RECTIFICATION OF ERRORS
EFFECT OF ERRORS ON TRIAL BALANCE
Tallying of Trial Balance is the primary indication about the arithmetical accuracy of the books of account. However, it cannot be the conclusive evidence of the total accuracy of the books of accounts maintained. This is due to the fact that certain errors as stated above do not affect the trial balance. As such, locating the errors requires a lot of skills, particularly when they do not affect the agreement of trial balance.
Errors affecting Trial Balance
Following errors may affect the agreement of Trial Balance –
a. Wrong totalling of subsidiary books – If the total of any subsidiary books is taken wrongly but the posting to the individual accounts is made correctly, it will affect the agreement of trial balance. Eg. Total of Purchase Register for the month of March is taken as Rs. 1,50,000 instead of Rs. 1,55,000. Posting to the individual accounts of suppliers total to the correct amount of Rs. 1,55,000, but the Purchases Account is debited by Rs. 1,50,000, the trial balance will not agree.
b. Posting on the wrong side of an account – If a transaction is posted on the wrong side of the account, the trial balance will not agree. Eg. A payment of Rs. 10,000 made to M/s. Pam Industries is posted on the credit side of M/s. Pam Industries Account, the trial balance will not agree.
c. Omission of posting an amount in the ledger – If an amount is entered in the journal or subsidiary book but not posted in the ledger, the trial balance will not agree. Eg. A cash payment of Rs. 1,500 for the conveyance expenses has been entered in the cash book but is not debited to Conveyance Account, the trial balance will not agree.
d. Posting of wrong amount – If an amount is wrongly posted to an account, the trial balance will not agree. Eg. A cash payment of Rs. 1,500 for the conveyance expenses has been correctly entered in the cash book, but while posting the same to the Conveyance Account, it is posted as Rs. 150, the trial balance will not agree.
e. Error in balancing – If an error has been committed while calculating the closing balance of cash book or a ledger account, the trial balance will not agree.
Errors not affecting the Trial Balance
Following types of errors may not affect the agreement of Trial Balance.
a. Errors of Principle – If the revenue expenditure is treated as capital expenditure or if revenue receipt is treated as capital receipt or if capital expenditure is treated as revenue expenditure or if capital receipt is treated as revenue receipt, it will not affect the agreement
of trial balance. Eg. An amount of Rs. 10,000 paid for maintenance of machinery. Instead of posting this amount to Machinery Maintenance Account, it is debited to Machinery Account, the trial balance will still agree but it will not show a true and fair view.
b. Errors of Omission – If a transaction is totally omitted while making the entries in the books of accounts, it will not affect the agreement of trial balance. Eg. A bill for the purchase of material worth Rs. 15,000 has been received, but it is not entered in the Purchase Register at all, the trial balance will still agree but it will not show a true and fair view.
c. Errors of Commission – If an amount is posted to the correct side of a wrong account, it will not affect the agreement of trial balance. Eg. A payment is Rs. 25,000 made to Mr. Salim is debited to the account of Mr. Sham, the trial balance will still agree but it will not show a true and fair view.
d. Recording of wrong amount in the books of prime entry or subsidiary books – If a transaction is wrongly entered in the book of prime entry or the subsidiary book and then correctly posted to the correct account, it will not affect the agreement of trial balance. Eg. Stationary worth Rs. 4,500 has been purchased but it is entered as Rs.
4,700 in the cash book, the trial balance will still agree but it will not show a true and fair view.
e. Compensating Errors – If one type of error is compensated by the error of the opposite nature, it will not affect the agreement of trial balance. Eg. While balancing the traveling expenses account, the closing debit balance is taken as Rs. 1,40,000 instead of Rs. 1,50,000. Similarly, while balancing the sales account, the closing credit balance is taken as Rs. 28,90,000 instead of Rs. 29,00,000. The trial balance will still agree but it will not show a true and fair view.
Steps in locating the errors
If the errors result into the disagreement of trial balance, following steps should be taken to locate the errors.
a. Total of all the subsidiary books and cash book should be checked carefully. Similarly, the total of trial balance should be checked carefully.
b. It should be ensured that all the opening balances have been correctly brought forward in the current year’s books of account.
c. It should be ensured that all the ledger accounts have been properly balanced and the balances of all the ledger accounts have been reflected in the Trial Balance.
d. If an amount of Rs. 24,000 is debited to a certain account instead of crediting the same to the same account, the difference between the debit side and credit side of trial balance
will be Rs. 48,000. As such, the difference in trial balance should be halved to locate such errors.
e. If the difference in the trial balance is divisible by 9 without any reminder, it may indicate the transposition or transplacement of the amounts. Eg. If the cash payment of Rs. 176 is posted as Rs. 167, the difference in the trial balance will be divisible by 9.
f. The trial balance of the current year can be compared with the trial balance of the previous year to locate certain highlighting error.
