Correction of Errors Principles of Accounting B.Com Part I Sameer Hussain

Size: px

Start display at page:

Download "Correction of Errors Principles of Accounting B.Com Part I Sameer Hussain"

Dorcas Howard
5 years ago
Views:

1 Correction of Errors Principles of Accounting B.Com Part I

2 WHAT THE EXAMINER USUALLY ASK? Types of errors: o Error of omission. o Error of commission. o Error of principle. o Compensating error. o Error of original entry. o Reversal of entries Rectification of errors discovered before closing accounts. Rectification of errors discovered after closing accounts. Page 78

3 CORRECTION OF ERRORS CORRECTION OF ERRORS Correcting entries are made to correct the error in the books of account. There are two types of errors: Errors where the trial balance still balances. Error where trial balance does not balances. ERRORS WHERE TRIAL BALANCE STILL BALANCES A transaction has been completely omitted from the accounting Error of Omission: records. For example, a cash purchase of merchandise of Rs.10,000 was not recorded. Error of Commission: Error of Principle: Compensating Error: Error of Original Entry: Reversal of Entries: A transaction has been recorded in the wrong account. For example, salaries expenses of Rs.3,000 has been debited to wages expenses account in error. A transaction has conceptually been recorded incorrectly. For example, building purchase of Rs.100,000 has been debited to the repair expense account rather than building account. Two different errors have been made which cancel each other out. For example, rent expense of Rs.12,000 has been debited to rent expense account as Rs.14,000 and a casting error on the sales account has resulted in sales being overstated by Rs.2,000. The correct double entry has been made but with the wrong amount. For example, cash sale of Rs.3,200 has been recorded as Rs.2,300. The correct amounts have been posted to the correct accounts but on the wrong side. For example, cash sales of Rs.20,000 has been debited to sales and credited to cash. ERRORS WHERE TRIAL BALANCE DOES NOT BALANCES A debit entry has been made but no credit entry or vice versa. Debit entry is made with different amount and credit entry is made with different amount. Debit and credit both are made on the same side. If the debits of trial balance do not agree with the credits of trial balance, then suspense account is used to correct the difference. STEPS TO CORRECT ERROR. Page 79

4 examples Error of Omission: A cash purchase of merchandise of Rs.10,000 was not recorded. No entry Purchases 10,000 Dr. Cash 10,000 Cr. Purchases 10,000 Dr. Cash 10,000 Cr. Error of Commission: Salaries expenses of Rs.3,000 has been debited to wages expenses account in error. Wages expenses 3,000 Dr. Cash 3,000 Cr. Salaries expenses 3,000 Dr. Cash 3,000 Cr. Salaries expenses 3,000 Dr. Wages expenses 3,000 Cr. Error of Principle: Building purchase of Rs.100,000 has been debited to the repair expense account rather than building account. Repair expenses 100,000 Dr. Cash 100,000 Cr. Building 100,000 Dr. Cash 100,000 Cr. Building 100,000 Dr. Repairs expense 100,000 Cr. Compensating Error: Rent expense of Rs.12,000 has been debited to rent expense account as Rs.14,000 and a casting error on the sales account has resulted in sales being overstated by Rs.2,000. Rent expenses 14,000 Dr. Cash 12,000 Cr. Cash 10,000 Dr. Sales 12,000 Cr. Rent expenses 12,000 Dr. Cash 12,000 Cr. Cash 10,000 Dr. Sales 10,000 Cr. Sales 2,000 Dr. Rent expenses 2,000 Cr. Error of Original Entry: Cash sale of Rs.3,200 has been recorded as Rs.2,300. Cash 2,300 Dr. Sales 2,300 Cr. Cash 3,200 Dr. Sales 3,200 Cr. Cash 900 Dr. Sales 900 Cr. Reversal of Entries: Cash sales of Rs.20,000 has been debited to sales and credited to cash. Cash 20,000 Dr. Sales 20,000 Cr. Sales 20,000 Dr. Cash 20,000 Cr. Cash 40,000 Dr. Sales 40,000 Cr. Page 80

