CHAPTER- 12

RECTIFICATION OF ERRORS

Sr. Lecture video

Course Outline Topics
No
1 Types of Errors 106
Errors that do not cause any difference in Trial 107
2
Balance
3 Errors that do cause a difference in Trial Balance 108
4 Practice - Trial balance agreement 109
5 Practice - Suspense account 110 and 111
6 Practice - Calculation of Adjusted Profit 112
7 Practice - Calculation of Working Capital 113
8 Capital and Revenue 114

Topic videos 106-114 are mandatory part of this module

Types of errors
While performing functions of financial accounting i.e., classifying, recording, posting and reporting, there
could be some instances of errors and omissions in the presence of which the financial statements do not
present reliable and fair results of the economic phenomena of the entity. These errors and omissions
need to be corrected according to the accounting rules so that the financial performance and position of
the entity is reliable and fairly presented.
These errors and omissions are widely split into two categories:
1. Those errors that do not cause a difference in trial balance agreement
2. Those errors that do cause a difference in trial balance agreement.
1. Errors that do not cause any difference in trial balance
Sr. # Reasons of Error Rectifying Entry
a) Error of omission
When financial information is completely omitted for
Debtors a/c Dr. 1,000
recording in the books of original entry e.g. sales invoice of
Sales a/c Cr. 1,000
Rs.1,000 issued before closing date but not recorded in the
books of original entry.
b) Error of commission
When correct accounting effect (Dr/Cr) is given in the
wrong accounting head but the main head remains correct
e.g. purchase of computer Rs.5,000 for office was wrongly Computer a/c Dr 5,000
debited to the furniture account. (both accounts belong to Furniture a/c Cr 5,000
the same main head; Assets)
This error will have no effect (positive or negative) on
financial position as well as financial performance.
Error of principle
c)
When correct accounting effect (Dr/Cr) is given in the
wrong accounting head as well as the wrong main head e.g.
purchase of computer Rs.5,000 for office was wrongly
Computer a/c Dr 5,000
debited to the stationery account. (both accounts belong to
Stationary a/c Cr 5,000
different main heads, like computer belongs to Asset and
stationery belongs to Expense)
This type of error will cause a difference in financial
performance (net profit) and/or financial position (Asset =
Owners’ equity + Liability)
Error of principle occurs because of wrong decision about
capital and revenue nature at the time of recognizing
accounting heads.
d) Error of original entry Debtors a/c Dr 270
When correct accounting entry is recorded in the books of Bad debts a/c Cr 270
accounts but the amount in both accounting effect (Dr &
Cr) is wrong although the amount is same e.g. debtors to
be written off for Rs. 250 as bad debts were recorded in the
correct accounts but the amount was posted in both
accounts was Rs. 520, causing a difference of Rs. 270 in
both sides. It is also known as transposition error.
e) Compensating error Capital a/c Dr 200
Rent expense a/c Dr 60
When the sum of more than one errors cancels the
Sales a/c Cr 260
accounting effect of each other e.g. sales were less credited
with Rs. 260 and at the same time opening balance of
capital account was brought forward with an amount that
is Rs. 200 more than the correct amount and Rent expense
owing of Rs. 60 was although credited to rent payable
account but was not debited to the rent expense.
2. Errors that do cause a difference in trial balance
Suspense account error
Whenever there is a difference in the trial balance, such amount of difference shall be named as
suspense account. Suspense account is used to make both sides of trial balance equal.
Trial Balance
Particulars Dr. (Rs) Particulars Cr. (Rs)

Assets 65,000 Capital 40,000

Expenses 13,000 Sales 100,000

Purchases 80,000 Liabilities 25,000

Drawings 2,500 Provisions 3,000

160,500 168,000

In the above trial balance credit side is heavier than debit side by Rs. 7,500. In order to balance
the trial balance, Rs.7,500 will be included in debit side as Suspense Account.
Trial Balance
Particulars Dr. (Rs) Particulars Cr. (Rs)
Assets 65,000 Capital 40,000

Expenses 13,000 Sales 100,000

Purchases 80,000 Liabilities 25,000

Drawings 2,500 Provisions 3,000

Suspense a/c 7,500

168,000 168,000

Possible reasons for difference in the Trial Balance

Sr. # Reasons of Error Rectifying Entries
a) Under/over casting of a ledger account maintained in main
ledger e.g. Sales a/c Dr 200
• sales income account was over-cast by Rs. 200 Suspense a/c Cr 200

