How To Rectify Errors In Financial Accounts

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Information about How To Rectify Errors In Financial Accounts
Business & Mgmt

Published on October 9, 2008

Author: divinvarghese

Source: slideshare.net

Description

Financial Accounts

ST. Joseph’s College of Commerce, Bangalore presents to global students community RECTIFICATION OF ERRORS IN FINANCIAL ACCOUNTS Alternative work is rest All teachers Who teach Accounts At all levels CA-CPT ICWA Company secretary Sit, relax and enjoy Learn, unlearn and re-learn

How to Rectify Errors in Financial Accounts By Prof. Augustin Amaladas M.Com(Loyola college, Chennai),AICWA., PGDFM.,B.Ed. Simple to Tough errors and their rectifications Useful to CPT, ICWA,CS Students Useful To lecturers Who enter Into Teaching profession Alternative work is rest by S.L.Swamy

Dedicated to Prof.Dr. Victor Louis Anthuvan (St. Joseph’s College, Trichy) Sir made us to learn in a simple way My guru-Thank you sir. Dr. Abdul Kalam ex president Studied in St. Joseph’s College- Trichy Made the nation proud of. Dedicated to Rahul Dravid SJCC, Bangalore (Indian cricket captain)our student and my student.

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.

Understanding basic rules of accounting, concepts and conventions help you to under stand the rectification of errors better.

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 Conventions Coservativism Materiality Consistency

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

Conventions

Coservativism

Materiality

Consistency

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 When amount / goods withdrawn for personal use we make an entry in the business When Income tax paid by the owner out of business money we make an entry In the books of accounts.

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 of accounts.

b] Dual aspect concept Every debit has equal amount of credit Asset =Liability Liability creates asset If asset>Liability= profit If Liability> Assets= loss

Every debit has equal amount of credit

Asset =Liability

Liability creates asset

If asset>Liability= profit

If Liability> Assets= loss

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 like current assets.

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 like current assets.

d] Accounting period concept Fixing time limit for accounts Profit for the period It can be one week or two week or 6 months/one year or 5 years But to find profit we normally consider 12 months period Financial year for income tax point of view 1 st April-31 st March of the following year Calendar year –January to December Dipavali to Dipavali

Fixing time limit for accounts

Profit for the period

It can be one week or two week or 6 months/one year or 5 years

But to find profit we normally consider 12 months period

Financial year for income tax point of view 1 st April-31 st March of the following year

Calendar year –January to December

Dipavali to Dipavali

e] Cost concept The cost to the organisation (Actual) is recorded 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 real worth of the business Market price may be disclosed with in bracket in the balance sheet

The cost to the organisation (Actual) is recorded 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 real worth of the business

Market price may be disclosed with in bracket in the balance sheet

f] Money measurement concept Every thing which can be expressed in terms of Money is recorded in the books Beautiful women are working /Handsome boys working in TEC /Efficient engineers worth Rs.5000 crores –How do you record?. Good working environment? Highly motivated employees? Qualitative information are not accounted.

Every thing which can be expressed in terms of Money is recorded in the books

Beautiful women are working /Handsome boys working in TEC /Efficient engineers worth Rs.5000 crores –How do you record?.

Good working environment?

Highly motivated employees?

Qualitative information are not accounted.

Answer We do not have record for qualitative aspects. They can enter this transaction under Human resource accounting rather than financial accounting.

We do not have record for qualitative aspects. They can enter this transaction under Human resource accounting rather than financial accounting.

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 considered as expense of the current year under accrual basis of accounting.

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 considered as expense of the current year under accrual basis of accounting.

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.

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.

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?

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?

Coservativism To be on the safer side Expect future losses as current year loss But future income is not treated as current year income. Stock is valued cost price / market price which ever is lower Making provision for bad debts is based on this assumptions.

To be on the safer side

Expect future losses as current year loss

But future income is not treated as current year income.

Stock is valued cost price / market price which ever is lower

Making provision for bad debts is based on this assumptions.

Materiality Material impact on profitability are considered Insignificant transactions ignored from recording Pen purchased, pencil purchased? It comes under stationary. It can not be disclosed(Shown) separately like pen account or pencil account.

Material impact on profitability are considered

Insignificant transactions ignored from recording

Pen purchased, pencil purchased?

It comes under stationary. It can not be disclosed(Shown) separately like pen account or pencil account.

