Rectification Of Accounting Errors

Non Profit Corporate Bylaws Template - Rectification Of Accounting Errors

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Accountants put in order trial equilibrium to check the correctness of accounts. If total of debit balances does not agree with the total of credit balances, it is a clear-cut indication that safe bet errors have been committed while recording the transactions in the books of traditional entry or subsidiary books. It is our utmost duty to search these errors and rectify them, only then we should stride for making ready final accounts. We also know that all types of errors are not revealed by trial equilibrium as some of the errors do not effect the total of trial balance. So these cannot be settled with the help of trial balance. An accountant should spend his energy to search both types of errors and rectify them before making ready trading, profit and loss list and equilibrium sheet. Because if these are ready before rectification these will not give us the definite effect and profit and loss disclosed by them, shall not be the actual profit or loss.

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Non Profit Corporate Bylaws Template

All errors of accounting policy can be classified as follows:

1. Errors of Principle

When a transaction is recorded against the basic ideas of accounting, it is an error of principle. For example, if income expenditure is treated as capital expenditure or vice versa.

2. Clerical Errors

These errors can again be sub-divided as follows:

(i) Errors of omission

When a transaction is either thoroughly or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of traditional entry or with regard to omission to post a transaction from the books of traditional entry to the list involved in the ledger.

(ii) Errors of commission

When an entry is incorrectly recorded either thoroughly or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission effect the trial equilibrium whereas others do not. Errors effecting the trial equilibrium can be revealed by making ready a trial balance.

(iii) Compensating errors

Sometimes an error is counter-balanced by other error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.

From the point of view of rectification of the errors, these can be divided into two groups :

(a) Errors affecting one list only, and

(b) Errors affecting two or more accounts.

Errors affecting one account

Errors which influence can be :

(a) Casting errors;

(b) error of posting;

(c) carry forward;

(d) balancing; and

(e) omission from trial balance.

Such errors should, first of all, be settled and rectified. These are rectified either with the help of journal entry or by giving an explanatory note in the list concerned.

Rectification

Stages of correction of accounting errors

All types of errors in accounts can be rectified at two stages:

(i) before the making ready of the final accounts; and

(ii) after the making ready of final accounts.

Errors rectified within the accounting period

The proper recipe of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. But while errors are being rectified before the making ready of final accounts, in safe bet cases the correction can't be done with the help of journal entry because the errors have been such. Normally, the policy of rectification, if being done, before the making ready of final accounts is as follows:

(a) correction of errors affecting one side of one list Such errors do not let the trial equilibrium agree as they effect only one side of one list so these can't be corrected with the help of journal entry, if correction is required before the making ready of final accounts. So required estimate is put on debit or credit side of the involved account, as the case maybe. For example:

(i) Sales book under cast by Rs. 500 in the month of January. The error is only in sales account, in order to definite the sales account, we should record on the credit side of sales list 'By under casting of. Sales book for the month of January Rs. 500".I'Explanation:As sales book was under cast by Rs. 500, it means all accounts other than sales list are correct, only credit equilibrium of sales list is less by Rs. 500. So Rs. 500 have been credited in sales account.

(ii) reduction allowed to Marshall Rs. 50, not posted to reduction account. It means that the estimate of Rs. 50 which should have been debited in reduction list has not been debited, so the debit side of reduction list has been reduced by the same amount. We should debit Rs. 50 in reduction list now, which was omitted previously and the reduction list shall be corrected.

(iil) Goods sold to X wrongly debited in sales account. This error is effecting only sales list as the estimate which should have been posted on the credit side has been wrongly settled on debit side of the same account. For rectifying it, we should put duplicate the estimate of transaction on the credit side of sales list by writing "By sales to X wrongly debited previously."

(iv) estimate of Rs. 500 paid to Y, not debited to his personal account. This error of effecting the personal list of Y only and its debit side is less by Rs. 500 because of omission to post the estimate paid. We shall now write on its debit side. "To cash (omitted to be posted) Rs. 500.

Correction of errors affecting two sides of two or more accounts

As these errors influence two or more accounts, rectification of such errors, if being done before the making ready of final accounts can often be done with the help of a journal entry. While correcting these errors the estimate is debited in one account/accounts whereas similar estimate is credited to some other account/ accounts.

