WI | nsec Accounting A eS in Accounting Pelremeeups 3.15.1 Introduction : can be occurred due to many reasons at the t , et rors, the results of accounting records may nai of accounting by a business. Due to aconomic decisions cannot take accurate deci 8 e accurate. Hence, those involved in Isions based on the: ; attect the objective of Accounting, Therefore, identificatio tie ee and rectification of errors jn Accounting. ‘Ors is pivotal 3.15.2 Reasons for Accounting Errors Lack of knowledge of the book keeper on Aci Negligence Forgetting and omission Making errors with a fraudulent intention Incompetent mentality of the employee ‘counting 3.15.3Classification of Accounting Errors Accounting errors can be categorized based oN following bases. 1. According to the nature of errors 2. According to the time of occurrence 3. According to the impact on equality of the trial balance 3.15.3.1 Classification of Errors according to the Nature of Errors tors can further be classified as per the nature of errors. i Errors of Omission it. Errors of Commission iii. Errors of Principle “. — Etrors of Duplication v. Compensating Errors vi. Clerical Errors Errors of Omission Error of omission is, not fecording a transaction in full or recording only one entry out of the double entries. i tf * Purchase of furniture of Rs. 8,000 for office use has been recorded in the books o accounts, i count. Purchase invoice of Rs. 2,000 has has been recorded only in purchases acc Ettors of Commission ' | higher in primary Error of Commission means recording value of transaction lesser or hig! 00ks of Ledger accounts. i ; Rs. 2,500 i Furniture purchases of Rs. 25,000 has been recorded 0 000 in pure Ch purchases of Rs. 8,000 has been recorded a5 RS. £9 ae ee in furniture account. hases account.All vi. Financial Accounting Chapter 93 Errors of Principle Recording transactions in a way which does not agree with double entry account principles is called as an error of principle. (i.e. Recording a capital nature transactioy ; revenue nature account or vice versa). © Purchases of furniture of Rs. 20,000 furniture for office use has been debited furniture repairs account. This was correctly recorded in the cash journal, ° * Building maintenance expenses of Rs. 20,000 has been debited to building account, nina Errors of Duplication Recording the same transaction twice in primary books or Ledger accounts © Sales invoice of Rs. 2,000 has been recorded twice in Ledger accounts, * Salary payment of Rs. 5,000 has recorded twice in the Ledger accounts. Compensating Errors An accounting error is set off by another error or errors are called as errors of compensating, © Recording Rs. 2,000 cash sales as Rs. 20,000 in cash account and total of sales account has been over casted by Rs. 18,000. «Adding cash account lesser of Rs. 1,000 and recording Rs. 7,000 rent received as 6,000 in that account. Clerical Errors Errors occur due to recording a transaction in another account which is in the same nature are called as clerical errors. 3.2 Classification of Errors according to the Time of Occurrence Errors occurring when recording in primary books © Omission of Rs. 7,000 sales invoice from sales journal. © Rs. 21,500 of purchases invoice has been duplicated in purchases journal. Errors occurring when posting to Ledger © Credit Sales of Rs. 5,000 has posted to sales account as Rs. 500. * purchases of Rs. 7,500 has been credited to both cash account and purchases account. Errors in balancing the Ledger accounts. * Over addition of debit side of cash control account by Rs. 5,000. + when balancing the interest income account Rs. 350 has been under stated. Errors in preparing the trial balance The balance of machinery account amounted to Rs. 275,000 has extracted to tn balance as Rs. 257,000. * Interest income balance of Rs. 35,000 has been copied to debit column in trial balanc 3.15.3.3 Classification of Errors according to the Impact on the Equality of Trial Balance pening errors can be classified according to the impact on the equality of trial balance : lows. irr - an _~~ cpt MELB | Financier accounting tuois that do not atfect the equally of tal balance gucors that affect the equality of tral balance errors that do not affect the equality of trial batance errors can be existed even if the trial balance Of an entity was, agteed, Hence aqueene in trial balance does not confirm that the H rice ACCOUNtING 15 100% accuate. accounting errors can be existed though trial balance is agreed, Reasons for that are out {ined as follows; & Missing transactions in full Errors. of duplication 15. Compensating errors Friars of principles errors that affect the equality of trial balance These are the errors that affected for not agreeing the with credit account balances of the trial balance of Ledger accounts after balancing the same, These errors can be categorized as follows, a) Recording only one entry of the double entries of a transaction, Salary payment of Rs. 2,000 