8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
1/75
1
How to Rectify Errors in
Financial Accounts
Simple to Tough errors and
their rectifications
Useful to B.COM,ICMAP & ICAP
Students
Useful
To lecturersWho enter
Into
Teaching
profession
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
2/75
2
JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAPMODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAPMODULE D, BBA, MBA & PIPFA.
CONTACT:
0322-3385752
0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
3/75
3
Let us under stand the basic rules,
concepts and conventions Understanding basic rules of accounting,
concepts and conventions help you to under
stand the rectification of errors better.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
4/75
4
1.concepts& conventions
Meaning: Basic assumptions upon which the basic
process of accounting based. a] Business entity concept-
b] Dual aspect concept
c] Going concern concept
d] Accounting period concept e] Cost concept
f] Money measurement concept
g] Matching Concept
ConventionsCoservativismMateriality
Consistency
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
5/75
5
a] Business entity concept-
Business is different from the owner
We pass Journal entry when owner contributes
towards capital. When amount / goods withdrawn for personal use
we make an entry in the business
When Income tax paid by the owner out of
business money we make an entry In the books ofaccounts.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
6/75
6
b] Dual aspect concept
Every debit has equal amount of credit
Asset =Liability
Liability creates asset
If asset>Liability= profit
If Liability> Assets= loss
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
7/75
7
c] Going concern concept
Business will go for at least for a reasonable
period.
Depreciation is provided based on this
assumption.
If this assumption is not made all Fixed
assets will be valued at realised value likecurrent assets.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
8/75
8
d] Accounting period concept
Fixing time limit for accounts
Profit for the period
It can be one week or two week or 6months/one year or 5 years
But to find profit we normally consider 12months period
Financial year for income tax point of view
1st
April-31st
March of the following year Calendar yearJanuary to December
Dipavali to Dipavali
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
9/75
9
e] Cost concept
The cost to the organisation (Actual) isrecorded in the books
Assets are not recorded according to the
market price every year. Depreciation is calculated on cost not based
on market price
Accounting records may not show the realworth of the business
Market price may be disclosed with in
bracket in the balance sheet
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
10/75
10
f] Money measurement concept
Every thing which can be expressed in termsof Money is recorded in the books
Beautiful women are working /Handsome
boys working in TEC /Efficient engineersworth Rs.5000 croresHow do you record?.
Good working environment?
Highly motivated employees? Qualitative information are not accounted.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
11/75
11
Answer
We do not have record for qualitativeaspects. They can enter this transaction
under Human resource accounting ratherthan financial accounting.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
12/75
12
g] Matching Concept
Matching Cost with revenue
It is used to estimate correct profits
Accrual/ cash basis of accounting Even cash paid /received if it belongs to accounting
period we consider them as expenditure /income
Salary outstanding for the last month?
Income from Investments yet to be received? Rent received in advance for next year?
Salary outstanding for the last month to be consideredas expense of the current year under accrual basis ofaccounting.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
13/75
13
Matching concept- continues
Income from investment yet to be received to be
considered for the current year as it belongs to
current year.The year of receipt is not important. Rent received in advance does not belong to
current year under accrual method of accounting
as it belongs to next year even though it is
received during the current accounting year.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
14/75
14
Conventions
Customs and traditions that are followed by the
accountants while preparing the financial
statements. Why do we respect elders?
Why do we shake hands?
Why do Young Indians hate receiving dowry?
Why do students come late to class?
Why do Indians work hard?
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
15/75
15
Coservativism
To be on the safer side
Expect future losses as current year loss
But future income is not treated as currentyear income.
Stock is valued cost price / market price
which ever is lower Making provision for bad debts is based on
this assumptions.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
16/75
16
Materiality
Material impact on profitability areconsidered
Insignificant transactions ignored fromrecording
Pen purchased, pencil purchased?
It comes under stationary. It can not bedisclosed(Shown) separately like penaccount or pencil account.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
17/75
17
Consistency
Accounting policies and procedures shouldbe followed consistently
Method of depreciation should be followedconsistently.
