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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-28
RECTIFICATION OF ERROR
In financial accounting, every single event occurring in monetary terms is recorded. Sometimes, it just so
happens that some events are either not recorded or it is recorded in the wrong head of account or wrong
figure is recorded in the correct head of account.
Whatever the reason may be, there is always a chance of error in the books of accounts. These errors in
accounting require rectification. The procedure adopted to rectify errors in financial accounting is called
"Rectification of error".
HOW TO RECTIFY THESE ERRORS
One way of rectification is that we can simply erase or overwrite the incorrect entry and replace it with the
correct one. But this practice is not allowed in accounting. We have to Rectify / correct the mistake by
recording another entry.
TYPES OF ERRORS
Before going to the rectification process, let's first see the different kinds of errors that can appear in our
books of accounts:
ERROR OF OMISSION
One of the most common errors is that an event escapes recording. This means that an event occurred but
we did not record it. For example, we discussed about bank charges being deducted by banks without our
knowledge or our payments made by banks on our standing orders etc. There can be other reasons as well.
Such errors are called ERRORS OF OMISSION.
ERROR OF COMMISSION
Then, there is a chance that the event is classified and recorded correctly but within wrong classification of
account. For example, a payment to Mr. A, who is a debtor, is recorded in the account of Mr. B, who is also
a debtor. Now the classification is correct but entry is posted in the wrong account. Such errors are called
ERRORS OF COMMISSION.
ERROR OF PRINCIPLE
Then there are errors in which an entry is recorded in the wrong class of account. For example a purchase of
fixed asset, say, a vehicle is recorded in an expense account. These errors are called ERRORS OF
PRINCIPLE.
ERROR OF ORIGINAL ENTRY
The errors in which recording is in correct account but the figure is incorrect are called ERRORS OF
ORIGINAL ENTRY. For example, a receipt of Rs. 50,000 from a debtor is recorded as Rs. 5,000 in his
account.
REVERSAL OF ENTRY
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Financial Accounting (Mgt-101)
VU
Then, there are errors in which the entry is reversed by mistake. This means that the account that should
have been debited is credited and vice versa. These errors are called REVERSAL OF ENTRY.
RECTIFYING THE ERRORS
Now, we will rectify all these types of entries:
ERROR OF OMISSION
This is the easiest error to rectify. You have to record the entry that was omitted by mistake. It is important
to note here that the rectifying entry will be posted on the date on which the error was discovered. But we
will give a note in the narration of the voucher that the event took place on such date.
Example
A purchase of Rs. 5,000 from ABC on April 15, was omitted by mistake
Rectification Entry on the date of discovery:
Debit:
Purchase Account
15,000
Credit:
ABC Account
15,000
Narration:
Rectification of omission of recording purchase to ABC on April 15.
ERRORS OF COMMISSION / ERROR OF PRINCIPLE
In both these cases, the effect given to incorrect account is reversed and effect is given to the correct
account.
Example
Purchase of an asset for Rs. 20,000 is recorded in the expense account.
Rectification:
Debit:
Asset Account
50,000
Credit:
Relevant Expense Account
50,000
Narration: Rectification of purchase of asset incorrectly recorded as expense.
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Financial Accounting (Mgt-101)
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ERROR OF ORIGINAL ENTRY
If the entry recorded is of lesser amount than the required amount, then an entry of the balance amount is
passed. On the other hand, if the entry recorded is of a greater amount than the required amount, a reverse
entry is passed of the balance amount that cancels the effect of the error.
Example
1)
A receipt of cash Rs. 5,000 from B is recorded as Rs. 500
2)
A receipt of cash Rs. 5,000 from B is recorded as Rs. 50,000
Rectification
In the first instance, the recorded figure is less by Rs. 4,500. The rectification entry will, therefore, be:
Debit:
Cash Account
4,500
Credit:
B Account
4,500
In the second instance, the recorded figure exceeds by Rs. 45,000 from the desired figure. The rectification
will, therefore, be a reverse entry of Rs. 45,000:
Debit:
B Account
45,000
Credit:
Cash Account
45,000
REVERSAL OF ENTRY
If a reverse entry is recorded by mistake, then two entries are required to rectify it, one to reverse the effect
of mistake and the other to record correct entry or we can pass one entry with double amount that serves the
purpose of both the entries.