has been recorded only in the salaries account, oe se total of debit account balances — i which was prepared using the balances ia 4 b) Recording a debit amount which is different from the credit amount of the transaction. cases Gt Aaceurns | same cash purchases of Rs. 5,000 has been recorded as Rs, 500 In purchases account. ©) Recording the double entries in the same side of both accounts, cash sales of Rs. 10,000 has been debited to cash account as well as sales account, d) Errors that occurred when balancing the Ledger accounts, Rs. 2,000 has been over added when balancing sales account. e) Errors that occurred when preparing the trial balance, Rent expense account balance of Rs, 2,000 has not been taken to the debit of trial balance, OPGnrnacns Suspense account is the Ledger account which is used to record the difference of the trial lance temporarily in the event that such difference exists at the end of an accounting period. "sense account balance shall be zero once all the errors are rectified Mdentityi “aifying the generation of suspense account balance Debi 'dentitying the debit balance ; f * balance in Suspense account arises, if the credit balance is higher than the debit balance Of trial balance,BEDI | Finwnciat accounting Chapter 03 Trial Balance _ Suspense Account Description ] Debit Credit Balance B/F 5,000 SS xX | 80,000 | XXX | 85,000 Suspense Account | __5,000 |___ 85,000 85,000 2. Identifying the credit balance ; ; / Credit balance in suspense account arises, if the debit balance is higher than the credit balance of trial balance. Trial Balance Suspense Account Description ~~ Debit Credit Balance B/F 6,000 XXX 60,000 XXX 54,000 Suspense Account | 6,000 _ ¢ That means, a debit balance in suspense account needs to be shown, if deficiency arises in the debit side of trial balance and vice versa. © a EM PAC emery A balance in suspense account arises due to the errors which affect the equality of trial balance. We have studied such errors above. Suspense account balance shall be zero once errors which affected the equality of the trial balance are corrected. Other errors which do not affect the equality of the trial balance shall be corrected in those accounts after accounts checking. Accordingly, following points should be noted when fectifying errors. 1. First decide whether the errors affect the equality of the trial balance. 2. If itis an error affecting the equality of the trial balance then decide whether this error Causes a shortage in debit side or credit side. The balance in suspense account arises in the side the shortage was there (debit balance or credit balance). Then post one entry to suspense account and other entry to the account need to be corrected resulting in a zero balance in the suspense account. If it is an error which does not affect to the equality of the trial balance, then correct those two or more erroneous accounts after identifying them. Rectification Of errors shall be recorded firstly in the “General Journal” and then in Ledger Accounts”. Adjusted trial balance can be prepared after rectifying all the errors Then financial statements are . Prepared based on that adjusted trial balance ance the year-end adjustments were made. msCO NNNN— TCS ae WED | Financiot Accounting pvatted profit may become erroneous if the financial Statements are prepared based on atormation with errors. If so, them 2 statement of adjusted profit is prepared showing the ct of correction entries. amps conection of the profit amount is done through a statement of profit revision and tollowing explanation is given, statement of Adjusted Profit thisis the statement prepared to correct the profit and it is important to identify the relationship between profit, income and expenses. the relationship between profit, income and expenditure ~ Profit Loss Increase in income Increase Decrease Inverse “pectease in income Decrease Increase Increase in expenses Increase Journal entries need to be recorded in general journal for each and every correcting entry made and the source document is the journal voucher. Ea reer sec Financial statements of Malith’s Business were prepared after transferring Rs. 16,000, the difference of trial balance as at 31 /12/2019 to the debit side of suspense account. Profit for the year ended 31 '/12/2019 was Rs. 260,000. Subsequently, following errors were identified. 