Rectification in the Next Accounting Period

Rectification in the Next Accounting Period :

The method of rectification of errors in the next accounting period depends upon the fact whether the account affected was part of the trading and profit & loss account. If the account affected is not part of the trading and profit & loss account, the rectification is done in the usual manner. However, if error involves an account having its impact on the profit, a Profit & Loss Adjustment Account is opened. While rectifying errors, all nominal accounts are replaced by Profit & Loss Adjustment Account. Profit and Loss Adjustment Account is transferred to capital account of the sole proprietor or partners capital accounts in the case of partnership; In the case of a joint stock company the account is transferred to Profit and Loss Appropriation Account.

(a) Wages of Rs 2,500 paid for the installation of machinery charged to wages account. In the same accounting period, the rectifying entry would be:

Machinery Account Dr. 2,500
To Wages Account 2,500

But if the final accounts have been prepared, the wages account has been closed by transfer to trading account, so the rectifying entry will be:

Machinery Account Dr. 2,500
To Profit and Loss Adjustment Account 2,500

(b) Salaries paid Rs.3,500 posted to wages account in the ledger. In the same accounting period, the rectifying entry would be:

Salaries Account Dr. 3,500
To Wages Account 3,500

But if the final accounts have been prepared, no entry is required to be passed because both the accounts are nominal accounts and the profit has not been affected by the error.

Ascertainment of Correct Profit for the previous period

If in an accounting period, errors affecting nominal accounts take place and they are not detected and rectified before the close of the books of accounts for the period concerned, the profit as revealed by the Profit and Loss Account for the period will be incorrect. The correct profit for the period can be ascertained in the next accounting period after all such errors have been detected and rectified. If the Profit and Loss Adjustment Account reveals a profit, it should be added to the profit, as revealed by the Profit and Loss Account of the previous period to know the correct profit for the previous period. On the other hand, if Profit and Loss Adjustment Account shows a loss, it would be deducted from the profit of the previous accounting period, to ascertain the correct profit for the previous year.

Illustration 5:

The trial balance of M. Mukherjee did not tally on 31.3.2012. The following errors were detected afterwards. Pass the necessary journal entries to rectify the errors and find out the difference in trial balance assuming that all errors have been rectified.

(i) A sum of Rs.600 received from Mathur on 31.3.2012 was entered in the cash book on 2.4.2012.
(ii) Returns inwards book was undercast by Rs. 300.
(iii) The purchase of typewriter for Rs. 25,000 was entered in the purchases day book.
(iv) Wages of workmen engaged in the construction of building amounting Rs.35,000 were debited to wages account.
(v) A purchase of Rs. 2,671 had been posted to the debit of supplier’s account as Rs.2,617.

(vi) Goods amounting to Rs.1,000 had been returned by Raju and were taken into stock, but no entry was passed in the books for the transaction.

(vii)Rs.24,000 paid for purchase of T.V. for proprietors own use had been charged to miscellaneous expense
account.
(viii) A sale of Rs.600 to Sethi was credited to his account with Rs. 60.

(ix) A sale of Rs.2,000 has been passed through the purchases journal.

(x) Rs.75 paid for repairs to furniture had been entered in the total column of petty cash book, but not entered
in the appropriate analysis column, the total of which has been posted.

Solution:

Rectifying Journal Entries

Date	Particulars	Dr. (Rs.)	Cr. (Rs.)
(i)	No further entry required as receipt has already been recorded and no nominal account is ……

(ii)	Returns Inwards A/c Dr.	300
	To Suspense A/c		300
	(Returns inward book was undercast by Rs.300, error now rectified)

(iii)	Typewriter A/c Dr.	25,000
	To Purchases A/c		25,000
	(Typewriter purchased was wrongly passed through purchases day book, error now rectified)

(iv)	Building A/c Dr.	35,000
	To Wages A/c		35,000
	(Wages paid for construction of building was wrongly debited to wages account, error now rectified)

(v)	Suspense A/c Dr.	5,288
	To Supplier’s A/c (Rs. 2,671 + ` 2,617) 5,288		5,288
	(Purchase of ` 2,671 from supplier wrongly debited to his account by ` 2,617, error now rectified)

(vi)	Returns Inwards A/c Dr.	1,000
	To Raju		1,000
	(Goods returned by Raju not entered in the books of account, now entered)

(vii)	Drawings A/c Dr.	14,000
	To Miscellaneous Expenses A/c		14,000
	(Purchase of T.V. for owner earlier charged to miscellaneous expenses account, error now rectified)

(viii)	Sethi (600 + 60) Dr.	660
	To Suspense A/c		. 660
	(Being goods of Rs. 600 sold to Sethi wrongly credited to his account for ` 60, error now rectified)


(ix)	Suspense A/c Dr.	4,000
	To Purchases A/c		2,000
	To Sales A/c		2,000
	(Being a sale of Rs.2,000 wrongly passed through purchases journal, error now rectified)

(x)	Repairs to Furniture A/c Dr.	75
	To Suspense A/c		75
	(Being repairs for furniture earlier not posted from petty cash book, error now rectified)

Dr. Suspense A/c Cr.