• sales income account was under-cast by Rs. 500 Suspense a/c Dr 500
(it will affect trial balance only) Sales a/c Cr 500

b) Omission of a balance from trial balance e.g. balance of bad

debts account Rs. 700 (already correctly accounted for) is Bad debts a/c Dr 700
not appearing in the trial balance. Suspense a/c Cr 700
(it will affect trial balance only)

c) Balance representing an account appearing in trial balance

with less or excess (wrong) amount e.g. Building a/c Building a/c Dr 630,000
balance c/f Rs. 700,000 erroneously was appearing in the Suspense a/c Cr 630,000
Trial Balance with Rs. 70,000
(it will affect trial balance only)
d) An account was given debit effect instead of credit effect
(causing difference with double amount) e.g. Sales of Rs. Suspense a/c Dr 1,600
800 on credit was correctly debited in Debtors a/c but was Sales a/c Cr 1,600
also debited to sales a/c mistakenly.

e) A ledger account was given credit effect instead of debit

effect (causing difference with double amount) e.g. Sales of Debtors a/c Dr 1,600
Rs. 800 on credit was correctly credited in Sales a/c but was Suspense a/c Cr 1,600
also credited in debtors’ a/c mistakenly.

f) Single accounting effect, either Dr or Cr was

recorded/posted in the books of account e.g. Sales of Rs. Debtors a/c Dr 800
800 on credit was posted in Sales a/c only Suspense a/c Cr 800

g) One of the accounting effects was recorded with wrong

amount e.g. Sales of Rs. 800 on credit was correctly Debtors a/c Dr 720
credited in Sales a/c but was wrongly debited to debtors’ Suspense a/c Cr 720
a/c with Rs. 80 only
Practice 12.1
Anjum has extracted following balances from her books of accounts. She has forgotten to extract the
balance from the discounts allowed account. What is the balance?

Accounting Heads Rs.

Plant and machinery 95,000
Property 135,000
Inventory 6,400
Payables 3,600
Receivables 2,850
Bank overdraft 970
Loan 45,000
Capital 100,000
Drawings 32,000
Sales 362,000
Purchases 156,000
Purchase returns 2,200
Discounts allowed ?
Discounts received 3,500
Sundry expenses 82,500

Accounting Heads Debit – Rs. Credit – Rs.

Plant and machinery 95,000
Property 135,000
Inventory 6,400
Payables 3,600
Receivables 2,850
Bank overdraft 970
Loan 45,000
Capital 100,000
Drawings 32,000
Sales 362,000
Purchases 156,000
Purchase returns 2,200
Discounts allowed ?
Discounts received 3,500
Sundry expenses 82,500
Total 509,750
Difference in Trial Balance (Discount allowed) 7,520

Total 517,270 517270

Practice 12.2

A trial balance has been extracted and a suspense account opened. One error relates to the mis-posting of
an amount of Rs.200, being discounts received from suppliers. This was recorded on the wrong side of the
discounts account.
What will be the correcting journal entry?
Suspense account Dr. 400
Discount allowed Cr. 200
Discount received Cr. 200

Practice 12.3

Layla has recorded a payment of Rs.880 for repairs of the company van from the bank. The correct entry
was made to the bank account but no other entries were made.
What would be the journal entry to correct this error?
Van repair account Dr. 880
Suspense account Cr. 880

Practice 12.4

Dazy recorded an amount of Rs.3,000 for rent. Both the rent account and the bank account were debited.
What would be the journal to correct this error?
Suspense account Dr. 6,000
Bank account Cr. 6,000

Practice 12.5

Tipu’s trial balance at 31 October 20X9 is out of agreement, with the credit side totaling Rs.1,610 less than
the debit side. Upon investigation, the following errors were discovered:
1. Debit side of the purchases account for October had been overcast by Rs.1,050.
2. Rent expense of Rs.240 had been debited to the rent income account.
3. The provision for doubtful debts, which was increased by Rs.280, had been recorded in the
provision for doubtful debts account as a decrease.
Following the correction of these errors, the balance on the suspense account would be:

Suspense Account
Particulars Debit Particulars Credit
Rs. Rs.
20X9 20X9
Purchase account over-cast 1,050 Difference b/f from TB 1,610
Provision for doubtful debts 560

Balance NIL

1,610 1,610
Practice 12.5

Rosy paid Rs. 500 for office cleaning in cash. She made the following accounting entry in her books:
Trade payables Dr. 500
Cleaning expenses Cr. 500

What will be rectifying journal entry?