Stock valuation- cost/market price
whichever is lower is consistently followed If not followed it amounts to change in thepolicy of the company
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
18/75
18
2.system of accounting
(26)
1.Cash system:
unless cash received /paid in theaccounting year can not be
considered as income/expensesrespectively
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
19/75
19
2.Mercantile
Mercantile/Accrual/due concept:
Even cash received/paid but due for payment/due forreceipt (yet to be received/payable) if they belong tocurrent accounting year are considered.
If last year expenditure paid this year?
If you receive/paid in advance ? If last year expense paid during the current year can not be
considered as current year expenditure.In the same wayany income received in advance at the end of current yearshould not be entered as current year income or
expenditure.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
20/75
20
3.Types of Expenditure
A) Capital expenditure
B) Revenue expenditure
C) Deferred Revenue
expenditure
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
21/75
21
JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAPMODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE
D, BBA, MBA & PIPFA.
CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI,PAKISTAN
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
22/75
22
A) Capital expenditure(30)
Expenditure incurred which will :
a) Increase Production capacity
b) Increase earning capacity
c) Reduction in the cost of operation.
Example: purchase of fixed assetsPurchase of Machinery
purchase of investment
If such expenditure is not to do with the basic functions of
the business such expenditure is capital expenditure.How do you consider if you buy goodwill, copy right or
patent right?
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
23/75
23
Capital expenditure-continue(page-30)Both tangible and intangible assets included
Intangible assets such as patent right, copy right, technical
know-how, franchises, goodwill etc.,
Depreciation is provided on fixed assets. Depreciation
appears in the profit and loss account
The asset appears in the Balance sheet (after deducting
depreciation)
The life is more than one year
They should not appear in the profit and loss account
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
24/75
24
Revenue Expenditure
Expenditure incurred which will :
a)Not Increase Production capacity
b)Not Increase earning capacity
c)maintain the capacityNo Depreciation is provided on current assets
which will appear in the profit and lossaccount
They appear in the profit and loss account
The life is not more than one year
They should not appear in the balance sheet
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
25/75
25
Wrong treatment?
When goods purchased(dealer in such
goods) it is a revenue expenditure. It should
appear either in the trading account or profitand loss account.
If it appears as an asset , then you inflate the
profits which gives a wrong profit to thefirm.It also affects the assets(over stated)
which gives over stated financial position.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
26/75
26
Example:
Your father purchased 20 kg rice bag costing Rs.600
and your mother purchased a fridge for Rs. 15000 on
the same day.Rise is to be treated as monthly
expenditure where as fridge to be treated as long term
expenditure(Capital expenditure).
Instead, if such purchase of rice accounted withfridge it means monthly expenditure decreased and
long term expenditure is increased.
Accounting point of view rice goes to trading account
to find out cost of the month and fridge goes toBalance Sheet on the asset side as a part of asset.
S f id t i dd d ith i th
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
27/75
27
Suppose fridge cost is added with rice, then your
monthly expenditure will be high and asset
account is reduced.
The indirect impact is that depreciation would not
have been provided on such asset as it is included
with revenue(Rise)account which affects profits.
Example-2:
Building purchased for Rs.20,00,000 entered into
purchase account.Building depreciates by 10%
under straight line method.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
28/75
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
29/75
29
Suppose you are a dealer in
building(Real estate) Purchase of building is considered as goods(dealer
in building).The entry made in purchase account is
correct. No need to rectify such transaction.
Suppose you buy furniture(dealer) for Rs.20000
entered into furniture account.What is the effect?
How do you rectify?
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
30/75
30
Here the mistake is that revenue expenditure is
treated as capital expenditure.The correct
journal entry is Purchase a/c debit and cash a/ccredit.
Wrong entry is: Furniture a/c debit and cash
is credited. In the absence of information we assume the
mistake with respect to furniture and purchase
but there is no mistake with respect to cashaccount because cash payment is correct.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
31/75
31
Deferred revenue
expenditure(page-30) Deferred means- postponed
Heavy revenue expenditure
Vodafone incurred 200 crores for advertisement after
merger with Hutch It can not be written off within a year
It appears in the balance sheet as last item
Every year some amount is written off in the profit and loss
account. Research and development expenditure, initial
advertisement expenditure, preliminary expenditure areexample
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
32/75
32
5.Double entry / Single entry
Is Accounting based on business concept or
religious concept?