5 ILLUSTRATION # 1: (Errors Discovered in the Same Year) 1997 Regular & Private BIEK Pass Journal Entries with full narration to rectify the following errors before closing the accounts:- (a) Purchase of an office table amounting to Rs.1,600 has been entered as office equipment. (b) Sales return of Rs.550 from a customer has been debited to sales discount account. (c) Withdrawal by the proprietor of Rs.500 has been debited to General expense account. (d) Payment to technicians for installation of computer Rs.1,500 has been debited to repairs Expense account. (e) Receipt of Rs.600 from Rana and Company, a customer, has been recorded in the account of Rani and Company. (f) Old office furniture sold for Rs.750 has been recorded as Rs.720 in furniture account wrongly. (g) Machinery repairs payment Rs.200 has been debited to Machinery account. (h) Construction as addition of office building for Rs.50,000 was wrongly debited to building repairs account. (i) Purchase of stationary for Rs.1,200 has been recorded as purchases. SOLUTION # 1: M/S. CORRECTING ENTRIES Date Particulars P/R Debit Credit 1 Office furniture 1,600 Office equipment 1,600 (To correct the office equipment account) 2 Sales return and allowances 550 Sales discount 550 (To correct the sales discount account) 3 Drawings 500 General expense 500 (To correct the general expense account) 4 Equipment 1,500 Repairs expense 1,500 (To correct the repairs expense account) 5 Accounts receivable (Rani and Company) 600 Accounts receivable (Rana and Company) 600 (To correct the customer receivable account) 6 Cash 30 Office furniture 30 (To correct the office furniture account) 7 Repairs expense 200 Machinery 200 (To correct the machinery account) 8 Building 50,000 Repairs expense 50,000 (To correct the repairs expense account) 9 Supplies 1,200 Purchases 1,200 (To correct the purchases account) Page 81

6 ILLUSTRATION # 2: (Errors Discovered in the Next Year) 2008 Regular UOK The following errors were made during the year 2007 & were discovered in 2008: (a) Purchase of equipment for Rs.250,000 was debited to repairs expense account in error. Because of this error, depreciation on equipment Rs.20,000 could not be recorded. (b) Credit purchase of merchandise of Rs.170,000 was not recorded in 2007 although the goods were received and included in the ending inventory of (c) Merchandise of Rs.180,000 purchased in the month of December 2007 & included in the ending inventory of 2007, but the purchase was recorded on January 5, (d) Ending inventory of 2007 was understated by Rs.5,000. Pass correcting entries in General Journal entries in the year SOLUTION # 2: M/S. CORRECTING ENTRIES Date Particulars P/R Debit Credit 1 Equipment 250,000 Profit & loss account 250,000 (To correct the purchase of equipment) 2 Profit & loss account 20,000 Allowance for depreciation Equipment 20,000 (To correct the depreciation on equipment) 3 Profit & loss account 170,000 Accounts payable 170,000 (To correct the purchase of merchandise on account) 4 Profit & loss account 180,000 Purchases 180,000 (To correct the purchases recorded in 2008) 5 Merchandise inventory 5,000 Profit & loss account 5,000 (To correct the overstatement of ending inventory) Page 82