Cleaning expense Dr. 1,000

Trade payable Cr. 500
Cash account Cr. 500
Important Tips to Remember (ITTR)
1. In certain circumstances, after rectifying all possible errors, there remains an unidentified
balancing difference in the rectifying accounting entry; such effect (Dr./Cr.) shall be given to the
suspense account.
2. In the questions of suspense account, sales book and purchases book are considered as Sales a/c
and Purchases a/c respectively. Whereas, the correct concept is that sales book is a book of
original entry and sales account is nominal ledger account representing revenue of the entity.
Casting error in a book of original entry would have two-fold effects whereas, casting error in a
nominal ledger account would have single effect accompanying with suspense account as
balancing effect.
3. If, in a rectifying entry, any nominal accounting head, relating to Income Statement (Expense and
Income) is given debit effect, it would cause a decrease in the net profit. And if credit effect is
given, then there would be an increase in net profit figure that was previously calculated in
presence of errors.
Profit and Loss Adjustments
Rs.
Profit before rectification of error **
+ Nominal a/c credited in rectifying entry **
- Nominal a/c debited in rectifying entry (* *)
Adjusted Net Profit ***
4. If in a rectifying entry an account relating to current assets or current liabilities is given debit
effect it would cause an increase in working capital. And if credit effect is given to any current
asset or current liability, it would cause a decrease in working capital.
Working Capital = Current Assets – Current Liabilities.
5. When Dr. side of Trial balance exceeds its Cr. Side the difference (named as suspense a/c)
appearing in Cr. side is transferred to Cr. Side of Suspense A/c and vice versa.
6. Suspense a/c balance should be eliminated after rectification of all errors, but where some
balance remains untraced in the Suspense A/c and it gives a closing balance, such balance
whether Dr. or Cr. Should be closed in income statement and should never be carried forward in
Statement of Financial Position (Balance Sheet) as asset or liability.
7. Concept of Capital and Revenue – Expenditure/Receipts should be taken care while recognizing
accounting heads as Dr. or Cr.
o Capital expenditure – Asset
o Revenue expenditure – Expense
o Capital receipt – Liability or Owners’ Equity
o Revenue receipt – Income
Capital Revenue Capital Revenue
Expenditure Expenditure Receipt Receipt
1. Purchase of car ★
2. Repair of car ★
3. Purchase of computer ★
4. Installation of software ★
5. Purchase of USB for data transfer ★
6. Receipt of Loan from bank ★
7. Receipt of service fee ★
8. Construction of store room ★
9. Rent of store room ★
10. Wages for machine operator ★
Error that takes place because of wrong decision about the nature of accounting head; capital or
revenue is known as error of principle.
MCQs

1. Which ONE of the following is an error of principle?

A. A gas bill credited to the gas account and debited to the bank account
B. The purchase of a non-current asset credited to the asset at cost account and debited
to the supplier's account
C. The purchase of a non-current asset debited to the purchases account and credited to
the supplier's account
D. The payment of wages debited and credited to the correct accounts, but using the
wrong amount
2. Which one of the following journals is correct according to its narrative?
Debit Credit
Rs. Rs.
A. Sarfraz personal account 100,000
Directors' remuneration 100,000
Bonus allocated to account of managing director (Mr Sarfraz)

B. Purchases 14,000
Wages 24,000
Repairs to buildings 38,000
Transfer of costs of repairs to buildings carried out by company employees using
materials from inventory

C. Discounts allowed 2,800

Discounts received 2,800
Correction of error: discounts allowed total incorrectly debited to discounts
received account.