How to rectify the errors
The errors should be rectified by any one of the following methods –
I. In some cases, if the trial balance does not agree but the books have to be closed, the difference is placed to a Suspense Account and the trial balance is tallied. If the credit side of the trial balance is heavy by Rs. 50,000 and same amount is placed on the debit side of Suspense Account. Subsequently, attempts are made to locate the errors and the rectification entries are routed through the Suspense Account. After all the errors have been located, the balance in Suspense Account will become zero. It should be remembered that the Suspense Account is operated till the errors are located and finally the balance in Suspense Account has to become zero. Further, only the errors affecting the agreement of trial balance are routed through the Suspense Account.
Illustration
A merchant while balancing his books of account finds that, the trial balance shows excess credit of Rs. 1,700. Being required to prepare the final accounts, he places the difference to a newly opened Suspense Account which he carries forward. In the next accounting year, the following errors are discovered –
a. Goods bought from Narayan amounting to Rs. 5,000 had been posted to the credit of Narayan as Rs. 5,500.
b. An item of Rs. 1,000 entered in the sales returns book was posted to the debit of Pandey who had returned the goods.
c. Sundry items of furniture sold for Rs. 26,000 had been entered in the sales book. Ignore depreciation and profit or loss on the sale.
d. Discount amounting to Rs. 200 from a creditor had been duly entered in the creditor’s account, but not posted to discount account.
Draft journal entries necessary for rectifying the abovementioned errors. Prepare the Suspense Account and show the ultimate effect of the errors on the last year’s profit by preparing the Profit and Loss Adjustment Account.
Solution
a. Goods bought from Narayan had been posted to the credit of Narayan Account by Rs. 5,500 instead of Rs. 5,000. As such, Narayan Account has been credited more by Rs. 500. As such, this excess credit needs to be reversed by passing following entry – Narayan A/c. Dr. 500
To, Suspense A/c. 500
b. Goods supplied to Pandey worth Rs. 1,000 should have appeared on the debit side of Pandey’s account. Instead of that the entry has been made on the credit side of Pandey’s account. This excess credit needs to be reversed by passing the following entry – To Suspense A/c. Dr. 2,000
Pandey A/c. 2,000
c. As the amount of furniture sold has been entered in the sales book, sales account has been wrongly credited. This wrong credit needs to be reversed by debiting sales account.
The journal entry to be passed is – Sales A/c. Dr. 26,000
To Furniture A/c. 26,000
d. Discount received from the creditor has been entered in the creditor’s account but discount account has not been credited. As such, the error will be rectified by passing the following entry –
Suspense A/c. Dr. 200
To Discount Received A/c. 200
Suspense Account
Date Particulars Folio Rs. Date Particulars Folio Rs.
1 To Balance b/fd 1,700 1 By Narayan A/c. 500
1 To Discount Recd. A/c. 200 1 By Pandey A/c. 2,000
To Balance c/fd 600
2,500 2,500
II. The errors which affect two accounts and which do not affect the agreement of trial balance may be rectified by passing the rectification entries. The basic principle for rectifying the errors by this means suggests the following steps to be taken –
a. What is the wrong entry passed ?
b. What should be the correct entry to be passed ?
c. Nullify the wrong effect by reversing the same and reinstate the correct by passing the rectification entry.
Illustration
Pass necessary journal entries to rectify the following errors –
a. An amount of Rs. 200 withdrawn by the proprietor for his personal use has been debited to trade expenses account.
b. A purchase of goods from Nathan amounting to Rs. 300 has been wrongly entered through the sales book.
c. A credit sale of Rs. 100 to Santhanam has been wrongly passed through the purchase book.
d. Rs. 150 received from Malhotra have been credited to Mehrotra.
e. Rs. 375 paid on account of salary to the cashier Dhawan stands debited to his personal account.
f. A contractor’s bill for the extension of premises amounting to Rs. 2,750 has been debited to building repairs account.
g. On 25th June, goods of the value of Rs. 500 were returned by Akashdeep and were taken into stock but the returns were entered in the books under date 3rd July i.e. after the expiration of the financial year on 30th June.
h. A bill of Rs. 200 for old office furniture sold to Sethi was entered in the sales daybook.
i. The periodical total of the sales book was cast short by Rs. 100.
j. An amount of Rs. 80 received on account of interest was credited to commission account.
