PC 13_14 (Civil Accounts/Financial Accounting)

Chapter 2-ACCOUNTING PROCESS

Recording of Transactions

The first step involves identifying the transactions to be recorded and preparing the source documents
which are in turn recorded in the basic book of original entry called journal and are then posted to individual
accounts in the principal book called ledger.

Source the transaction involves this aspect, i.e. Give and Take.
Documents Payment of cash involves give aspect and delivery of goods and service is a take aspect.
Thus, business transactions are exchanges of economic consideration between parties and
have two-fold effects that are recorded in at least two accounts
Business transactions are usually evidenced by an appropriate documents such as Cash
memo, Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc.
A document which provides evidence of the transactions is called the Source Document or a
Voucher
All such documents (vouchers) are arranged in chronological order and are serially
numbered and kept in a separate file. All recording in books of account is done on the basis
of vouchers.
Preparation of Accounting vouchers may be classified as cash vouchers, debit vouchers, credit vouchers,
Accounting journal vouchers, etc.
Vouchers There is no set format of accounting vouchers. The design of the accounting vouchers
depends upon the nature, requirement and convenience of the business
A transaction with one debit and one credit is a simple transaction and the accounting
vouchers prepared for such transaction is known as Transaction Voucher
Voucher which records a transaction that entails multiple debits/credits and one
credit/debit is called compound voucher. Compound voucher may be: (a) Debit Voucher or
(b) Credit Voucher
Transactions with multiple debits and multiple credits are called complex transactions and
the accounting voucher prepared for such transaction is known as Complex Voucher/
Journal Voucher.
Accounting Accounting equation signifies that the assets of a business are always equal to the total of
Equation its liabilities and capital (owner’s equity).
The equation reads as Assets (A) = Liabilities (L) + Capital (C) OR A-L = C OR A-C = L
The accounting equation depicts the fundamental relationship among the components of
the balance sheet, it is also called the Balance Sheet Equation.
The balance sheet is a statement of assets, liabilities and capital.
The proprietors and outsiders provide the resources of the business. The claim of the
proprietors is called capital and that of the outsides is known as liabilities
Using Debit and In double entry accounting, every transaction affects and is recorded in at least two
Credit accounts.
When recording each transaction, the total amount debited must equal to the total amount
credited.
An account looks like the letter T. Because of its shape, this simple form called a T-account
The T format has a left side and a right side for recording increases and decreases in the
item.
In a T account, the left side is called debit (Dr.) and the right side is known as credit (Cr.).

Rules of Debit and Credit

All accounts are divided into five categories for the purposes of recording the transactions: (a) Asset (b)
Liability (c) Capital (d) Expenses/Losses, and (e) Revenues/Gains

Category Change Recording in Accounts

Assets and Expenses (Losses) Increase Debit
Decrease Credit
Liabilities, Capital and Revenues (Gains) Increase Credit
 Decrease Debit

Analysing transactions and recording

Books of The book in which the transaction is recorded for the first time is called journal or book of
Original original entry
Entry The source document, is required to record the transaction in the journal. This practice
provides a complete record of each transaction in one place and links the debits and credits for
each transaction
Journalism The process of recording transactions in journal is called journalising
Posting After the debits and credits for each transaction are entered in the journal, they are
transferred to the individual accounts. The process is called Posting
This sequence causes the journal to be called the Book of Original Entry and the ledger account as the
Principal Book of entry.
journal is subdivided into a number of books of original entry
Journal Proper Cash Book Other day Book