Example
A payment of Rs. 10,000 made to Mr. D is recorded on the receipt side of the cash book and credit is given
to D's account.
Rectification
We can correct this mistake by two entries:
Debit:
Mr. D Account
10,000
Credit:
Cash Account
10,000
This will reverse the effect of mistake:
Debit:
Mr. D Account
10,000
Credit:
Cash Account
10,000
And this will record the transaction correctly:
Or
We can record it through one entry:
Debit:
Mr. D Account
20,000
Credit:
Cash Account
20,000
Based on our above discussion, we can devise a general procedure for rectification of errors.
Take another example, assume that we received cash Rs. of 50,000 from a debtor and instead of Debiting the
Cash Book / Cash Account, we debited the Bank Book whereas the credit was given to the correct account.
Step 1: Note down the correct entry
Debit
Cash
50,000
Credit
Creditors
50,000
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Financial Accounting (Mgt-101)
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Step 2: Note down the incorrect entry
Debit
Bank
50,000
Credit
Creditors
50,000
Step 3: See that Credit affect is correct. In case of Debit, affect has been given to Bank instead of cash.
Therefore we will give the due affect to Cash by debiting it and Remove the incorrect affect from bank by
crediting it.
Debit
Cash Account
50,000
Credit
Bank Account
50,000
ILLUSTRATION
Rectify the following errors:
1. A cheque issued of Rs. 50,000 to Mr. A(Creditor), but the credit was given to cash account.
2. Purchase of goods from Mr. B worth of Rs. 5,500 was recorded at Rs. 4,500.
3. Cash sale to Mr. C worth of Rs. 10,000 was debited to sale account and credited to cash
account.
4. Repair of vehicle worth of Rs. 5,000 was charged to asset account.
5. A cheque of Rs. 15,000 received and deposited in bank from Mr. D, but no entry was passed.
SOLUTION
Entry # 1
Correct Entry
Debit:
Mr. A (Creditor) A/C
50,000
Credit:
Bank A/C
50,000
Incorrect Entry passed
Debit:
Mr. A (Creditor) A/C
50,000
Credit:
Cash A/C
50,000
Rectifying Entry
Debit:
Cash A/C
50,000
Credit:
Bank A/C
50,000
Entry # 2
Correct Entry
Debit:
Purchase A/C
5,500
Credit:
Mr. B's A/C
5,500
Incorrect Entry passed
Debit:
Purchase A/C
4,500
Credit:
Mr. B's A/C
4,500
Rectifying Entry
Debit:
Purchase A/C
1,000
Credit:
Mr. B's A/C
1,000
Entry # 3
Correct Entry
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Financial Accounting (Mgt-101)
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Debit:
Cash
10,000
Credit:
Sale A/C
10,000
Incorrect Entry passed
Debit:
Sale A/C
10,000
Credit:
Cash
10,000
Rectifying Entry
Debit:
Cash
20,000
Credit:
Sale A/C
20,000
Entry # 4
Correct Entry
Debit:
Repair A/C
5,000
Credit:
Cash A/C
5,000
Incorrect Entry passed
Debit:
Asset (vehicle) A/C
5,000
Credit:
Cash A/C
5,000
Rectifying Entry
Debit:
Repair A/C
5,000
Credit:
Asset (vehicle) A/C
5,000
Entry # 5
Correct Entry
Debit:
Bank A/C
15,000
Credit:
Mr. D's A/C
15,000
Incorrect Entry passed
No entry was passed
Rectifying Entry
Debit:
Bank A/C
15,000
Credit:
Mr. D's A/C
15,000
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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES