for rent debited to Landlord’s Account.
5. Salary ₹ 125 paid to a clerk due to him has been debited to his personal account.
6. ₹ 100 received from Shah & Co. has been wrongly entered as from Shaw & Co.
7. ₹ 700 paid in cash for a typewriter was charged to Office Expenses Account.

SOLUTION

ILLUSTRATION 3
Give journal entries to rectify the following:

1.  A purchase of goods from Ram amounting to ₹150 has been wrongly entered through the Sales Book. 
2.  A credit sale of goods amounting ₹120 to Ramesh has been wrongly passed through the Purchase Book. 
3.  On 31st December, 2022 goods of the value of ₹300 were returned by Hari Saran and were taken into inventory on the same date but no entry was passed in the books. 
4.  An amount of ₹200 due from Mahesh Chand, which had been written off as a Bad Debt in a previous year, was unexpectedly recovered and had been posted to the personal account of Mahesh Chand. 
5.  A cheque for ₹100 received from Man Mohan was dishonoured and had been posted to the debit of Sales Returns Account. 

SOLUTION

Thus, it can be said that errors detected before the preparation of trial balance can be rectified either through rectification statements (not entries) or through rectification entries.

After Trial Balance but before Final Accounts 

 The method of correcting errors described earlier is suitable when the errors are found before the end of the accounting period. Once corrected, the trial balance will match. However, there are instances when the trial balance is made to agree artificially, even in the presence of errors, by opening a suspense account. 

Suspense Account:

• A suspense account is used to balance the trial when there is a discrepancy between the debit and credit columns. 
• If the credit column exceeds the debit column, the suspense account is debited, and vice versa. 
• It is important to note that this agreement is not genuine, and efforts should be made to identify the errors. 

Rectification of Errors:

• The rule for rectifying errors at this stage is straightforward. Errors that could not be rectified with complete journal entries before the trial balance can now be corrected using journal entries with the help of the suspense account. 
• These errors are the ones that led to the creation of the suspense account in the trial balance. 
• Errors affecting multiple accounts, where a complete journal entry is possible, can be rectified in the same manner as before the trial balance. 

Suppose, the sales book for November, 2022 is casted short by ₹100 ; 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. Now one error remains, the Suspense Account must be closed by 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 casted ₹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 credit. 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 :

Notes:

(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.

[Intext Question]

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, 2022 but has been omitted to enter in the Cash Book.
(b) The total of Returns Inward Book for December has been casted short by ₹100.
(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 for his personal use had been charged to “Miscellaneous Expenses Account”.
(h) Goods amounting to ₹100 had been returned by customer and were taken into inventory, but no entry in respect thereof, was made into the books.
(i) A sale of ₹ 200 to Singh & Co. was wrongly credited to their account. Entry was correctly made in sales book.

SOLUTION

ILLUSTRATION 6
The following errors, affecting the account for the year 2022 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 casted short by ₹ 900 .
(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
Write out the Journal Entries to rectify the following errors, using a Suspense Account.
(1) Goods of the value of ₹ 100 returned by Mr. Sharma were entered in the Sales Day Book and posted therefrom to the credit of his account;
(2) An amount of ₹150 entered in the Sales Returns Book, has been posted to the debit of Mr. Philip, who returned the goods;
(3) A sale of ₹ 200 made to Mr. Ghanshyam was correctly entered in the Sales Day Book but wrongly posted to the debit of Mr. Radheshyam as ₹ 20; and
(4) The total of “Discount Allowed” column in the Cash Book for the month of September, 2022 amounting to ₹ 250 was not posted.

SOLUTION

Correction in the Next Accounting Period 

•  Rectification of errors is assumed to be done before closing the books for the concerned year. 
•  However, sometimes it is carried out in the next year, carrying forward the balance in the Suspense Account or transferring it to the Capital Account. 

Example of a Rectification Error:

•  Suppose, in December 2022, the Purchase Book was cast short by ₹1,000, and a Suspense Account was opened with the difference in the trial balance. 
•  If the error is rectified the next year by debiting the Purchase Account and crediting the Suspense Account, it will incorrectly increase the Purchases Account for 2023 by ₹1,000. 
•  This would result in a lower profit for 2023 than the actual, falsifying the Profit and Loss Account. 

Avoiding Profit Misrepresentation:

•  To avoid misrepresenting profit, corrections related to nominal accounts (expenses and incomes) should be made through a special account called “Prior Period Items” or “Profit and Loss Adjustment Account.” 
•  The balance in this account should be transferred to the Profit and Loss Account. 

Prior Period Items:

•  Prior Period Items are material income or expenses that arise in the current period due to errors or omissions in the financial statements of one or more prior periods. 
•  These items should be separately disclosed in the current statement of profit and loss, along with their nature and amount, to show their impact on the current period's profit or loss. 

ILLUSTRATION 8
Mr. Roy was unable to agree the Trial Balance last year and wrote off the difference to the Profit and Loss Account of that year. Next Year, he appointed a Chartered Accountant who examined the old books and found the following mistakes:|
(1) Purchase of a scooter was debited to conveyance account ₹3,000.
(2) Purchase account was over-cast by ₹10,000.
(3) A credit purchase of goods from Mr. P for ₹ 2,000 was entered as a sale.
(4) Receipt of cash from Mr. A was posted to the account of Mr. B ₹ 1,000.
(5) Receipt of cash from Mr. C was posted to the debit of his account, ₹ 500.
(6) ₹ 500 due by Mr. Q was omitted to be taken to the trial balance.
(7) Sale of goods to Mr. R for ₹ 2,000 was omitted to be recorded.
(8) Amount of ₹ 2,395 of purchase was wrongly posted as ₹ 2,593.

Mr. Roy used 10% depreciation on vehicles. Suggest the necessary rectification entries.

SOLUTION

Note : Entries No. (2) and (8) may even be omitted; but this is not advocated.