Journal transactions are recorded in the chronological order, as and when they take place
Each transaction is separately recorded after determining the particular account to be debited
or credited.
In the Particulars column, the account title to be debited is written on the first line beginning
from the left hand corner and the word ‘Dr.’ is written at the end of the column.
The account title to be credited is written on the second line leaving sufficient margin on the
left side with a prefix ‘To’
Below the account titles, a brief description of the transaction is given which is called
Narration.
Having written the Narration a line is drawn in the Particulars column, which indicates the end
of recording the specific journal entry
The column relating to Ledger Folio records the page number of the ledger book on which
relevant account is appears.
This column is filled up at the time of posting and not at the time of making journal entry.
Where the number of transactions is very large and these are recorded in number of pages in
the journal book, the amount columns are totalled at the end of the page and carried forward
(c/f) to the next page where such amounts are recorded as brought forward (b/f) balances.
The goods account is divided into five accounts, viz. purchases account, sales account,
purchases returns account, sales returns account, and stock account to record the transaction
pertaining to the particular category.
Ledger The ledger is the principal book of accounting system.
It contains different accounts where transactions relating to that account are recorded
A ledger is the collection of all the accounts, debited or credited, in the journal proper and
various special journal
A ledger may be in the form of bound register, or cards, or separate sheets may be maintained
in a loose leaf binder. In the ledger, each account is opened preferably on separate page or
card.
The net result of all transactions in respect of a particular account on a given date can be
ascertained only from the ledger.
For easy posting and location, accounts are opened in the ledger in some definite order i.e. in
the same order as they appear in the profit and loss account and in balance sheet.
In the beginning, an index is also provided. For easy identification, in big organisations, each
account is also allotted a code number
Distinction between Journal and Ledger
the book of first entry or original entry the book of second entry
the book for chronological record the book for analytical record
a book of source entry and has greater importance as Not a book of source entry and has lesser importance
legal evidence as legal evidence
Transaction is the basis of classification of data within Account is the basis of classification of data within the
the Journal ledger.
Process of recording in the Journal is called process of recording in the ledger is known as Posting
Journalising
Classification All ledger accounts are put into five categories namely, assets, liabilities, capital,
of Ledger revenues/gains and expense losses
Accounts All these accounts may further be put into two groups i.e. permanent and temporary accounts.
All permanent accounts are balanced and carried forward to the next accounting period.
All permanent accounts appears in the balance sheet. Thus, all assets, liabilities and capital
accounts are permanent accounts
The temporary accounts are closed at the end of the accounting period by transferring them to
the trading and profit and loss account
all revenue and expense accounts are temporary accounts.
Posting from Posting is the process of transferring the entries from the books of original entry (journal) to
Journal the ledger.
In other words, posting means grouping of all the transactions in respect to a particular
account at one place for meaningful conclusion and to further the accounting process.
Posting from the journal is done periodically, may be, weekly or fortnightly or monthly as per
the requirements and convenience of the business.
Sub-Journal Many of the business transactions are repetitive in nature. They can be easily recorded in
special journals, each meant for recording all the transactions of a similar nature.
For example, all cash transactions may be recorded in one book, all credit sales transactions in
another book and all credit purchases transactions in yet another book and so on
These special journals are also called daybooks or subsidiary books.
Transactions that cannot be recorded in any special journal are recorded in journal called the
Journal Proper
Some of the important special purpose book are Cash Book, Purchases Book, Purchases Return
Book, Sales Book, Sales Return Book and Journal Proper
Cash Book Cash book is a book in which all transactions relating to cash receipts and cash payments are
recorded.
It starts with the cash or bank balances at the beginning of the period.
Generally, it is made on monthly basis.
This is a very popular book and is maintained by all organisations, big or small, profit or not-for
profit
It serves the purpose of both journal as well as the ledger (cash) account.
It is also called the book of original entry.
When a cashbook is maintained, transactions of cash are not recorded in the journal, and no
separate account for cash or bank is required in the ledger.
Single The cash book contains only one amount column on each (debit and credit) side.
Column Cash
Book
Double There are two columns of cash and bank amount on each side of the cash book.
column cash all payments into the bank are recorded on the left side and all withdrawals/payments through
book the bank are recorded on the right side
When cash is deposited in the bank or cash is withdrawn from the bank, both the entries are
recorded in the cash book. Such entries are called Contra entry and marked by the letter C.
When cash is paid into the bank, the amount deposited is written on the left side in the bank
column and at the same time the same amount is entered on the right side in the cash column