Consistency Accounting policies and procedures should be followed consistently Method of depreciation should be followed consistently. Stock valuation- cost/market price whichever is lower is consistently followed If not followed it amounts to change in the policy of the company

Accounting policies and procedures should be followed consistently

Method of depreciation should be followed consistently.

Stock valuation- cost/market price whichever is lower is consistently followed

If not followed it amounts to change in the policy of the company

2.system of accounting (26) 1.Cash system: unless cash received /paid in the accounting year can not be considered as income/expenses respectively

1.Cash system:

unless cash received /paid in the accounting year can not be considered as income/expenses respectively

2.Mercantile Mercantile/Accrual/due concept: Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current 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 way any income received in advance at the end of current year should not be entered as current year income or expenditure.

Mercantile/Accrual/due concept:

Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current 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 way any income received in advance at the end of current year should not be entered as current year income or expenditure.

3.Types of Expenditure A) Capital expenditure B) Revenue expenditure C) Deferred Revenue expenditure

A) Capital expenditure

B) Revenue expenditure

C) Deferred Revenue expenditure

A) Capital expenditure(30) Expenditure incurred which will : Increase Production capacity Increase earning capacity Reduction in the cost of operation. Example: purchase of fixed assets Purchase 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?

Expenditure incurred which will :

Increase Production capacity

Increase earning capacity

Reduction in the cost of operation.

Example: purchase of fixed assets

Purchase 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?

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

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

Revenue Expenditure Expenditure incurred which will : Not Increase Production capacity Not Increase earning capacity maintain the capacity No Depreciation is provided on current assets which will appear in the profit and loss account They appear in the profit and loss account The life is not more than one year They should not appear in the balance sheet

Expenditure incurred which will :

Not Increase Production capacity

Not Increase earning capacity

maintain the capacity

No Depreciation is provided on current assets which will appear in the profit and loss account

They appear in the profit and loss account

The life is not more than one year

They should not appear in the balance sheet

Wrong treatment? When goods purchased(dealer in such goods) it is a revenue expenditure. It should appear either in the trading account or profit and loss account. If it appears as an asset , then you inflate the profits which gives a wrong profit to the firm.It also affects the assets(over stated) which gives over stated financial position.

When goods purchased(dealer in such goods) it is a revenue expenditure. It should appear either in the trading account or profit and loss account.

If it appears as an asset , then you inflate the profits which gives a wrong profit to the firm.It also affects the assets(over stated) which gives over stated financial position.

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 with fridge 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 to Balance Sheet on the asset side as a part of asset.

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 with fridge 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 to Balance Sheet on the asset side as a part of asset.

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.

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.

Here it is entered into purchase account. It means you are treating it as goods(dealer in real estate) which is a revenue expenditure instead of capital expenditure.Your profit is less by Rs. 20,00,000. But had been entered into building account the profit would have been more by Rs.20,00,000. Because it is entered in the purchase account we had forgotten to provide depreciation of Rs.2,00,000 which should had been done. Net effect to rectify the error is:- Increase the profits by Rs.18,00,000. And increase the asset should be increased by 18,00,000.

Here it is entered into purchase account. It means you are treating it as goods(dealer in real estate) which is a revenue expenditure instead of capital expenditure.Your profit is less by Rs. 20,00,000. But had been entered into building account the profit would have been more by Rs.20,00,000.

Because it is entered in the purchase account we had forgotten to provide depreciation of Rs.2,00,000 which should had been done.

Net effect to rectify the error is:- Increase the profits by Rs.18,00,000. And increase the asset should be increased by 18,00,000.

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?

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?

Here the mistake is that revenue expenditure is treated as capital expenditure.The correct journal entry is Purchase a/c debit and cash a/c credit. 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 cash account because cash payment is correct.

Here the mistake is that revenue expenditure is treated as capital expenditure.The correct journal entry is Purchase a/c debit and cash a/c credit.

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 cash account because cash payment is correct.

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 are example

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 are example

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

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

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 and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses.

Personal rule/Account-supplier debtors, owner, banker, outstanding wages

Real rule/Account- cash, bank, building, furniture, goodwill, patent rights

Nominal rule/account: income and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses.

Personal rule Debit the receiver credit the giver Example: Computer chips purchased on credit from wipro Here credit Wipro as Wipro is the giver of computer. Sold goods to Meena Meena is the receiver-debit

Debit the receiver

credit the giver

Example: Computer chips purchased on credit from wipro

Here credit Wipro as Wipro is the giver of computer.