Giving first and receiving later.
Giving cash receiving machinery
We consider both aspects such as debit and
credit
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
33/75
33
Rules of accounting
Personal rule/Account-supplier debtors,owner, banker, outstanding wages
Real rule/Account- cash, bank, building,furniture, goodwill, patent rights
Nominal rule/account: income andexpenditure: salary, rent , insurance,commission, internet expenses, cell phoneexpenses.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
34/75
34
Personal rule
Debit the receiver
credit the giver Example: Computer chips purchased on creditfrom wipro
Here credit Wipro as Wipro is the giver of
computer. Sold goods to Meena
Meena is the receiver-debit
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
35/75
35
Exercise
Amount collected from debtors? Amount deposited to bank?
Amount collected from debtor: Cash and debtor are
important.Cash is related to real rule
Debit what comes in and credit what goes out
Therefore cash to be debited and debtors belong to
personal rule.Credit the giver. Therefore credit debtor
account. Cash deposited to bank : JE: Bank a/c debit and cash to
be credited.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
36/75
36
Real rule
These are the accounts of assets and liabilities
Rule:
debit what comes in Credit what goes out
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
37/75
37
Nominal rule
Related to Expenses and income
Rule:
Debit all expenses andlosses
Credit all incomes and
gains
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
38/75
38
Suitable questions to pass journal
entry If cash transaction, person is not important
Every birth of an account there is a death of
the account
Ask what comes in?
Or what goes out?
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
39/75
39
Let us pass Correct Journal entries
for a few transactions
General rules:- All assets are debited if it comes tobusiness(when you buy for business)
All liabilities are credited when borrowed.
All expenses are debited and All income and gains are
credited.If it is a credit transaction person is important. If it is a
cash transaction person is not important.(like cashpurchase or cash sales)
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
40/75
40
Pass Journal entries
1. Capital introduced by owner Rs. 20lakhs.
Answer: Business point of view owner is different
from business. Business receives cash andthe giver is owner.
JE: Cash a/c debit(Real rule)
Capital a/c credit(Personal rule)
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
41/75
41
JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAPMODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE
D, BBA, MBA & PIPFA.
CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI,PAKISTAN
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
42/75
42
2.
Borrowed loan Rs. 10,00,000
Answer:
Cash comes to business and loan vendor
account is important.
JE: Cash a/c debit(Real rule)
Loan a/c credit(Personal rule)
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
43/75
43
3.
Company issues Shares to public
Rs.50,00,000.
Answer:
Cash comes to business. Many owners
given this money.
JE: Cash a/c debit (Real rule)
Share capital a/c credit(Personal rule)
4
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
44/75
44
4. Partners contributed capital to business: A Rs.55,00,000 cash and
B Rs.19,00,000 in cash, building worth Rs.50,00,000, furnitureworth Rs.25,00,000 and his good will Rs.10,00,000.
Answer:
JE: 1.Cash a/c debit Rs.55,00,000(Real rule)
As Capital a/c credit Rs. 55,00,000
(personal rule)2. Cash a/c debit Rs.19,00,000(Real rule)
Building a/c debit Rs. 50,00,000(Real rule)
Furniture a/c debit Rs. 25,00,000(Real rule)
Good will a/c debit Rs. 10,00,000(Real rule)Bs Capital credit Rs.104,00,000
(Personal Rule)
Here cash, building, furniture and good will are assets coming tobusiness therefore debited.The giver is B therefore credited.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
45/75
45
Share broker purchased shares Rs. 25,00,000.
Answer:Shares are coming to business. First understand the
nature of business. Being a share broker shares
are considered as goods(a revenue expenditure).Goods are purchased for cash.
JE: Purchase of goods a/c debit Rs.25,00,000
(Real rule)Cash a/c credit Rs.25,00,000
(Real rule)
5
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
46/75
46
Infosys buy shares of Wipro Rs.20,00,000 for
cash.Answer:
Here Infosys is not a dealer in shares. It is a
capital expenditure. It is not goods. It is a cashtransaction.
