BBA 1 ITA

1. Rectification of Errors
BBA I
INTRODUCTION TO ACCOUNTING
UNIT 2

2. Chapter Objectives
• Understand the concept of different types of
errors
• Identify the procedure for locating errors
• Describe the meaning and importance of
suspense account
• Rectify accounting errors by means of
appropriate journal entries
• Understand the effect of different errors on
computation of business profits
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3. Identification of Errors
• Errors occur when some transactions are
incorrectly entered in the account books.
• Identification and rectification of the errors is
necessary to ensure the correctness of final
accounts.
• Errors are classified into four categories:
– Omission error: This error occurs when a
transaction is not recorded in the Journal. This
type of error is difficult to locate because it is not
reflected in the Trial Balance as both debit and
credit entries related to a transaction are missing.
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4. Identification of Errors (contd.)
– Commission error: This error occurs while posting
and balancing of accounts in Ledger. This type of
error can be easily located by analyzing the Trial
Balance.
– Principle error: This error occurs when the
accountant fails to distinguish between revenue
and capital items. This type of error is difficult to
locate because it is not reflected in the Trial
Balance.
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5. Identification of Errors (contd.)
– Compensating error: This error occurs when the
entries corresponding to two transactions, which
are incorrectly entered in the account books,
compensate each other. It is difficult to locate this
type of error because it does not affect the overall
debit and credit balances of an account.
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6. Location of Error
• The omission, commission and compensating
errors cannot be located from the Trial
Balance. Location of such errors can only be
determined when:
– Statements of accounts are received from the
suppliers, customers and other business
associates
– Statements of accounts are sent to the customers
– Internal and external audits are performed
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7. Location of Error (contd.)
 Errors like principle errors are easily located
when there is a mismatch between the debit
and credit totals of the Trial Balance. To locate
such errors, an accountant performs any of the
following tasks:
 Computes the difference between debit and credit
totals in Trial Balance and performs various
operations on it to determine the error entry
 Checks the schedules of sundry creditors and debtors
 Checks the total of all the subsidiary books such as
Sales Book and Purchase Book
 Checks all the entries in Journal and their posting in
Ledger
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8. Suspense Account
• It is a temporary account to which the
difference in the Trial Balance is transferred.
• It should be opened only when the accountant
fails to determine the location of errors.
• It is closed when the accounting entries are
passed to rectify the errors that resulted in
the difference in the Trial Balance.
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9. Rectifying Accounting Entries
• To rectify the errors in the books of accounts,
special entries known as rectifying entries are
passed in the books of accounts.
Illustration: Sales Book overcast by Rs. 100.
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10. Rectifying Accounting Entries (contd.)
• The following are the rectifying entries for the
given situation:
– Case 1: Accountant has identified the location of
error before transferring the difference in Trial
Balance to Suspense account.
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Date Particulars Dr. Cr.
Sales Account Dr.
(Being excess credit to Sales account,
now rectified)
100

11. Rectifying Accounting Entries (contd.)
– Case 2: Accountant has identified the location of
error after transferring the difference in Trial
Balance to Suspense account.
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Date Particulars Dr. Cr.
Sales account Dr.
To Suspense account
100
100

12. Effect of Errors on Profit
 Errors in the books of accounts, which are
associated with Trading account and Profit and
Loss account, may affect the profit calculation of
business for a particular period.
 Example of accounts that affects the profit
calculation of business are Purchase, Sales,
Expense and Income accounts.
 Accounts that should be debited are if
unnecessarily credited will result in increase in
the net profit.
 Accounts that should be credited are if
unnecessarily debited will result in decrease in
the net profit.
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13. Summary
• In this chapter, you have:
– Understood the concept of different types of
errors
– Identified the procedure for locating errors
– Described the meaning and importance of
Suspense account
– Rectified accounting errors by means of
appropriate journal entries
– Understood the effect of different errors on
computation of business profits
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14. References/Sources
• ACCOUNTING FOR MANAGERS Dr. Sakshi Vasudeva Galgotia publishing company
(Theory & Practice).Chapter no. 7 Rectification of Errors. Page no. 181

15. Thank you