Sold goods to Meena

Meena is the receiver-debit

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.

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.

Real rule These are the accounts of assets and liabilities Rule: debit what comes in Credit what goes out

These are the accounts of assets and liabilities

Rule: debit what comes in

Credit what goes out

Nominal rule Related to Expenses and income Rule: Debit all expenses and losses Credit all incomes and gains

Related to Expenses and income

Rule: Debit all expenses and losses

Credit all incomes and gains

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?

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?

Let us pass Correct Journal entries for a few transactions General rules:- All assets are debited if it comes to business(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 cash purchase or cash sales)

General rules:- All assets are debited if it comes to business(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 cash purchase or cash sales)

Pass Journal entries 1. Capital introduced by owner Rs. 20 lakhs. Answer : Business point of view owner is different from business. Business receives cash and the giver is owner. JE : Cash a/c debit(Real rule) Capital a/c credit(Personal rule)

1. Capital introduced by owner Rs. 20 lakhs.

Answer :

Business point of view owner is different from business. Business receives cash and the giver is owner.

JE : Cash a/c debit(Real rule)

Capital a/c credit(Personal rule)

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)

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)

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)

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. 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, furniture worth 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) A’s 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) B’s Capital credit Rs.104,00,000 (Personal Rule) Here cash, building, furniture and good will are assets coming to business therefore debited.The giver is B therefore credited.

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, furniture worth 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)

A’s 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) B’s Capital credit Rs.104,00,000

(Personal Rule)

Here cash, building, furniture and good will are assets coming to business therefore debited.The giver is B therefore credited.

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

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)

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 cash transaction. JE : Investments a/c debit Rs.20,00,000(Real rule) Cash(Bank) a/c credit Rs.20,00,000 (Real rule) 6.

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 cash transaction.

JE : Investments a/c debit Rs.20,00,000(Real rule)

Cash(Bank) a/c credit Rs.20,00,000

(Real rule)

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.

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)

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 but share capital belongs to person who owns them. 8

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 but share capital belongs to person who owns them.

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 that the 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

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 that the 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)

Salary paid to Kumaran Rs.50,000 Answer: Salary paid for services rendered by Kumaran.Kumaran is not a creditor. Salary is an expenditure. JE : Salary a/c debit 50,000 Cash a/c credit Rs.50,000 If we enter into Kumeran account by using personal rule, kumeran account were to be opened.How do you close his account? Salary is important rater than Kumeran.If you cannot close any time during the life of the company do not open such account. In the same way rent paid to land lord can not be entered into land lord account.Instead it should be entered in the rent account. 10

Salary paid to Kumaran Rs.50,000

Answer:

Salary paid for services rendered by Kumaran.Kumaran is not a creditor. Salary is an expenditure.

JE : Salary a/c debit 50,000

Cash a/c credit Rs.50,000

If we enter into Kumeran account by using personal rule, kumeran account were to be opened.How do you close his account? Salary is important rater than Kumeran.If you cannot close any time during the life of the company do not open such account. In the same way rent paid to land lord can not be entered into land lord account.Instead it should be entered in the rent account.

Depreciation provided on Plant and Machinery Rs.2,00,000. Answer: Depreciation is a non cash account. There are many transactions 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 after year when we provide depreciation. The capital expenditure slowly becomes a revenue expenditure when we provide depreciation. 11

Depreciation provided on Plant and Machinery Rs.2,00,000.

Answer:

Depreciation is a non cash account. There are many transactions 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 after year when we provide depreciation. The capital expenditure slowly becomes a revenue expenditure when we provide depreciation.

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

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)

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) 13

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)

Rectification of Errors Before preparing Trial Balance After trial balance But before Trading, P/L and Balance sheet After preparing Trading 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 www.augustin.co.nr

Basic rules for rectification-1 If words used ‘ account’-means error only with respect to that individual account. Example: wages paid Rs 50,000 not entered into wages account. Here wages paid might have affected cash also, but the statement says that it is not entered into wages account only. It does not mention about cash account. Therefore we assume that cash account had been entered correctly. Therefore rectify wages account only. It is one side error or one account error.

If words used ‘ account’-means error only with respect to that individual account.

Example: wages paid Rs 50,000 not entered into wages account.

Here wages paid might have affected cash also, but the statement says that it is not entered into wages account only. It does not mention about cash account. Therefore we assume that cash account had been entered correctly. Therefore rectify wages account only. It is one side error or one account error.