Date	Particulars	Amount (Rs.)	Date	Particulars	Amount (Rs.)
	To Supplier’s A/c	5,288		By Difference in trial balance	8,253
	To Purchases A/c	2000		(Keeping ……….)
	To Sales A/c	2000		By Returns Inwards A/c	300
				By Sethi	660
				By Repairs to Furniture A/c
		_____			75
		9,288			9,288

Illustration :
While closing his books of account, Om Prakash finds that the Trial Balance on that date, i.e. 31st March, 2012 is out by Rs.907 excess debit. He places the difference in a newly opened Suspense Account and prepares his final accounts which reveal a profit of Rs.14,780 for the year ended 31st March, 2012. In April 2012, the following errors were detected in the accounts for the year 2011-12;

(i) Purchases book was undercast by Rs. 1,000.

(ii) Cash received from Jamna Das Rs. 687 was posted to the debit of Janki Das as Rs. 678.

(iii) Discount received Rs.7,630 and discount allowed Rs.6,873, the totals of the appropriate columns in cash
book were not posted to the ledger.

(iv) Schedule of debtors was totalled Rs.1,16,280 instead of Rs.1,16,380. Om Prakash maintains a provision for bad debts @ 5%.

(v) Bank charges and interest,Rs.115 remained unposted to the debit side of the nominal account.

(vi) Depreciation on furniture Rs. 2,970 was wrongly recorded as Rs.2,790.

Pass journal entries to rectify the above-mentioned errors, prepare Suspense Account and Profit and Loss Adjustment Account and ascertain the correct amount of profit for the year ended 31st March, 2012.

Solution:

Journal

Date	Particulars	L.F	Dr. Amount (Rs.}	Cr. Amount (Rs.}
(i)	Profit and Loss Adjustment Account Dr.
	To Suspense Account		1,000
	(Being rectification of error caused by undercasting of Purchases Book for the year 2011-12 by ` 1,000)			1,000

(ii)	Suspense Account Dr.		1,365
	To Jamna Dass			687
	To Janki Dass			687
	(Being rectification of wrong debit of Rs.678 to Janki Das and omission of credit of Rs.687 to Jamna Das, in 2011-12 books)

(iii)	Suspense Account Dr.		757
	To Profit and Loss Adjustment Account			757
	(Being rectification of omission of posting of discount received `7,630 and discount allowed ` 6,873 in 2011-12)

(iv)	Schedule of Debtors Account Dr.		100
	Profit and Loss Adjustment Account Dr.		5
	To Suspense Account			100
	To Provision for Bad Debts Account			5
	(Being rectification of schedule of debtors and also rectification of Provision for bad debts account due to wrong basis on which the amount of bad debts was calculated in 2011-12)

(v)	Profit and Loss Adjustment Account Dr.		115
	To Suspense Account			115
	(Rectification of omission of posting to bank charges and interest account)

(vi)	Profit and Loss Adjustment Account Dr.		180
	To Furniture Account			180
	(Being rectification of wrong entry for depreciation on furniture)

Ledger Accounts
Dr. Suspense Account Cr.

Date	Particulars	Amount	Date	Particulars	Amount
2012			2012
31-Mar	To Balance c/fd	907	31-Mar	By Difference in Trial Balance	907
2011			2011
1-Apr	To Jamna Das	687	1-Apr	By Balance b/fd	907
	To Janaki Das	678		By P & L Adj. A/c	1,000
	To P & L Adjustment	757		By Schedule of Debtors	100
		_______			115
				By P & L Adj. A/c	_______
		2,122			2,122

Dr. Profit and Loss Adjustment Account Cr.

	Particulars	Rs.		Particulars	Rs.
(i)	To Suspense Account	1,000	(iii)	By Suspense Account	757
(iv)	” Provision for Bad Debts	5		By Loss transferred to Capital A/c	543
(v)	” Suspense Account	115
(vi)	” Furniture Account	__180
		1,300			1,300

Actual profit for the year ended 31st March, 2012 = Rs.14,780 –Rs. 543 =Rs.14,237.