Correction of errors in next accounting period

As stated earlier, that it is advisable to search and rectify the errors before making ready the final accounts for the year. But in safe bet cases when after valuable search, the accountant fails to search the errors and he is in a hurry to put in order the final accounts, of the enterprise for filing the return for sales tax or income tax purposes, he transfers the estimate of distinction of trial equilibrium to a newly opened 'Suspense Account'. In the next accounting period, as and when the errors are settled these are corrected with reference to suspense account. When all the errors are discovered and rectified the suspense list shall be concluded automatically. We should not forget here that only those errors which effect the totals of trial equilibrium can be corrected with the help of suspense account. Those errors which do not effect the trial equilibrium can't be corrected with the help of suspense account. For example, if it is found that debit total of trial equilibrium was less by Rs. 500 for the calculate that Wilson's list was not debited with Rs. 500, the following rectifying entry is required to be passed.

Difference in trial balance

Trial equilibrium is affected by only errors which are rectified with the help of the suspense account. Therefore, in order to calculate the distinction in suspense list a table will be prepared. If the suspense list is debited in' the rectification entry the estimate will be put on the debit side of the table. On the other hand, if the suspense list is credited, the estimate will be put on the credit side of the table. In the end, the equilibrium is calculated and is reversed in the suspense account. If the credit side exceeds, the distinction would be put on the debit side of the suspense account. effect of Errors of Final Accounts

1. Errors effecting profit and loss account

It is prominent to note the effect that an en-or shall have on net profit of the firm. One point to remember here is that only those accounts which are transferred to trading and profit and loss list at the time of making ready of final accounts effect the net profit. It means that only mistakes in nominal accounts and goods list will effect the net profit. Error in the these accounts will either growth or decrease the net profit.

How the errors or their rectification effect the profit-following rules are helpful in insight it :

(i) If because of an error a nominal list has been given some debit the profit will decrease or losses will increase, and when it is rectified the profits will growth and the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but the estimate debited to machinery repairs list -this error will reduce the profit. In rectifying entry the estimate shall be transferred to machinery list from machinery repairs account, and it will growth the profits.

(il) If because of an error the estimate is omitted from recording on the debit side of a nominal account-it results in growth of profits or decrease in losses. The rectification of this error shall have reverse effect, which means the profit will be reduced and losses will be increased. For example, rent paid to landlord but the estimate has been debited to personal list of landlord-it will growth the profit as the expense on rent is reduced. When the error is rectified, we will post the valuable estimate in rent list which will growth the expenditure on rent and so profits will be reduced.

(iil) profit will growth or losses will decrease if a nominal list is wrongly credited. With the rectification of this error, the profits will decrease and losses will increase. For example, investments were sold and the estimate was credited to sales account. This error will growth profits (or reduce losses) when the same error is rectified the estimate shall be transferred from sales list to investments list due to which sales will be reduced which will effect in decrease in profits (or growth in losses).

(iv) profit will decrease or losses will growth if an list is omitted from posting in the credit side of a nominal or goods account. When the same will be rectified it will growth the profit or reduce the losses. For example, commission received is omitted to be posted to the credit of commission account. This error will decrease profits ( or growth losses) as an income is not credited to profit and loss account. When the error will be rectified, it will have reverse effect on profit and loss as an supplementary income will be credited to profit and loss list so the profit will growth ( or the losses will decrease). If due to any error the profit or losses are effected, it will have its effect on capital list also because profits are credited and losses are debited in the capital list and so the capital shall also growth or decrease. As capital is shown on the liabilities side of equilibrium sheet so any error in nominal list will effect equilibrium sheet as well. So we can say that an error in nominal list or goods list effects profit and loss list as well as equilibrium sheet.

2. Errors effecting equilibrium sheet only

If an error is committed in a real or personal account, it will effect assets, liabilities, debtors or creditors of the firm and as a effect it will have its impact on equilibrium sheet alone. Because these items are shown in equilibrium sheet only and equilibrium sheet is ready after the profit and loss list has been prepared. So if there is any error in cash account, bank account, asset or liability list it will effect only equilibrium sheet.

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