When cash is withdrawn for cash chest, the amount withdrawn is written on the left side in the
cash column and at the same time the same amount is entered on the right side in the bank
column
The bank column is balanced in the same way as the cash column. However, in the bank
column, there can be credit balance also because of overdraft taken from the bank.
Overdraft is a situation when cash withdrawn from the bank exceeds the amount of deposit.
If a received cheque is deposited on the same day the amount is recorded in the bank column
of the cash book on the receipts side only.
On the date of receipt a cheque is treated as cash received and hence recorded in the cash
column on the receipts side, if not deposited to bank on the same day.
On the day of deposit to the bank, it is shown in the Bank Column on receipt (Dr.) side and in
 the Cash Column on the payment (Cr.) side. This is a contra entry.
If a cheque received from a customer is dishonoured, the firm will make an entry on the credit
side of the cash book by entering the amount of the dishonoured cheque in the bank column
and the name of the customer in the particulars column.
If the bank debits the firm on account of interest, commission or other charges for bank
services, the entry will be made on the credit side in Bank column.
If the bank credits the firm’s account, the entry will be made on the debit side of the cash book
in the Bank column.
When the bank column is maintained in the cash book, the bank account also is not opened in
the ledger. The bank column serves the purpose of the bank account
Petty Cash In every organisation, a large number of small payments such as conveyance, cartage, postage,
Book telegrams and other expenses (collectively recorded under miscellaneous expenses) are made.
These are generally repetitive in nature. If all these payments are handled by the cashier and
are recorded in the main cash book, the procedure is found to be very cumbersome
To avoid this, large organisations normally appoint one more cashier (petty cashier) and
maintain a separate cash book to record these transactions. Such a cash book maintained by
petty cashier is called petty cash book
The petty cashier works on the Imprest system under which a definite sum is given to the petty
cashier at the beginning of a certain period. When the petty cashier has spent the substantial
portion of the imprest amount he gets reimbursement of the amount spent from the head
cashier
Balancing of On the left side, all cash transactions relating to cash receipts (debits) and on the right side all
Cash Book transactions relating to cash payments (credits) are entered date-wise
When a cash book is maintained, a separate cash book in the ledger is not opened.
The cash book is balanced in the same way as an account in the ledger. But it may be noted
that in the case of the cash book, there will always be debit balance because cash payments
can never exceed cash receipts and cash in hand at the beginning of the period
Source document for cash receipt- duplicate copy of the receipt issued by the cashier
Source document for payment- invoice, bill, receipt, etc.
When payment has been made, all these documents, popularly known as vouchers, are given a
serial number and filed in a separate file for future reference and verification.
Purchases All credit purchases of goods are recorded in the purchases journal whereas cash purchases
(Journal) are recorded in the cash book
Book Other purchases such as purchases of office equipment, furniture, building, are recoded in the
journal proper if purchased on credit or in the cash book if purchased for cash
The source documents for recording entries in the book are invoices or bills received by the
firm from the supplies of the goods.
Entries are made with the net amount of the invoice. Trade discount and other details of the
invoice need not be recorded in this book
The monthly total of the purchases book is posted to the debit of purchases account in the
ledger. Individual suppliers’ accounts may be credited daily.
Purchases In this book, return of goods to supplier are recorded.
Return For every return, a debit note (in duplicate) is prepared and the original one is sent to the
(Journal) supplier for making necessary entries in his book
Book A Debit note is a document evidencing a debit to be raised against a party for reasons other
than sale on credit
The supplier may also prepare a note, which is called the credit note
A Credit note is prepared, when a party is to be given a credit for reasons other than credit
purchase
The source document for recording entries in the purchases return journal is generally a debit
note
Each debit note is serially numbered and dated.
The monthly total of the purchases return book is posted to the credit of purchases account in
the ledger. Individual suppliers’ accounts may be debited daily.
Sales Cash sales are recorded in the cash book whereas credit sales of merchandise are recorded in
(Journal) the sales journal.
Book The source document for recording entries in the sales journal are sales invoice or bill issued
 by the firm to the customers.
At the end of each month the amount column is totalled and posted to the credit of sales
account in the ledger.
Posting to the debit side of individual customer’s accounts may be made daily.
Sales Return This journal is used to record return of goods by customers to them on credit.
(Journal) On receipt of goods from the customer a credit note is prepared.
Book The source document for recording entries in the sales return book is generally the credit note
At the end of each month the amount column is totalled and posted to the debit of sales
account in the ledger.
Posting to the credit side of individual customer’s accounts may be made daily.
Journal A book maintained to record transactions, which do not find place in special journals, is known
Proper as Journal Proper or Journal Residual.
Opening entry Adjustment Entries Rectification entries Transfer Entries Other entries