JE: Investments a/c debit Rs.20,00,000(Real rule)
Cash(Bank) a/c credit Rs.20,00,000
(Real rule)
6.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
47/75
47
Debentures issued by ICICI Bank for Rs.1
crore. Answer:
ICICI point of view, it is a loan.Cash collected.
JE: Cash a/c debit Rs.1 crore(Real rule)
Debenture a/c credit rs. 1 crore
(personal rule)
7.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
48/75
48
Building acquired by Wipro by issue of shares
Rs.20,00,00,000.Answer:
It is a capital expenditure.Here no cash paid but given
shares.The person who supplied shares are share
holders(owners)
JE: Building a/c debit Rs. 20 crores(Real rule)
Share capital a/c Rs.20 crores(personal rule)
Note: share capital does not come under real rule butshare capital belongs to person who owns them.
8
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
49/75
49
Shares of Wipro limited held by Infosys sold for
Rs.25,00,000.
Answer:
The investments sold; the capital receipt. When ever we
use the term sales account it indicates the goods thatthe company deal.
JE: Cash a/c debit Rs.25,00,000(real rule )
Investments a/c credit Rs. 20,00,000
(Real rule)
Profit on sale of investment a/c credit Rs.5,00,000
(Nominal rule)
9
10
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
50/75
50
Salary paid to Kumaran Rs.50,000
Answer:
Salary paid for services rendered by Kumaran.Kumaranis not a creditor. Salary is an expenditure.
JE: Salary a/c debit 50,000
Cash a/c credit Rs.50,000If we enter into Kumeran account by using personal rule,
kumeran account were to be opened.How do you closehis account? Salary is important rater than Kumeran.If
you cannot close any time during the life of thecompany do not open such account. In the same wayrent paid to land lord can not be entered into land lordaccount.Instead it should be entered in the rent
account.
10
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
51/75
51
Depreciation provided on Plant and Machinery
Rs.2,00,000.Answer:
Depreciation is a non cash account. There are manytransactions are non cash items. It is an expenditure as
there is a reduction in the value of asset.JE: Depreciation a/c Debit Rs.2,00,000(Nominal)
Plant and Machinery a/c Rs.2,00,000
(Real rule)-goes out
Note: Plant and Machinery account goes out year afteryear when we provide depreciation. The capitalexpenditure slowly becomes a revenue expenditure
when we provide depreciation.
11
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
52/75
52
Company declared dividend Rs. 20,00,000
Answer:
Dividend is an appropriation of profit.It is not an
expenditure because it is a share of profits.In order
to compute profit we do not reduce dividend.
JE: Dividend a/c debit Rs. 20,00,000(Nominal rule)
Cash a/c credit Rs.20,00,000(Real rule)
12
13
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
53/75
53
Interest paid on debentures/loan Rs. 1,00,000
Answer:
Interest is a business expenditure as it is paid to
third party. If paid to owner is not considered as
expenditure.JE: Interest a/c debit Rs.1,00,000(Nominal rule)
Cash a/c credit Rs. 1,00,000(Real)
www.augustin.co.nr
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
54/75
54
Rectification of Errors
Before preparing
Trial Balance
After trial balance
But before Trading,
P/L and Balance sheet
After preparingTrading and P/L
and Balance sheet
Hit the individual
account
Hit profit or reserve or
Capital{do not bother
about individual/nature Of expenditure}
And hit the Balance sheet Only net balance
if it affects Balance sheet
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
55/75
55
Basic rules for rectification-1
If words used account-means error only withrespect to that individual account.
Example: wages paid Rs 50,000 not entered intowages account.
Here wages paid might have affected cash also, butthe statement says that it is not entered into wagesaccount only. It does not mention about cashaccount. Therefore we assume that cash accounthad been entered correctly.Therefore rectify wagesaccount only. It is one side error or one accounterror.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
56/75
56
Basic rules for rectification-2
Do not make too many assumptions.
Example: wages paid to install a machinery isentered into wages account.
