Journalizing Rectification Of Accounting Errors

Journalising of accounting errors is the process of rectifying the errors committed before preparing trial balance or after preparing trial balance but before preparing final account or after preparing final account.

Types of Accounting Errors: I. Errors of Principle:

If any transactions are recorded without abiding by the rules of double entry system of accounting, the mistake so committed is termed as "Error of Principle".

II. Clerical Errors:

Clerical Errors may be of three types:

1) Errors of Omission:

A journal entry is composed of two transactions. While recording the transactions in the books of accounts, if one part of the transaction is recorded, it would be a mistake and the mistake so committed is termed as "Errors of Omission".

It is also possible that omission or mistake may be committed while posting of Journal Entries to Ledger Accounts.

2) Errors of Commission

If any wrong entry is passed or if posting is made on the wrong side or if mistake is made in calculating figures, the mistake so committed will be termed as "Errors of Commission".

3) Compensating Errors

Compensating Errors are those errors that are equal in amount but are put against each other so that the accounts still balance in sense that they cancel each other. Compensating errors are committed while computing or recording of accounting transactions, that is neutralized or counter balanced by an equal and opposite error.

Rectification of Errors may be defined as the process of rectifying or correcting the mistakes that has been committed while recording the transactions in the books of accounts of the company or organisation.

The errors in the books of accounts need to be detected and can be rectified in any of the following stages:

Before preparing Trial Balance ( before balancing of books of accounts).
After Trial Balance is prepared but before preparation of Final Accounts.
After preparation of Final Accounts (in the subsequent accounting period).

In accounting, Trial Balance is prepared to authenticate the arithmetical accuracy of the books of accounts. If both the sides (Debit and Credit) of the Trial Balance tally each other, it signifies that the different accounts prepared are arithmetically correct. But, if the debit and credit side of the Trial Balance does not tally each other, it indicates that some mistake has been committed either in the Journal or in the subsidiary Books.

The errors committed should be detected and rectified before preparation of the Final Account,. It is to be noted that all the errors may not be revealed by the Trial Balance. As such, there may remain some errors that could not be located in the Trial Balance.

But the errors that are not disclosed in the Trial Balance also needs to be detected and rectified so that a true and fair picture of the financial position of the concern i.e. the amount of profit or loss earned or suffered by the concern may be found out.

From the rectification point of view, errors can be classified into two:

Errors affecting one account
Errors affecting more than one account

The errors in the books of accounts need to be detected and can be rectified in any of the following stages:

Before preparing Trial Balance ( before balancing of books of accounts).
After Trial Balance is prepared but before preparation of Final Accounts.
After preparation of Final Accounts (in the subsequent accounting period).

Before preparing Trial Balance (before balancing of books of accounts):

If the error detected before closing of the books of account influence two accounts, a suitable entry will have to be passed so as to reverse the consequence of the mistake and bring about an acceptable situation.

But if the error is not affecting two accounts i.e. one sided, it may not be possible to pass a rectification journal. Therefore, rectification in such case can be made possible only in the ledger by debiting or crediting the account that has been affected by the error.

After Trial Balance is prepared but before preparation of Final Accounts:

There may remain some errors that could not be detected by the Trial Balance. Such errors may be rectified by transferring the difference to Suspense Account and the Trial Balance is thus artificially made to tally.

If the detected error is affecting two accounts, a suitable entry will have to be passed so as to reverse the consequence of the mistake and bring about an acceptable situation. But if the error is affecting one account, it may be rectified by passing a journal entry through a Suspense Account

After preparation of Final Accounts (in the subsequent accounting period):

Inspite of every religious efforts, sometimes every error may not be detected and the Balance Sheet may be prepared with a Suspense Account either on the Assets side or on the liability side

The errors that remained may be rectified in the subsequent accounting year by careful observations so that the errors committed does not creep up to the other accounts the subsequent year.