Solution
a Wrong Entry Trade Expenses A/c 200
To Cash A/c 200
Correct Entry Drawings A/c 200
To Cash A/c 200
Rectification Entry Drawings A/c 200
To Trade Expenses A/c 200
b Wrong Entry Nathan A/c 300
To Sales A/c 300
c Wrong Entry Purchases A/c 100
To Santhanam A/c 100
d Wrong Entry Cash A/c 150
To Mehrotra A/c 150
Correct Entry Cash A/c 150
To Malhotra A/c 150
Rectification Entry Mehrotra A/c 150
To Malhotra A/c 150
e Wrong Entry Dhawan A/c 375
To Cash A/c 375
Correct Entry Salary A/c 375
To Cash A/c 375
Rectification Entry Salary A/c 375
To Dhawan A/c 375
f Wrong Entry Building Repairs A/c 2,750
To Cash A/c 2,750
Correct Entry Building A/c 2,750
To Cash A/c 2,750
Rectification Entry Building A/c 2,750
To Building Repairs A/c 2,750
g Wrong Entry No entry passed
Correct Entry Sales returns A/c 500
To Akashdeep A/c 500
Rectification Entry Sales returns A/c 500
To Akashdeep A/c 500
h Wrong Entry XYZ A/c 200
To Sales A/c 200
Correct Entry XYZ A/c 200
To Furniture A/c 200
Rectification Entry Sales A/c 200
To Furniture A/c 200
i Wrong Entry No entry passed
Correct Entry Suspense A/c 100
To Sales A/c 100
Rectification Entry Suspense A/c 100
To Sales A/c 100
j Wrong Entry Cash A/c 80
To Commission A/c 80
1. It is said that tallying of Trial Balance is not the conclusive proof of accuracy of the books of account. Why ?
2. What are errors in financial accounting ? What are the different types of errors ? 3. What do you mean by Suspense Account? How is it operated in financial accounting?
Can the balance of Suspense Account appear in the Trial Balance in ideal situations?
4. What are errors in financial accounting? Do all the errors affect the Trial Balance? State the errors that affect the Trial Balance and the errors that do not affect the Trial Balance.
PROBLEMS Q.1
Ganesh drew a Trial Balance of his operations for the year ended 31st March 1992. There was a difference in the Trial Balance which he closed with a Suspense Account. On a scrutiny by the Auditors, the following errors were found –
a. Purchases day book for the month of April 1991, was undercast by Rs. 1,000.
b. Sales day book of October 1991 was overcast by Rs. 10,000.
c. A furniture purchased for Rs. 8,100 was entered in the Furniture Account as Rs. 810.
d. A bill for Rs. 10,000 drawn by Ganesh was not entered in the Bills Receivable Book.
e. A machinery purchased for Rs. 10,000 was entered in the purchase day book.
Pass necessary journal entries to rectify the same and ascertain the difference in the Trial Balance that was shown under the Suspense Account in respect of the above items.
Q.2
A bookkeeper while preparing his Trial Balance finds that the debit exceeds by Rs. 7,250.
Being required to prepare the final accounts, he places the difference to a Suspense Account.
In the next year, the following mistakes were discovered –
a. A sale of Rs. 4,000 has been passed through the Purchase daybook. The entry in customer’s account has been correctly recorded.
b. Goods worth Rs. 2,500 taken away by the proprietor for his use has been debited to Repairs Account.
c. A bill receivable for Rs. 1,300 received from Krishna has been dishonoured on maturity but no entry passed.
d. Salary Rs. 650 paid to a clerk has been debited in his Personal Account.
e. A purchase of Rs. 750 from Raghubir has been debited to his account. Purchase Account has been correctly debited.
f. A sum of Rs. 2,250 written off as depreciation on furniture has not been debited to Depreciation Account.
Draft the Journal Entries for rectifying the above mistakes and prepare Suspense Account.
Q.3
The accountant of X prepared the Trial Balance for the year ended 31st March 1996. But there was a difference and the accountant put the difference in Suspense Account. Rectify the following errors found and prepare the Suspense Account.
a. The total of the Returns Outward book, Rs. 420 has not been posted in the ledger.
b. A purchase of Rs. 350 from Y has been entered in the sale book. However, Y’s account has been correctly entered.
c. A sale of Rs. 390 to Z has been credited to his account as Rs. 290.
d. Old furniture sold for Rs. 5,400 has been entered as Rs. 4,500 in sales account.
e. Goods taken by proprietor, Rs. 500 have not been entered in the books at all.