Illustration :
The books of account of Bipin Lal for the year ended 31st March, 2013, were closed with a difference in the trial balance carried forward. Subsequently the following errors were detected:

(i) Rs.1,500 being the total of discount column on the credit side of the cash book was not posted to discount account.

(ii) Closing stock was overstated by Rs.9,000 being casting error in the schedule of inventory.

(iii) Returns outwards book was under cast by Rs.150.

(iv) A credit sale of Rs. 870 was wrongly posted as 780 to the customer’s account.

(v)Rs.6,000 being the cost of purchase of office furniture was entered in the purchases book. Pass rectification entries, prepare suspense account, and find the effect of correction on profit for the year ended 31st March, 2011

Date	Particulars	L. F	Dr .Amount	Cr. Amount
(i)	Suspense A/c Dr.		1,500
	To Profit and Loss Adjustment A/c			1,500
	(Discount received not posted from cash book to ledger, error now rectified)

(ii)	Profit and Loss Adjustment A/c Dr.		9,000
	To Stock in Trade			9,000
	(Closing stock was overstated by ` 9,000, error now rectified)

(iii)	Suspense A/c Dr.		150
	To Profit and Loss Adjustment A/c			150
	(Returns outwards book undercast, error now rectified)

(iv)	Customer’s Dr.		90
	To Suspense A/c			90
	(Credit sale of Rs. 870 wrongly posted as 780, to the customer’s account, error now rectified)

(v)	Office Furniture A/c Dr.		6,000
	To Profit and Loss Adjustment A/c			6,000
	(Purchase of office furniture wrongly entered in purchases account, error now rectified)

Dr. Suspense Account Cr.

Particulars	Rs.	Particulars	Rs.
To Profit and Loss Adjustment A/c	1,500	By Balance b/fd	1,560
To Profit and Loss Adjustment A/c	150	By Customer’s A/c	90
	1,650		1,650

Dr. Profit and Loss Adjustment Account Cr.


To Stock in Trade	9,000	By Suspense A/c	1,500
		By Suspense A/c	150
		By Office furniture A/c	6,000
		By Loss transferred to
	_____	Capital A/c	1,350
	9,000		9,000

Illustration :

On 31st March 2013, an accountant of a sole proprietorship concern could not agree his trial balance. He put the difference in a newly opened suspense account and closed the books of account for the year. In the subsequent accounting year, the following errors in the books for the year 2012-13 were located:

(i) Rs.8,000 paid for purchase of office furniture was posted to the purchases account.

(ii) The sales book was overcast by Rs.100.
(iii) Wages paid for installation of machinery, Rs. 2,750 had been debited to wages account as Rs.5,250
(iv) A cheque for Rs.7,330 was received from Rao after allowing him a discount ofRs.70. It was endorsed in
favour of Sen in full settlement ofRs.7,500. The cheque was dishonoured, but no entry for dishonour
was passed in the books.
Pass journal entries to rectify the above-mentioned errors. Also prepare the suspense account and profit and
loss account assuming that all the errors have been located.

Solution:

Rectifying Journal Entries


(i)	Office Furniture A/c Dr.	8,000
	To Profit & Loss Adjustment A/c		8,000

(ii)	Profit & Loss Adjustment A/c Dr.	100
	To Suspense A/c		100
	(Rectification of error caused by over-casting of sales book by `100)



(iii)	Machinery A/c Dr.	2,750
	Suspense A/c Dr.	2,500
	To Profit & Loss Adjustment A/c		5,250
	(Wages ` 2,750 paid for the erection of machinery debited to wages account as ` 5,250, error now rectified)

(iv)	Rao (`7,330 + 70) Dr.	7,400
	Profit & Loss Adjustment A/c Dr.	100
	To Sen		7,500
	(Cheque received from Rao for ` 7,330 after allowing him ` 70 discount and endorsed in favour of Sen against ` 7,500 dishonoured; no entry made earlier for dishonour, error now rectified)

Dr. Suspense A/c Cr.

Particulars	Rs.	Particulars	Rs.
To Profit & Loss Adjustment A/c	2,500	By Balance b/fd (difference in Trial Balance—balancing figure)	2,400
	______	By Profit & Loss Adjustment A/c	100
	2,500		2,500

Profit & Loss Adjustment A/c

Partiscular

Rs.

Partiscular

Rs.

To Suspense A/c	100	By Office Furniture A/c	8,000
To Sen	100	By Machinery A/c	2,750
To Capital A/c (Transfer of profit)	13,050	By Suspense A/c	2,500
	___________		___________
	13,250		13,250

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