Opening In order to open new set of books in the beginning of new accounting year and record therein
opening balances of assets, liabilities and capital, the opening entry is made in the journal.
Adjustment In order to update ledger account on accrual basis, such entries are made at the end of the
accounting period. Such as Rent outstanding, Prepaid insurance, Depreciation and Commission
received in advance.
Rectification To rectify errors in recording transactions in the books of original entry and their posting to
ledger accounts this journal is used.
Transfer Drawing account is transferred to capital account at the end of the accounting year.
Accounts relating to operation of business such as Sales, Purchases, Opening Stock, Income,
Gains and Expenses, etc., and drawing are closed at the end of the year and their
Total/balances are transferred to Trading and Profit and Loss account by recording the journal
entries
These are also called closing entries.
Other At the time of a dishonour of a cheque the entry for cancellation for discount received or
entries discount allowed earlier.
Purchase/sale of items on credit other than goods.
Goods withdrawn by the owner for personal use.
Goods distributed as samples for sales promotion.
Endorsement and dishonour of bills of exchange
Transaction in respect of consignment and joint venture, etc.
Loss of goods by fire/theft/spoilage.

Balancing Accounts in the ledger are periodically balanced, generally at the end of the accounting period,
the Accounts with the object of ascertaining the net position of each amount
Balancing of an account means that the two sides are totalled and the difference between
them is shown on the side, which is shorter in order to make their totals equal
In case the debit side exceeds the credit side, the difference is written on the credit side and
called the debit balance.
If the credit side exceeds the debit side, the difference between the two appears on the debit
side and is called the credit balance.
The accounts of expenses losses and gains/revenues are not balanced but are closed by
transferring to trading and profit and loss account

Bank Reconciliations Statement

The amount of balance shown in the passbook or the bank statement must tally with the balance as
shown in the cash book. But in practice, these are usually found to be different. Hence, the causes for such
difference should be ascertained. If deposits exceed withdrawals the passbook/bank statement shows a credit
balance and if withdrawals exceed deposits it will show a debit balance (overdraft).

The statement prepared for listing the causes for differences between the bank balances as per pass
book/bank statement and bank balances as per cash and to reconcile/tally the two balances is called Bank
Reconciliation Statement.
Causes of the differences between the two balance

Timing differences on recording of the transactions. Errors made by the business or by the bank

Timing differences on recording of the transactions

Cheques issued by the When cheques are issued by the firm to suppliers or creditors of the firm, these are
firm but not yet immediately entered on the credit side of the cash book
presented for The bank will debit the firm’s account only when these cheques are actually paid by
payment the bank
Balances in passbook/bank statement stand at higher side
Cheques paid into the When firm receives cheques from its customers (debtors), they are immediately
bank but not yet recorded in the debit side of the cash book
collected the bank credits the customer account only when the amount of cheques are actually
realised
Balances in passbook/bank statement stand at lower side
Direct debits made by Sometimes, the bank deducts amount for various services such as cheque collection
the bank on behalf of charges, incidental charges, interest on overdraft, stop cheque payment charges,
the customer cheque bounce charges etc. from the account without the firm’s knowledge.
The firm comes to know about it only when the bank statement arrives.
the balance as per passbook will be less than the balance as per cash book.
Amounts directly There are instances when debtors (customers) directly deposits money into firm’s
deposited in the bank bank account
account the firm does not receive the intimation from any source till it receives the bank
statement
the balance shown in the bank passbook will be more than the balance shown in the
firm’s cash book.
Interest and dividends When the bank collects interest and dividend on behalf of the customer, then these
collected by the bank are immediately credited to the customers’ account.
But the firm will know about these transactions and record the same in the cash book
only when it receives a bank statement
the balance shown in the bank passbook will be more than the balance shown in the
firm’s cash book.
Direct payments Sometimes the customers give standing instructions to the bank to make some
made by the bank on payment regularly on stated days to the third parties.
behalf of the Payment in Cash Book is recorded when reflected in the bank statement
customers the balance as per the bank passbook would be less than the one shown in the cash
book.
Cheques deposited/ If a cheque deposited by the firm is dishonoured or a bill of exchange drawn by the
bills discounted business firm is discounted with the bank is dishonoured on the date of maturity, the
dishonoured same is debited to customer’s account by the bank
As this information is not available to the firm immediately, there will be no entry in
the firm’s cash book regarding the above items.
the balance as per the passbook would be less than the cash book balance
Differences caused by the errors
Errors committed in Omission or wrong recording of transactions relating to cheques issued, cheques
recording transaction deposited and wrong totalling, etc., committed by the firm while recording entries in
by the firm the cash book cause difference between cash book and passbook balance.
Errors committed in Omission or wrong recording of transactions relating to cheques deposited and
recording transactions wrong totalling, etc., committed by the bank while posting entries in the passbook
by the bank also cause differences between passbook and cash book balance.