D. Suspense account 20,000

Rent income 10,000
Rent expense 10,000
Correction of error: rent received credited in error to rent expense account.
3. A trial balance extracted from a sole trader's records failed to agree, and a suspense account was
opened for the difference. Which of the following errors would require an entry in the suspense
account in correcting them?
1. Discount allowed was mistakenly debited to discount received account.
2. Cash received from the sale of a non-current asset was correctly entered in the cash
book but was debited to the disposal account.
3. The balance on the rent account was omitted from the trial balance.
4. Goods taken from inventory by the proprietor had been recorded by crediting
drawings account and debiting purchases account.
A. All four items
B. 2 and 3 only
C. 2 and 4 only
D. 1 and 3 only
4. A trial balance shows a total of debits of Rs.347,800 and a total of credits of Rs.362,350.
After adjusting for the following errors, what is the balance on the suspense account?
1. A credit sale of Rs.3,670 was incorrectly entered in the sales day book as Rs.3,760.
2. A non-current asset with a carrying value of Rs.7,890 was disposed of for Rs.9,000.
The only accounting entry was to debit cash.
3. The provision for doubtful debts was increased from Rs.8,900 to Rs.10,200. The
allowance account was debited in error.
A. Rs.26,150 debit
B. Rs.26,060 debit
C. Rs.26,240 debit
D. Rs.2,950 credit
Explanation:
1. There will be no effect as the error is in the book of original entry that will require
rectification of double entry with same amount
2. Debit suspense account with 9,000 and credit disposal account
3. Difference of 1,300 needs to be credited twice in the provision for doubtful debts
account and debit 2,600 to suspense account.
5. The trial balance of Bab-al-Shams shows total debits of Rs.125,819 and total credits of
Rs.118,251. Which of the following explains the difference in full?
A. Discounts allowed of Rs.3,784 have been shown on the wrong side of the trial balance.
B. Discounts received of Rs.3,784 have been credited to the payables ledger control
account.
C. The sales day book has been undercast by Rs.7,568.
D. An opening accrual of Rs.7,568 has been omitted from the rental expense account.

This information is relevant to the following TWO questions:

A company's draft financial statements for 20X5 showed a profit of Rs.630,000. However, the trial balance
did not agree, and a suspense account appeared in the company's financial statements. Subsequent
checking revealed the following errors:
1. The cost of an item of plant Rs.48,000 had been entered in the cash book and in the
plant account as Rs.4,800. Depreciation at the rate of 10% per year (Rs.480) had
been charged.
2. Bank charges of Rs.440 appeared in the bank statement in December 20X5 but had
not been entered in the company's records.
3. One of the directors paid Rs.800 due to a supplier in the company's payables ledger
by a personal cheque. The bookkeeper recorded a debit in the supplier's ledger
account but did not complete the double entry for the transaction (The Company
does not maintain a payables ledger control account).
4. The payments side of the cash book had been understated by Rs.10,000.
6. Which of the above items would require an entry to the suspense account in correcting them?
A. All four items
B. 3 and 4 only
C. 2 and 3 only
D. 1, 2 and 4 only
7. What would the company's profit become after the correction of the above errors?
A. Rs.634,760
B. Rs.624,760
C. Rs.624,440
D. Rs.625,240
(630,000 – 4,320 depreciation less charged – 440 bank charges not recorded)
8. The draft accounts of GoGo business for the year ended 31 July 20X9 show a profit of Rs.54,250
prior to the correction of the following errors:
1. Cash drawings of Rs.250 have not been accounted for.
2. Bad debts of Rs.420 were not accounted for in the journal.
3. Rental received Rs.300 has been classified as Interest income.
4. A cheque of Rs.200 was received from a customer, but no bookkeeping entries
have yet been made.
What is the correct profit of the business for the year?
A. Rs.53,580
B. Rs.53,830
C. Rs.54,250
D. Rs.55,830
(54,250 – 420 unrecorded bad debts) all other rectifications do not affect business profit.
9. Danish gives a cash discount of Rs.40 to a customer. The discount is credited to the discounts
allowed account.
The effect of recording the discount in this way is that profit will be:
A. correct
B. overstated by Rs.80
C. understated by Rs.80
D. understated by Rs.40
(Discount allowed that is an expense has been given credit effect hence understating profit
with double amount)

10. The book-keeper of High-Hopes was instructed to make a contra entry for Rs.270 between the
supplier account and the customer account for Grey-Ground. He recorded the transaction by
debiting the customer account and crediting the supplier account with RS.270. The business
accounts do not include control accounts.
Which of the following statements is correct?
A. Unless the error is corrected, profit will be over-stated by Rs.540
B. Unless the error is corrected, net assets will be over-stated by Rs.270
C. Unless the error is corrected, net assets will be over-stated by Rs.540
D. The errors should be corrected, but neither the profit nor the net assets are over-
stated
(Income or expense head is not involved. Net effect on assets and liabilities is NIL)