Here you find wages account is treated as a revenueexpenditure(Refer to the notes earlier) but it is acapital expenditure. Any expenditure incurred
before the asset is put into use to be capitalised.What about cash account?
We assume that cash account would have beencorrectly entered. (Continue in the next slide)
You might ask which side of wage account had
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
57/75
57
You might ask which side of wage account hadbeen entered, whether debit or credit?
Normal assumption is that wages alwaysentered in the debit side(nominal rule).
Do not assume, had been entered into credit sideof wages account what would have happened-
It is unnecessary assumption(too much in yourassumption)
Ask question:whether one/ two accounts is/are
affected? Here wages (wrongly entered) butyou should enter in the Building account now.
This is a normal assumption.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
58/75
58
How do you rectify wages?
Building account to be debited Rs.50,000
Wages account to be credited Rs.50000
To remove wages from the account put it in theopposite side of that account.
Every account is born in one side ie debit orcredit.All assets and expenditure accounts are born
in the debit side. If you want to kill it put it on thecredit side.
In the same way liabilities and income accounts areborn in the credit side. If you want to kill it put it on
the debit side.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
59/75
59
Rectification rule-3
Error to be rectified before the preparation of trial
balance or after trial balance or after the
preparation of Balance sheet.
Before preparation of Balance sheet-Hit the
individual account
After preparation on trading, profit and loss
account and Balance sheet- reduce/increase profitif it is an expense and if it affects asset/liability
increase/decrease the net amount only.
Rectification of errors Rule 4
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
60/75
60
Rectification of errors-Rule-4
If one side error(one account) to fulfill the double
entry book keeping we open suspense accountprovided, trial balance is already prepared.
Example:- Salary paid to Ranganath not entered intosalary account by Rs. 40,000
The mistake is only in salary debit side because salaryappears on the debit side. Cash account is correct(donot assume too much as I have stated earlier).
Rectification entry:
Salary a/c debit Rs.40,000
Suspense a/c credit Rs. 40,000.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
61/75
61
Rectification of error-Rule 5
Suspense account: Meaning
When trial balance does not tally(debit is not
equal to credit) in order to close the trialbalance we open entirely a new account on
the side of deficit.Such account is known as
suspense account.Example:-next page
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
62/75
62
Example for suspense account
Trial balance: Debit credit Purchases 5000 -
Wages 3000 -
Sales - 10,000 Building 4000
Suspense account ??? 2000(CR)
ote: here suspense account is a credit balance as trial is not an account
Since debit side of trial balance is more
than credit side, suspense account
is not a credit balance
Rectification of error-Rule-6
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
63/75
63
Omitted from book(s )means both debit and credit of suchtransactions are omitted.
Account meansomitted to enter into that specificaccount only(normally one side error)
Example: purchases from Mr.Amal not entered in the
purchase books Rs. 50,000Here this transaction is completely omitted as it is given
the word books.
To rectify pass a fresh journal entry:
JE: debit purchase a/c Rs.50,000
Credit Mr.Amal a/c Rs.50,000
Suppose it is stated that not entered into the purchaseaccount how do you rectify?
Rectification of error Rule 6
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
64/75
64
Here, the mistake is only in the purchase account. There
is no mistake in Mr. Amals account
Rectified entry is:Purchase a/c debit Rs.50,000(real rule)
Suspense a/c credit Rs.50,000
(fulfill double entry)
Note: normal assumption is that purchase is always
debit.
If it is sales it is always credit.64
Exercise-1
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
65/75
65
Rupees 1000 spent for repairs of building has been
posted to building account.Identify the mistake:
1. Repairs 2. Building.
Repairs do not increase the capacity of building but tomaintain the building. Therefore it is a revenue
expenditure but treated as capital expenditure.
Rectification : add to repairs and remove from building
Rectification entry: repairs a/c debit Rs.1000(real rule)
Building a/c credit Rs.1000
(to remove from building a/c)
Exercise-2
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
66/75
66
Sale of furniture Rs.20,000 entered in the Salesaccount.
Here he is not a furniture dealer. There fore sale ofcapital asset brings capital receipts. It is treated asrevenue receipts( like dealing in goods of furniture).
