SECTOR EMPRESARIAL, ENTRE OTROS
E. Sistema de Gestión, Toma de Decisiones y el Éxito Institucional en los CFT en el Perú.
Date Particulars L.F. Dr. Cr.
Amount (`) Amount (`)
(i) Drawings A/c Dr. 2,500
To Purchases A/c 2,500
(Being goods purchased for personal use was wrongly debited to purchases account, error now rectified)
(ii) Suspense A/c Dr. 5,500
To Hari Chand 5,500
(Being cash received from Hari Chand of `2,750 was wrongly debited to his account, now rectified)
(iii) Returns Inward A/c Dr. 650
To Suspense A/c 650
(Being returns inward book was under-cast by`650, now rectified)
(iv) Suspense A/c Dr. 500
To Interest Received A/c 500
(Being interest received had not been credited, error now rectified)
(v) Suspense A/c Dr. 4,000
To Purchases A/c 2,000
To Purchases Returns A/c 2,000
(Being purchases returns wrongly debited to purchases account, now rectified)
(vi) Interest A/c Dr. 1,200
To Suspense A/c 1,200
(Being interest on overdraft not posted to the ledger from cash book, error now rectified)
(vii) Supplier’s A/c Dr. 10,000
To Machinery A/c 10,000
(Being invoice for purchase of machinery recorded in books twice, now reversed)
Rectification in the Next Accounting Period
If errors are identified in the next accounting period, they are rectified as soon as they are detected. The method of rectification of errors in the next accounting period depends upon the fact whether the account affected was part of the trading and profit & loss account. If the account affected is not part of the trading and profit & loss account, the rectification is done in usual manner. However, if error involves an account having its impact on the profit, a Profit & Loss Adjustment Account is opened. While rectifying errors, all nominal
accounts are replaced by Profit & Loss Adjustment Account. Profit and Loss Adjustment Account is transferred to capital account of the sole proprietor or partner’s capital accounts in the case of partnership. In the case of a joint stock company the account is transferred to Profit and Loss Appropriation Account.
Examples:
(a) Wages of ` 2,500 paid for the installation of machinery charged to wages account. In the same accounting period, the rectifying entry would be:
` `
Machinery Account Dr. 2,500
To Wages Account 2,500
But if the final accounts have been prepared, the wages account has been closed by transfer to trading account, so the rectifying entry will be:
Machinery Account Dr. 2,500
To Profit and Loss Adjustment Account 2,500
(b) Salaries paid` 3,500 posted to wages account in the ledger. In the same accounting period, the rectifying entry would be:
Salaries Account Dr. 3,500
To Wages Account 3,500
But if the final accounts have been prepared, no entry is required to be passed because both the accounts are nominal accounts and the profit has not been affected by the error.
Ascertainment of Correct Profit for the previous period
If in an accounting period, errors affecting nominal accounts take place and they are not detected and rectified before the close of the books of accounts for the period concerned, the profit as revealed by the Profit and Loss Account for the period will be incorrect. The correct profit for the period can be ascertained in the next accounting period after all such errors have been detected and rectified. If the Profit and Loss Adjustment Account reveals a profit, it should be added to the profit, as revealed by the Profit and Loss Account of the previous period to know the correct profit for the previous period. On the other hand, if Profit and Loss Adjustment Account shows a loss, it would be deducted from the profit of the previous accounting period, to ascertain the correct profit for the previous year.
Illustration 5:
The trial balance of M. Mukherjee did not tally on 31.3.2011. The following errors were detected afterwards. Pass the necessary journal entries to rectify the errors and find out the difference in trial balance assuming that all errors have been rectified.
(i) A sum of`600 received from Mathur on 31.3.2011 was entered in the cash book on 2.4.2011. (ii) Returns inwards book was undercast by`300.
(iii) The purchase of typewriter for`25,000 was entered in the purchases day book.
(iv) Wages of workmen engaged in the construction of building amounting` 35,000 were debited to wages account.
(v) A purchase of`2,671 had been posted to the debit of supplier’s account as`2,617.
(vi) Goods amounting to ` 1,000 had been returned by Raju and were taken into stock, but no entry was passed in the books for the transaction.
(vii) `24,000 paid for purchase of T.V. for proprietors own use had been charged to miscellaneous expense account.
(viii) A sale of`600 to Sethi was credited to his account with`60. (ix) A sale of`2,000 has been passed through the purchases journal.
(x) `75 paid for repairs to furniture had been entered in the total column of petty cash book, but not entered in the appropriate analysis column, the total of which has been posted.
Solution:
Rectifying Journal Entries
Date Particulars L.F. Dr. Cr.