7 Practice questions Question # 1: 1991 Regular & Private UOK The following errors were made during the current year and were discovered before closing the books of account: (1) Depreciation Expense on building was overcharged by Rs.1,500. (2) Purchase of Merchandise of Rs.3,000 was debited to Office Supplies. (3) Accrued Advertising Expense of Rs.4,500 was overlooked. (4) Sales Returns of Rs.6,000 were charged to Purchase account. (5) Accrued Commission Income of Rs.7,500 was overlooked. Rectifying Entries in General Journal. Question # 2: 1997 Regular UOK Following errors were made by the bookkeeper of Munshi & Co. for the month of Nov. 1997:- (1) Sale of old furniture Rs.1,000 has been entered as sale of merchandise. (2) Received a cheque from Arshad & Co. for Rs.4,444/= but wrongly posted to Rashid & Co. (3) Usman, a customer, paid Rs.4,500 but entered in his account as Rs.5,400. (4) Earned and received Rs.750 as commission but recorded as Rs.705. (5) The proprietor has taken away merchandise worth Rs.500 for his personal use but the entry was entirely omitted. Pass journal entries to correct the above errors on 30 th November, Question # 3: 2008 Regular UOK The following errors/omissions were made during 2007 & were discovered before closing the books of accounts: (i) Sales return of Rs.16,000 was charged to purchase. (ii) Outstanding advertising expense were overlooked Rs.45,000. (iii) Rs.150,000 spent for extension of building was debited to building repairs account. (iv) Prepaid salary of Rs.10,000 was included in salary expense account. (v) Accrued rent income of Rs.15,000 was overlooked. Pass rectifying entries in General Journal. Question # 4: 2011 Regular UOK The following errors were made during the current year and were discovered before closing the books of accounts: 1) Accrued advertising expense of Rs.5,000 was overlooked. 2) Return of goods of Rs.1,500 by Shakeel was entered in error in Raheel s account. 3) Cash drawings of Rs.4,000 was credited to the bank of the cash book. 4) Repairs to machinery of Rs.3,000 was charged to machinery account. Rectify entries in General Journal. Question # 5: 2012 Regular UOK The following errors were made during 2011 & were discovered before closing of the books of accounts of Mansoor Co.: (i) Sales return of Rs.5,000 was charged to purchase account. (ii) Rs.75,000 spent for the extension of building was debited to building repairs account. (iii) Outstanding advertising expense was overlooked Rs.20,000. (iv) Prepaid salary of Rs.48,000 was included in salary expense account. Pass rectifying entries in General Journal. Page 83

8 Question # 6: 2012 Private UOK The following errors/omissions were made during 2011 & were discovered before closing of books of accounts: 1. Purchase return of Rs.20,000 was charged to sales return. 2. Outstanding advertising expenses were overlooked Rs.60, Rs.50,000 spent for building repairs the extension of building was debited to building a/c. 4. Prepaid salary of Rs.15,000 was included in salary expense account. 5. Accrued rent income of Rs.25,000 was overlooked. Pass rectifying entries in General Journal. Question # 7: 1991 Regular & Private UOK The following errors were made during 1989 and were discovered during 1990: (1) Ending Inventory was overstated by Rs.9,000. (2) Merchandise of Rs.8,000 purchased in the month of December 1989 and included in the Ending Inventory of 1989, but the Purchase was recorded on January 21, 1990 in the Purchase Journal of (3) Credit Purchase of Rs.7,000 was not recorded in 1989 although the goods were received and included in the Inventory of (4) Cost of machine amounting to Rs.25,000 was debited to Repairs Expense account in error. Because of this error Depreciation of Rs.5,000 on machine could not be recorded. Correcting Entries in General Journal that are required in Question # 8: 2011 Regular UOK The following errors were made during the year 2009 and were discovered during 2010: 1) Ending inventory was overstated by Rs.10,000. 2) Credit purchase of Rs.8,000 was not recorded in 2009 although goods were received and included in the inventory of ) Additional investment by owner of Rs.100,000 was credited to sales account. 4) Goods taken out for owner s use Rs.7,000 was debited to general expenses account. Rectify entries in General Journal. Question # 9: 2008 Private UOK The book keeper of Amen Company prepared the income statement of the company which revealed: Cost of goods sold 200,000 Net income 80,000 The company s auditor detected the following errors: (1) Ending merchandise inventory was overstated by Rs.6,000. (2) Sales return of Rs.2,000 were charged to purchase. (3) Sales included Rs.7,000 of advance from customers. (4) A sale of equipment for Rs.3,000 was credited to sales account, book value of equipment was Rs.4,000. (5) Office supplies of Rs.200 were on hand whereas the office supplies showed a debit balance of Rs.1,000. (i) Prepare a statement showing the amount that should be added to or deducted from cost of goods sold and net income so as to arrive at their correct figures. (ii) Assuming the books have not been closed, give the necessary correcting entries. Page 84

Chapter # 9. Correction of Errors. Principles of Accounting XI. Sameer Hussain.

Chapter # 9. Correction of Errors. Principles of Accounting XI. Sameer Hussain. Correction of Errors Principles of Accounting XI Chapter contents Correction of errors. Errors where trial balance still balances: o Error of omission. o Error of commission. o Error of principle. o Compensating