Preparation of Bank Reconciliation Statement

After identifying the causes of difference, the reconciliation may be done in the following two ways

without adjusting cash book balance. after adjusting cash book balance.

Situation in preparation in Bank Reconciliation Statement

 Favourable Balance Unfavourable Balance
The debit balance as per the cash book means the The credit balance as per the cash book means the
balance of deposits held at the bank. Such a balance withdrawal made in excess of deposits held at the
will be a credit balance as per the passbook. bank. Such a balance will be a debit balance as per
the passbook.
Such a balance exists when the deposits made by the It indicates overdraft.
firm are more than its withdrawals.

Dealing with balances

If starting point taken is the balance as per cash book, the balance as per pass book shall be ascertained
and vice versa. The final figure arrived at reconciliation statement shall tally to the balance of ascertaining source.

Balance Reason Starting point Action

required
Favourable Cheques issued by the firm but not yet presented for Cash Book Added
Balance and payment Pass Book Deducted
Unfavourable Cheques paid into the bank but not yet collected Cash Book Added
Pass Book Deducted
Direct debits made by the bank on behalf of the Cash Book Deducted
customer Pass Book Added
Amounts directly deposited in the bank account Cash Book Added
Pass Book Deducted
Interest and dividends collected by the bank Cash Book Added
Pass Book Deducted
Direct payments made by the bank on behalf of the Cash Book Deducted
customers Pass Book Added
Cheques deposited/ bills discounted dishonoured Cash Book Deducted
Pass Book Added
In case of unfavourable balance the balance taken as starting point is Negative one (in minus) so addition will
add the degree of negativity and deduction will reduce the negativity. Rest procedure will be same
Preparation of Bank Reconciliation Statement with Adjusted Cash Book

Under this method, the items which appear only in the passbook are figured out and are first recorded in
the cash book to work out the adjusted balance (also known as amended balance) of the cash book and then
prepare the bank reconciliation statement.

This shall reduce the number of items responsible for the difference and have the correct figure of
balance at bank in the balance sheet. In fact, this is exactly what is done in practice whereby only those items
which cause the difference on account of the time gap in recording appear in bank reconciliation statement.
These are as (i) cheques issued but not yet presented, (ii) cheques deposited but not yet collected, and (iii) due to
an error in the passbook.

Trial Balance and Rectification of Errors

A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in
the ledger with a view to verify the arithmetical accuracy of posting into the ledger accounts.

Trial balance is an important statement in the accounting process as it shows the final position of all
accounts and helps in preparing the final statement

The task of preparing the final statements is simplified because the accountant can take the balances of
all accounts from the trial balance instead of going through the whole ledger

Steps in preparation of a Trial Balance

Ascertain the Putting the totalled figures of an account Compute the total Verify the total of
balances of each of ledger in debit and credit column as the of debit and credit Dr. and Cr. Column.
account in the case may be against the appropriate head column If matches, then
 ledger (Assets, expenses and recoverable account is
amount- Debit column.) arithmetically
(Liabilities, income and payable amount- correct else there is
Credit column) some error.

Objectives of preparing a Trial Balance

To ascertain the As a summary of the ledger, the Trial Balance is a list of the accounts and their balances.
arithmetical When the totals of all the debit balances and credit balances in the trial balance are
accuracy of the equal, it is assumed that the posting and balancing of accounts is arithmetically correct.
ledger accounts However, the tallying of the trial balance is not a conclusive proof of the accuracy of the
accounts. It only ensures that all debits and the corresponding credits have been
properly recorded in the ledger.
To help in locating When a trial balance does not tally, it indicates that at least one error has occurred.
errors Stages of error (1) totalling of subsidiary books (2) posting of journal entries in the ledger
(3) calculating account balances (4) carrying account balances to the trial balance and (5)
totalling the trial balance columns.
It may be noted that the accounting accuracy is not ensured even if the totals of debit
and credit balances are equal because some errors do not affect equality of debits and
credits
The trial balance has tallied does not imply that all entries in the books of original record
(journal, cash book, etc.) have been recorded and posted correctly.
Simplification of The availability of a tallied trial balance is the first step in the preparation of financial
the task of statements.
preparing the final For preparing a financial statement, one need not refer to the ledger
statements Trial Balance is considered as the connecting link between accounting records and the
preparation of financial statements