Basic rules for rectification-2 Do not make too many assumptions. Example: wages paid to install a machinery is entered into wages account. Here you find wages account is treated as a revenue expenditure(Refer to the notes earlier) but it is a capital 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 been correctly entered. (Continue in the next slide)

Do not make too many assumptions.

Example: wages paid to install a machinery is entered into wages account.

Here you find wages account is treated as a revenue expenditure(Refer to the notes earlier) but it is a capital 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 been correctly entered. (Continue in the next slide)

You might ask which side of wage account had been entered, whether debit or credit? Normal assumption is that wages always entered in the debit side(nominal rule). Do not assume, had been entered into credit side of wages account what would have happened- It is unnecessary assumption ( too much in your assumption ) Ask question:whether one/ two accounts is/are affected? Here wages (wrongly entered) but you should enter in the Building account now. This is a normal assumption.

You might ask which side of wage account had been entered, whether debit or credit?

Normal assumption is that wages always entered in the debit side(nominal rule).

Do not assume, had been entered into credit side of wages account what would have happened- It is unnecessary assumption ( too much in your assumption )

Ask question:whether one/ two accounts is/are affected? Here wages (wrongly entered) but you should enter in the Building account now.

This is a normal assumption.

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 the opposite side of that account. Every account is born in one side ie debit or credit.All assets and expenditure accounts are born in the debit side. If you want to kill it put it on the credit side. In the same way liabilities and income accounts are born in the credit side. If you want to kill it put it on the debit side.

Building account to be debited Rs.50,000

Wages account to be credited Rs.50000

To remove wages from the account put it in the opposite side of that account.

Every account is born in one side ie debit or credit.All assets and expenditure accounts are born in the debit side. If you want to kill it put it on the credit side.

In the same way liabilities and income accounts are born in the credit side. If you want to kill it put it on the debit side.

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 profit if it is an expense and if it affects asset/liability increase/decrease the net amount only.

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 profit if it is an expense and if it affects asset/liability increase/decrease the net amount only.

Rectification of errors-Rule-4 If one side error(one account) to fulfill the double entry book keeping we open suspense account provided, trial balance is already prepared. Example :- Salary paid to Ranganath not entered into salary account by Rs. 40,000 The mistake is only in salary debit side because salary appears on the debit side. Cash account is correct(do not assume too much as I have stated earlier). Rectification entry : Salary a/c debit Rs.40,000 Suspense a/c credit Rs. 40,000.

If one side error(one account) to fulfill the double entry book keeping we open suspense account provided, trial balance is already prepared.

Example :- Salary paid to Ranganath not entered into salary account by Rs. 40,000

The mistake is only in salary debit side because salary appears on the debit side. Cash account is correct(do not assume too much as I have stated earlier).

Rectification entry :

Salary a/c debit Rs.40,000

Suspense a/c credit Rs. 40,000.

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 trial balance we open entirely a new account on the side of deficit.Such account is known as suspense account. Example:-next page

Suspense account: Meaning

When trial balance does not tally(debit is not equal to credit) in order to close the trial balance we open entirely a new account on the side of deficit.Such account is known as suspense account.

Example:-next page

Example for suspense account Trial balance: Debit credit Purchases 5000 - Wages 3000 - Sales - 10,000 Building 4000 Suspense account ??? 2000(CR) Note: 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

Trial balance: Debit credit

Purchases 5000 -

Wages 3000 -

Sales - 10,000

Building 4000

Suspense account ??? 2000(CR)

Omitted from book(s )means both debit and credit of such transactions are omitted. Account means –omitted to enter into that specific account only( normally one side error) Example: purchases from Mr.Amal not entered in the purchase books Rs. 50,000 Here 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 purchase account how do you rectify? Rectification of error-Rule-6

Omitted from book(s )means both debit and credit of such transactions are omitted.

Account means –omitted to enter into that specific account only( normally one side error)

Example: purchases from Mr.Amal not entered in the purchase books Rs. 50,000

Here 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 purchase account how do you rectify?

Here, the mistake is only in the purchase account. There is no mistake in Mr. Amal’s 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.

Here, the mistake is only in the purchase account. There is no mistake in Mr. Amal’s 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.

Rupees 1000 spent for repairs of building has been posted to building account. Identify the mistake: Repairs 2. Building. Repairs do not increase the capacity of building but to maintain 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-1

Rupees 1000 spent for repairs of building has been posted to building account.