Rectification entry:Sales a/c debit Rs.20,000
(to remove from sale)
Furniture a/c Rs.20,000
(to reduce furniture)
Note: sales normally credit and furniture is normallydebit as asset.In order to kill put it in the oppositeside.
Exercise 2
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
67/75
Exercise-4
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
68/75
68
A purchase of Rs.6700 had been posted on the debitside of the creditors account as Rs.7600
Here mistake with respect to creditor only on the wrongside as creditors normally appear on credit side(allliabilities appear on the credit side).
The second mistake is amount.Method of rectification: Remove the wrong amount andpost the correct amount on the correct side.
Rectification entry: Suspense a/c debit Rs.14,300
creditors a/c credit Rs.14,300(Rs. 7,600 is to remove wrong and Rs.6,700 to post
correctly and suspense account is opened to fulfilldouble entry as it is a one side error)
E i 5
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
69/75
69
A sale of Rs.10,000 to Mr.Tim had been passed
through the purchase day book. Here the mistake is misunderstanding of
transaction.Instead on sale treated as
purchase.The book means complete omission. Rectification method: reverse sales and Tim to
remove the mistake and post the correct onceagain.
Rectification entry: 1. Tim A/c debit Rs.10,000
Purchase a/c credit Rs.10,000
(to remove the mistake put in the opposite side)
Exercise-5
Exercise-5 continues
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
70/75
70
2.To post the correct entry:
Tim a/c debit Rs. 10000
credit sales a/c Rs.10,000Instead of passing two entries we can combine both
the entries like this:
Debit Tim a/c Rs.20,000
Credit purchases a/c Rs.10,000
credit Sales a/c Rs.10,000
Exercise-5 continues
Exercise-6
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
71/75
71
Goods sold on Higher Purchase Rs.50,000 entered in
the sales account after the payment of firstinstallment.
Here there is a technical error. The ownership is
transferred only after the last installment. In order to
rectify remove from sale to the extent of sale price
and add to stock to the extent of cost. Assume cost is
Rs. 40,000.remove from debtors Rs.50,000
Rectification entry: Sales a/c debit Rs. 50,000Stock a/c debit Rs.40,000
To Debtors a/c Credit Rs.50,000
(To remove sales, debtors and added to stock)
Exercise-7
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
72/75
72
Rectification after the preparation oft Trading and Profit and loss
account and Balance Sheet(after preparation of final books or
financial statements)Major repairs to renew the building Rs. 3,00,000 entered in the
repairs account.
Rectification: repairs appear in the Profit and Loss account and
building appears in the Balance sheet
To Rectify: Increase profit by Rs. 3,00,000 and add to building by
Rs.3,00,000 in the balance sheet
JE: Building a/c debit Rs. 3,00,000
Profit and Loss a/c credit Rs. 3,00,000
Assumtion: renewal done at the end of the year.Nature ofexpenditure is not important to rectify after the preparation of
final account.
Exercise 7
Exercise-8
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
73/75
73
Building purchase Rs. 40,00,000 entered in the
Furniture a/c as Rs. 20,00,000. Depreciation onbuilding is 10%.Depreciation on Furniture is30%.(Rectify after final accounts prepared)
Both building and furniture fall in the balance sheet.
But depreciation rates differ. It affects profittoo.Depreciation on building is Rs.4,00,000 anddepreciation on furniture is Rs.6,00,000.we hadprovided excess depreciation during the year,therefore profit should be increased.
Furniture in the balance sheet to be reduced byRs.14,00,000 and building to be increased by36,00,000. ??? What is the rectification entry.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
74/75
74
Rectification entry?
Building a/c Debit Rs.36,00,000
Furniture a/c credit Rs.14,00,000
Profit and loss a/c Rs.2,00,000
Suspense account credit Rs.20,00,000
Note: Show net amount only.
8/2/2019 How to Rectify Errors in Financial Accounts 120109230430 Phpapp01
75/75
JOIN KHALID AZIZ
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAPMODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE
D, BBA, MBA & PIPFA.
CONTACT:
0322-3385752
0312-2302870
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI,PAKISTAN