Q.4
A bookkeeper finds the difference in the Trial Balance amounting to Rs. 1,000 and puts it in the Suspense Account. Later on he detects the following errors –
a. Purchased goods from Ravi but entered into Sales Book.
b. Received one bill for Rs. 25,000 from Arun but recorded in Bills Payable Book.
c. An item of Rs. 3,500 relating to prepaid rent account was omitted to be brought forward.
d. An item of Rs. 2,000 in respect of purchase returns, had been wrongly entered in the purchase book.
e. Rs. 25,000 paid to Hari against our acceptance were debited to Harish Account.
f. Bills received from Janaki for repairs done to radio Rs. 2,500 and radio supplied for Rs. 45,000 were entered in the Purchase Book as Rs. 46,000.
Give rectifying journal entries with full narration and prepare Suspense Account.
Q.5
There is a difference in the Trial Balance of Shri Om. Subsequently, the following errors were found to have been committed. Pass journal entries to rectify them and ascertain the difference in the Trial Balance.
a. A sale of Rs. 2,000 to Shanti & Co. was credited to their account.
b. The Returns Inward Book had been cast Rs. 1,000 short.
c. A sale of Rs. 10,000 had been passed through the Purchase Day Book. The customer’s account, had, however been correctly debited.
d. Rs. 3,750 paid for wages to workmen for making showcases had been charged to Wages Account.
e. A purchase of Rs. 6,710 had been posted to the debit of the creditor’s account as Rs. 6,170. The creditor was Paras & Co.
Q. 6
There was difference in the Trial Balance of Shri Arihant which was put to newly opened Suspense Account. Subsequently, the following mistakes were discovered. Pass journal entries to rectify them and ascertain the difference in the Trial Balance.
a. Materials costing Rs. 700 in the erection of machinery and the wages paid for amounting to Rs. 400 were included in the Purchase Account and Wages Account respectively.
b. Goods sold under credit terms Rs. 16,900 to Mohan were recorded properly in the Sales Book but were debited to his account as Rs. 19,600 and carriage outward freight paid Rs. 700 chargeable from him were posted to Sales Expenses Account.
c. Sales Returns by Yogesh Rs. 2,300 were correctly recorded in the Sales Returns Book from where they were debited to Yogesh Account by Rs. 3,200.
d. Old furniture originally purchased for Rs. 1,800 written down to Rs. 1,100 was sold for cash Rs. 1,700 and was credited to Furniture Account.
e. Machinery purchased on credit Rs. 17,000 was recorded in Purchase Book and transport charges for the machine Rs. 1,200 were debited to Trade Expenses Account.
Q.7
Give journal entries to rectify the following errors –
a. Rs. 2,500 paid for the purchase of a radio set for the personal use of the proprietor debited to general expenses account.
b. Rs. 1,300, the amount of sale of old machinery, has been posted to sales account.
c. A sum of Rs. 160 paid by way of rent has been debited to landlord’s personal account.
d. Rs. 245 cost of repairing the floor of room has been charged to buildings account.
e. A payment of Rs. 250 made to Harish Brothers for cash purchase of goods from him stands debited to his account.
Q.8
Rectify the following errors by passing necessary journal entries –
a. Goods taken by the proprietor Rs. 1,500 for gift to his daughter were not recorded at all.
b. Rs. 1,500 received from Praveen against debts previously written off as bad debts have been credited to his personal account.
c. Received interest Rs. 150 posted to loan account.
d. A cheque received from Amar, a debtor, for Rs. 2,000 was directly received by the proprietor who deposited it into his personal bank account.
Q.9
While preparing the final accounts for the year ended 31st March 1995, Mr. Smart could not get his Trial Balance agreed. He transferred the difference to Suspense Account and prepared the final accounts. In April 1995, following errors were discovered in the books of accounts for the year 1994-95 –
a. The sales book for January 1995 was undercast by Rs. 1,000.
b. Entertainment expenses Rs.150 incurred on 5th January 1995 were omitted to be posted from cash book to the ledger.
c. Discount column on the receipt side of the cash book for February 1995 was added as Rs. 2,230 instead of Rs. 2,130.
d. A purchase from Mr. Sumer for Rs. 8,200 on 3rd March 1995 was correctly recorded in the purchase book. But the supplier was wrongly debited for the purchase.
Pass the necessary journal entries to rectify the above-mentioned errors without affecting the profit for the year 1995-96. Also prepare Suspense Account and Profit & Loss Adjustment
Pass the necessary journal entries to rectify the above-mentioned errors without affecting the profit for the year 1995-96. Also prepare Suspense Account and Profit & Loss Adjustment