Pass Rectification Journal Entries:

The purchase of a Computer for Rs. 25,000.000 was transferred to purchase Journal:
Wages Rs. 5,000.00 paid to laborers in the construction of building were debited to wages Account:
Purchase of Rs. 2500.00 from Mehta & Sons was debited to the Vendor's Account:
Purchase of a Car for the proprietor has been charged to Miscellaneous Expenses Account:
Sale of Rs. 2,000.00 to Malkani was wrongly credited to his Account:
The debit side of the Miscellaneous Expenses A/c was over cast by Rs. 5,000.00:
A purchase of Rs. 500.00 has been posted to the Ledger as Rs. 5,000.00:
Return Inward of Rs. 1,000.00 has not been posted to the Account:
A cheque of Rs. 3,000.00 issued to a creditor has been wrongly debited to Purchases Account:
A credit sale of Rs.500.00 has been credited to Sales Account and also to the Debtors Account:
Rs 580.00 paid for repairing of machinery was charged to Machinery Account as 850.00:
The Purchase Return Book was undercast by Rs. 1,000.00:

1.The purchase of a Computer for Rs. 25,000.000 was transferred to purchase Journal:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Computer A/c - -----------------------------------------------Dr. To purchase A/c (Being the purchase of computer wrongly debited to purchase account now rectified)	-	25,000.00	25,000.00

Explanation:

Purchase of computer cannot be transferred to purchase journal because purchase A/c relates to purchase of goods which is normally meant for resale.

Now, as (Computer) asset is purchased, Computer A/c has to be debited but cash or Vendor's A/c is not credited because as Purchase A/c was debited earlier by mistake, it is now credited. Thus the mistake committed earlier is now rectified.

2. Wages Rs. 5,000.00 paid to laborers in the construction of building were debited to wages Account:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Building A/c - ------------------------------------------------Dr. To Wages A/c (Being wages paid for construction of building wrongly debited to wages A/c now rectified)	-	5,000.00	5,000.00

Explanation:

Normally when wages are paid wages A/c is debited and Cash A/c is credited. But as wages paid for construction of building was earlier debited to wages A/c by mistake, it is now rectified and as such Wages A/c is credited and building A/c is debited. Thus reversing the consequences of the mistake committed.

3. Purchase of Rs. 2500.00 from Mehta & Sons was debited to the Vendor's Account:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Suspense A/c A/c - -----------------------------------------------Dr. To Mehta & Sons A/c (Being credit purchase wrongly debited to Vendor's A/c now rectified)	-	5,000.00	5,000.00

Explanation:

It is a case of credit purchase where the vendors should have been credited signifying increase in liability with the credit purchase so made. But as the Vendor's A/c have been debited wrongly, in the process of rectification; the Vendor's A/c is now credited with the double amount and suspense account is debited as because the purchase of commodity is not known specifically.

4. Purchase of a Car valued Rs. 2,50,000.00 for the proprietor has been charged to Miscellaneous Expenses Account:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Drawings A/c - -----------------------------------------------Dr. To Miscellaneous Expenses A/c (Being purchase of car for proprietor's personnel use wrongly debited to Miscellaneous Expenses A/c now rectified)	-	2,50,000.00	2,50,000.00

Explanation:

Normally, when money is withdrawn from business for personal use of the proprietor, Drawings A/c is debited and Cash A/c is credited. But as Miscellaneous Expenses Account was wrongly debited earlier, it is now credited and thereby rectifying the mistake committed earlier.

5. Sale of Rs. 2,000.00 to Malkani was wrongly credited to his Account:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Malkani A/c- -----------------------------------------------Dr. To Suspense A/c (Being sales made to Malkani wrongly credited to his account now rectified)	-	2,000.00	2,000.00

Explanation:

Whenever any sale is made (Cash/credit) Sales A/c is credited. In case of cash sale, cash A/c is to be debited and in case of credit sale, purchaser's A/c is to be debited. But here, as Malkani's A/c was wrongly credited; so now his (Malkani A/c) is debited and suspense A/c is credited suspense account is debited as because the sale of commodity is not known specifically.

6.The debit side of the Miscellaneous Expenses A/c was over cast by Rs. 5,000.00:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Suspense A/c - -----------------------------------------------Dr. To Miscellaneous Expenses A/c (Being the overcastting of the debit side of the Miscellaneous Expenses A/c now rectified)	-	5,000.00	5,000.00

Explanation:

Normally all expenditures made are debited. But here it is the case of overcastting of Expenditure. So Miscellaneous Expenses Account is credited and suspense Account is debited as the head of expenditures from where the amount of Rs 5,000.00 has been shown as overcast is not known specifically.