1. Total of discounts given column amounting to Rs. 10,000 has been credited to discounts feceived account. However discounts given has been correctly recorded in debtors control account. Electricity payment of Rs. 15,000 has been recorded only in the cash account. Rs. 5,000 purchase invoice has not been recorded the books of accounts. Total of sales return journal of Rs. 10,000 has been posted to Ledger as Rs. 1,000. Water bill of Rs,1 4,000/- has been recorded twice in the expenses account, though it was Correctly recorded in the cash payment journalHEGRE | Financial Accounting Chapter 03 6. Bad debts written off of Rs. 2,000 has been recorded only in the Trade Receivables Contra, Account (debtors control account) 7. Purchase of office equipment of Rs.10,000/- for office use has been debited to Office Expenses account as Rs. 1,000. Required, a) State whether following errors affected to the equality of the trial balance. b) Show correction entries completing following table. Correct double entry of the Correcting journal entry transaction Already posted double entry ©) Prepare the suspense account. d) Compute the adjusted profit. LNs a) Impact on the equality of the trial balance. A difference arises in trial balance. A difference arises in trial balance. No difference arises in trial balance. No difference arises in trial balance. No difference arises in trial balance. A difference arises in trial balance. A difference arises in trial balance. NOV awn aABDI 1 Finances accounting » + jveody posted double} Correct double entry of | comecting journal entry ce 3 | entry the transaction if| 2 TH + 1 Tocounts : Discounts given Discounts given A/c 1 | received A/C (Ct) | 10,000 | A/c (0r) | 10,000 (01) | 10,000 | | pebtors control Debtors control Discounts received | dare (cr) | 10,000 } A/c (GA) | 10,000] A/c (01) | 10,000 Suspense A/c (Cr) | 20,000| JS, 1 — Th ak (CO) Electricity Jelectricity expense 15,000 \" 15,000 | expense A/c (Dr) | 15,000] A/c (Or) | 15,000 Cash A/c (Cr) | 15,000 Suspense A/c (Cr) 1 Tho double entry Purchases A/c Purchases A/c (Dr)| 5,000 | (Dr) | 5,000 | Creditors control A/c Creditors control (ct)| 5,000 aye (Or) | 5,000 + {Sales return A/c Sales return A/c y Sales return A/c 7 (Or)} 1,000 (Or) | 10,000 (0r)| 9,000 Debtors control Debtors control Debtors control A/c Alc (cr) | 1,000] A/c (ct) | 10,000 (cr)| 9,000 Water expense Water expense CashA/c (Or) | 14,000 A/c (Dr) | 28,000] A/c (Or) | 14,000 | Water expense A/c CashaA/c (cr) CashA/c (Cr) | 14,000 (cr) | 14,000 28,000 & — [Debtors control ac Bad debts Bad debts A/c (0r)| 2,000 (Cr)| 2,000 (Dr)} 2,000} Suspense A/c (Cr) | 2,000 Debtors control A/c (cr)} 2,000 7 loffice expenses Office equipment Office equipment A/c Alc (01) | 1,000 A/c (01) | 10,000 (01) 10,000 Cash A/c CashA/c (Cr) | 10,000 | Office expenses A/c (cr) | 10,000 (c)| 1,000 Suspense A/c| Financial Accountir Chapter 03 ng, 9 Suspense Account Balance B/F 46,000 | 1. Discounts Allowed 1. Discounts received 2. Electricity expenses 6. Bad debts 7. Office equipment 4) Statement of Profit Revision (Rs.) Net Profit as per Ovaft Financial statements | 260,000 (+) 5. Water expenses overstated | 14,000 7. Office expenses | 1,000 15,000 275,000 (-) 1. Discounts Given / received (10,000 x 2) | 20,000 2. Electricity expenses | 15,000 3. not recording purchases 5,000 4. under-stating the sales returns 9,000 6. Bad debts not recorded | 2,000| (51,000) Adjusted Net Profit | 224,000 ——— PSC Be el Trial balance as at 31/03/2020 of Rasika Trading Company was not agreed. The difference aris- en was posted to a suspense account and the drafted profit was Rs. 1,576,300. Accounts were re-checked and following errors were identified subsequently. 1. Van repair cost of Rs. 31,000 has been debited to vans account. 2. Total of discounts given column amounted to Rs. 10,000 has been credited to discounts received account. However it has correctly posted to the debtors control account. 3. Bad debts written off of Rs. 2,000 has been posted only to the Trade Receivables Control Account. 4. goods drawings. of 5.15,000 has not been accounted in the books. 5. _ building rent income of Rs. 28,000 has been recorded only in the cash account. oo”La cnopter OF gequired, ) General journal entries to correct these errors. prepare suspense account. a) b) compute the Adjusted / correct Profit through a statement of profit revision. HED | Financial Accounting ——————sJ (a) General Journal (Rs.) Tate | Descripti pate - v7 ption Debit Credit 1 | Van repair expenses A/c Vans A/c (Or) 31,000 31000 (Correction of posting van repair expenses to vans ‘ asset A/C) Discounts given A/c — 2 | Disco 01 Discounts received A/c ‘on a Suspense A/c . 20,000 (Correction of posting discounts given amount to , discounts received A/c) - 3 |Bad debts A/c (or) 2,000 Suspense A/c 2,000 (Correction of posting bad debts only to the debtors control A/c) 4 | Drawings A/c (Or) 15,000 Purchases A/c 15,000 (Posting drawings to the Ledger) | 5 |Suspense A/c Debit (Or) 28,000 Building rent income A/c 28,000 (Correction of recording building rent received, only in the cash A/c) —L 4) Suspense Account (Rs.) Building rent income 28,000 Balance B/F Discounts given 10,000 Discounts received 10,000 Bad debts 2,000 28,000 ——- & 3 is iz = : 3 s 3 3 < EYwa financial Accounting 9 statement of Profit Revision _ eee Net Profit as per Draft Financial Statements (+) 4, Unrecorded Goods drawings 15,000 6. Building rent income 28,000 (-) 1. Van repair expenses 31,000 2. Discounts Allowed / discounts received 20,000 3. Bad debts 2,000 Adjusted Net Profit ee