Identify the mistake:

Repairs 2. Building.

Repairs do not increase the capacity of building but to maintain 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)

Sale of furniture Rs.20,000 entered in the Sales account. Here he is not a furniture dealer. There fore sale of capital asset brings capital receipts. It is treated as revenue 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 normally debit as asset.In order to kill put it in the opposite side . Exercise-2

Sale of furniture Rs.20,000 entered in the Sales account.

Here he is not a furniture dealer. There fore sale of capital asset brings capital receipts. It is treated as revenue 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 normally debit as asset.In order to kill put it in the opposite side .

A sale of Rs.2000 to Min Min was credited to Min Min account . Here the error with respect to Min Min account only.we assume that sales a/c is correct(normal assumption as I have explained earlier) The normal Journal entry is : MinMin a/c debit and Sales a/c credit. But we have credited Min Min a/c instead of debit.To rectify such error double the amount and put on the opposite side Rectification entry : Min Min a/c debit Rs.4000 (one 2000 for rectification and another to make actual entry To suspense a/c credit Rs.4000 Exercise-3

A sale of Rs.2000 to Min Min was credited to Min Min account .

Here the error with respect to Min Min account only.we assume that sales a/c is correct(normal assumption as I have explained earlier) The normal Journal entry is :

MinMin a/c debit and Sales a/c credit.

But we have credited Min Min a/c instead of debit.To rectify such error double the amount and put on the opposite side

Rectification entry : Min Min a/c debit Rs.4000

(one 2000 for rectification and another to make actual entry

To suspense a/c credit Rs.4000

A purchase of Rs.6700 had been posted on the debit side of the creditor’s account as Rs.7600 Here mistake with respect to creditor only on the wrong side as creditors normally appear on credit side(all liabilities appear on the credit side). The second mistake is amount. Method of rectification : Remove the wrong amount and post 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 fulfill double entry as it is a one side error) Exercise-4

A purchase of Rs.6700 had been posted on the debit side of the creditor’s account as Rs.7600

Here mistake with respect to creditor only on the wrong side as creditors normally appear on credit side(all liabilities appear on the credit side).

The second mistake is amount.

Method of rectification : Remove the wrong amount and post 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 fulfill double entry as it is a one side error)

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 once again. 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

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 once again.

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)

2. To post the correct entry: Tim a/c debit Rs. 10000 credit sales a/c Rs.10,000 Instead 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

2. To post the correct entry:

Tim a/c debit Rs. 10000

credit sales a/c Rs.10,000

Instead 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

Goods sold on Higher Purchase Rs.50,000 entered in the sales account after the payment of first installment . 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. 50,000 Stock a/c debit Rs.40,000 To Debtors a/c Credit Rs.50,000 (To remove sales, debtors and added to stock) Exercise-6

Goods sold on Higher Purchase Rs.50,000 entered in the sales account after the payment of first installment .

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. 50,000

Stock a/c debit Rs.40,000 To Debtors a/c Credit Rs.50,000

(To remove sales, debtors and added to stock)

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 of expenditure is not important to rectify after the preparation of final account. Exercise-7

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 of expenditure is not important to rectify after the preparation of final account.

Building purchase Rs. 40,00,000 entered in the Furniture a/c as Rs. 20,00,000. Depreciation on building is 10%.Depreciation on Furniture is 30%.(Rectify after final accounts prepared) Both building and furniture fall in the balance sheet. But depreciation rates differ. It affects profit too.Depreciation on building is Rs.4,00,000 and depreciation on furniture is Rs.6,00,000.we had provided excess depreciation during the year, therefore profit should be increased. Furniture in the balance sheet to be reduced by Rs.14,00,000 and building to be increased by 36,00,000. ??? What is the rectification entry. Exercise-8

Building purchase Rs. 40,00,000 entered in the Furniture a/c as Rs. 20,00,000. Depreciation on building is 10%.Depreciation on Furniture is 30%.(Rectify after final accounts prepared)

Both building and furniture fall in the balance sheet. But depreciation rates differ. It affects profit too.Depreciation on building is Rs.4,00,000 and depreciation on furniture is Rs.6,00,000.we had provided excess depreciation during the year, therefore profit should be increased.

Furniture in the balance sheet to be reduced by Rs.14,00,000 and building to be increased by 36,00,000. ??? What is the rectification entry.

Thank you very much Help your father in cooking Help your mother If you want to take rest Sweep your room Alternative Work is rest

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.

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.

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