7.A purchase of Rs. 500.00 has been posted to the Ledger as Rs. 5,000.00:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Vendor's A/c - -----------------------------------------------Dr. To Suspense A/c (Being purchase of Rs. 500.00 wrongly posted to the ledger as Rs. 5,000.00 now rectified)	-	4,500.00	4,500.00

Explanation:

Whenever any purchase is made, Purchase A/c is debited. In case of Cash purchase, Cash A/c is credited and in case of credit purchase, Vendor's A/c is credited. Here as the Ledger is wrongly posted as Rs. 5,000.00, the amount of Rs. 4,500.00 that has been posted in excess has now been adjusted by debiting Vendor's A/c and Suspense A/c is credited as the commodity purchased is not known.

8.Return Inward of Rs. 1,000.00 has not been posted to the Account:

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Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Return Inward A/c - -----------------------------------------------Dr. To Debtor's A/c (Being sales return of goods not recorded earlier now taken into account)	-	1,000.00	1,000.00

Explanation:

In case of credit Sales, sales A/c is normally credited and Debtor's Ac/ is debited. But, in case of sales return, it is just the opposite - Return Inward A/c or Sales Return A/c is debited and the Debtor's A/c is credited.

9. A cheque of Rs. 3,000.00 issued to a creditor has been wrongly debited to Purchases Account:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Sundry Creditors A/c - -----------------------------------------------Dr. To Purchases A/c (Being sales return of goods not recorded earlier now taken into account)	-	3,000.00	3,000.00

Explanation:

Whenever any payment is made to a creditor, it signifies decrease in liability and as such Creditors A/c is debited. But, instead of Bank A/c, Purchases A/c is credited because earlier by mistake Purchases A/c was debited which had to be rectified. Thus by crediting Purchases A/c, the mistake committed earlier is now rectified.

10. A credit sale of Rs.500.00 has been credited to Sales Account and also to the Debtors Account:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Debtors A/c - -----------------------------------------------Dr. To Suspense A/c (Being credit sale of Rs. 500.00 wrongly credited to sundry debtors account now rectified)	-	1,000.00	1,000.00

Explanation:

In case of credit Sales, sales A/c is normally credited and Debtor's A/c is debited with the amount of sale made. But as the debtors A/c has been wrongly credited, it signifies that the current position of the total value Sundry Debtors has been decreased. But in reality, the value of Sundry Debtors should increase to the extent of the amount of credit sale made. So rectify the mistake committed earlier, Debtors A/c has been debited with the amount double of the sale made and suspense A/c is credited as because the sale of commodity is not known specifically. Thus the rectification entry with double the amount of Sale made reverses the consequences of the mistake committed.

11. Rs 580.00 paid for repairing of machinery was charged to Machinery Account as 850.00

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Repairs to Machinery A/c- -----------------------------------------------Dr. Suspense A/c------------------------------------------Dr. To Machinery A/c (Being repairing charges of machinery wrongly charged to machinery account as Rs 850.00 now rectified.)	-	580.00 270.00	850.00

Explanation:

Normally in case of repair of any fixed asset, Repairs A/c is to be debited with the amount of repairs made and the concerned Asset A/c is to be credited with the same amount of repair. But as the concerned asset is not detected specifically, it is adjusted by debiting Suspense A/c with the excess amount so debited.

12. The Purchase Return Book was undercast by Rs. 1,000.00:

Date	Particulars	L/F	Amount(Dr.)	Amount(Cr.)
-	Suspense A/c- -----------------------------------------------Dr. To Purchase Return A/c (Being the amount of under casting of purchase account now rectified)	-	1,000.00	1,000.00

Explanation:

Normally all purchases made are debited and as such any purchase return is normally credited. But here it is the case of under casting of purchase return i.e. the purchase return book has not been credited with the amount to the extent of Rs. 1,000.00. So, Purchase Return A/c is credited and Suspense Account is debited as the return of goods is not specifically stated.

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