(`) (`)
(i) Cash A/c Dr. 600
To Mathur 600
(Being cash received was not entered in the cash book, error now rectified)
(ii) Returns Inwards A/c Dr. 300
To Suspense A/c 300
(Being returns inward book was undercast by `300, error now rectified)
(iii) Typewriter A/c Dr. 25,000
To Purchases A/c 25,000
(Being typewriter purchased was wrongly passed through purchases day book, error now rectified)
(iv) Building A/c Dr. 35,000
To Wages A/c 35,000
(Being wages paid for construction of building was wrongly debited to wages account, error now rectified)
(v) Suspense A/c Dr. 1,288
To Supplier’s A/c (`2,671 +`2,617) 1,288
(Being purchase of`2,671 from supplier wrongly debited to his account by`2,617, error now rectified)
(vi) Returns Inwards A/c Dr. 1,000
To Raju 1,000
(Being goods returned by Raju not entered in the books of account, now entered)
(vii) Drawings A/c Dr. 14,000
To Miscellaneous Expenses A/c 14,000
(Being purchase of T.V. for owner earlier charged to miscellaneous expenses account, error now rectified)
Date Particulars L.F. Dr. Cr.
(`) (`)
(viii) Sethi (600 + 60) Dr. 660
To Suspense A/c 660
(Being goods of`600 sold to Sethi wrongly credited to his account for`60, error now rectified)
(ix) Suspense A/c Dr. 4,000
To Purchases A/c 2,000
To Sales A/c 2,000
(Being a sale of`2,000 wrongly passed through purchases journal, error now rectified)
(x) Repairs to Furniture Ae/c Dr. 75
To Suspense A/c 75
(Being repairs for furniture earlier posted in the general ledger from petty cash book, error now rectified)
Dr. Suspense A/c Cr.
Date Particulars Amount
`
Date Particulars Amount
` To Supplier’s A/c To Purchases A/c To Sales A/c 1,288 2,000 2,000 _____ 5,288
By Difference in trial balance By Returns Inwards A/c By Sethi
By Repairs to Furniture A/c
4,253 300 660 ___75 5,288
Illustration 6:
While closing his books of account, Om Prakash finds that the Trial Balance on that date, i.e. 31st March, 2011 is out by ` 907 excess debit. He places the difference in a newly opened Suspense Account and prepares his final accounts which reveal a profit of ` 14,780 for the year ended 31st March, 2011. In April 2011, the following errors were detected in the accounts for the year 2010-11;
(i) Purchases book was undercast by`1,000.
(ii) Cash received from Jamna Das`687 was posted to the debit of Janki Das as`678.
(iii) Discount received`7,630 and discount allowed` 6,873, the totals of the appropriate columns in cash book were not posted to the ledger.
(iv) Schedule of debtors was totalled`16,280 instead of` 16,380. Om Prakash maintains a provision for bad debts @ 5%.
(v) Bank charges and interest,`115 remained unposted to the debit side of the nominal account. (vi) Depreciation on furniture`2,970 was wrongly recorded as`2,790.
Pass journal entries to rectify the above mentioned errors, prepare Suspense Account and Profit and Loss Adjustment Account and ascertain the correct amount of profit for the year ending 31st March, 2011.
Solution:
Journal
Date Particulars LF Dr. Cr.
Amount (`) Amount (`)
(i) Profit and Loss Adjustment Account Dr. 1,000
To Suspense Account 1,000
(Being rectification of error caused by undercasting of Purchases Book for the year 2010-11 by`1,000)
(ii) Suspense Account Dr. 1,365
To Jamna Dass 687
To Janki Dass 678
(Being rectification of wrong debit of
`678 to Janki Das and omission of credit of`687 to Jamna Das, in 2010-11 books)
(iii) Suspense Account Dr. 757
To Profit and Loss Adjustment Account 757
(Being rectification of omission of posting of discount received`7,630 and discount allowed `6,873 in 2010-11)
(iv) Schedule of Debtors Account Dr. 100
Profit and Loss Adjustment Account Dr. 5
To Suspense Account 100
To Provision for Bad Debts Account 5
(Being rectification of schedule of debtors and also rectification of Provision for bad debts account due to wrong basis on which the amount of bad debts was calculated in 2010-11)
(v) Profit and Loss Adjustment Account Dr. 115
To Suspense Account 115
(Rectification of omission of posting to bank charges and interest)
(vi) Profit and Loss Adjustment Account Dr. 180
To Furniture Account 180
(Being rectification of wrong entry for depreciation on furniture)
Ledger Accounts
Dr. Suspense Account Cr.