Methods of Preparing Trial Balance

Totals method Total of each side in the ledger (debit and credit) is ascertained separately and shown in the
trial balance in the respective columns.
The total of debit column of trial balance should agree with the total of credit column in the
trial balance because the accounts are based on double entry system.
this method is not widely used in practice, as it does not help in assuming accuracy of
balances of various accounts and preparation of the financial statements
Balances This is the most widely used method in practice.
Method Under this method trial balance is prepared by showing the balances of all ledger accounts
and then totalling up the debit and credit columns of the trial balance to assure their
correctness
The account balances are used because the balance summarises the net effect of all
transactions relating to an account and helps in preparing the financial statements
In trial balance, normally in place of balances in individual accounts of the debtors, a figure
of sundry debtors is shown, and in place of individual accounts of creditors, a figure of
sundry creditors is shown.
Totals-cum- This method is a combination of totals method and balances method
balances Under this method four columns for amount are prepared. X
Method Under this method four columns for amount are prepared. Two columns for writing the
debit and credit totals of various accounts and two columns for writing the debit and credit
balances of these accounts
This method is also not used in practice because it is time consuming and hardly serves any
additional or special purpose.

Significance of Agreement of Trial Balance

A tallied trial balance only proves, to a certain extent, that the posting to the ledger is arithmetically
correct. But it does not guarantee that the entry itself is correct. There can be errors, which affect the equality of
debits and credits, and there can be errors, which do not affect the equality of debits and credits.
 Error in Trial Balance

totalling of the totalling of posting of the showing Showing wrong Omission in

Dr and CR subsidiary total of account amount of showing an
balances in the books. subsidiary balances in account in TB account balance
TB books wrong column in the TB
of the TB
calculation of a while posting a journal entry i.e., posting made either
Error in recording a transaction in
ledger account with wrong amount or on the wrong side of the the journal i.e., account to be
balance account or in the wrong account debited is credited and amount to
be credited is debited
Recording a transaction in subsidiary book with wrong name or wrong amount.

Classification of errors

Errors of These are the errors which are committed due to wrong posting of transactions, wrong
Commission totalling or wrong balancing of the accounts, wrong casting of the subsidiary books, or
wrong recording of amount in the books of original entry, correct amount in wrong person
A/c etc.
This constitutes an error of commission. Such an error by definition is of clerical nature and
most of the errors of commission affect in the trial balance.
For example: Raj Hans Traders paid Rs. 25,000 to Preetpal Traders (a supplier of goods).
This transaction was correctly recorded in the cashbook. But while posting to the ledger,
Preetpal’s account was debited with Rs. 2,500 only
Errors of The errors of omission may be committed at the time of recording the transaction in the
Omission books of original entry or while posting to the ledger
Error of complete omission - When a transaction is completely omitted from recording in
the books of original record, it is an error of complete omission.
For example, credit sales to Mohan Rs. 10,000, not entered in the sales book
Error of partially omission- When the recording of transaction is partly omitted from the
books, it is an error of partial omission
For example a credit sales had been duly recorded in the sales book but the posting from
sales book to Mohan’s account has not been made
Errors of Accounting entries are recorded as per the generally accepted accounting principles. If any
Principle of these principles are violated or ignored, errors resulting from such violation are known as
errors of principle
An error of principle may occur due to incorrect classification of expenditure or receipt
between capital and revenue.
These errors do not affect the trial balance.
Compensating When two or more errors are committed in such a way that the net effect of these errors
Errors on the debits and credits of accounts is nil, such errors are called compensating errors.
Such errors do not affect the tallying of the trial balance
For example, if purchases book has been overcast by Rs. 10000 resulting in excess debit of
Rs. 10000 in purchases account and sales returns book is under-cast by Rs. 10000 resulting
in short debit to sales returns account
Error of This occurs where the entries for transactions are reversed i.e. the account which should be
reversal entries debited is credited and the account which should be credited is debited
Trial Balance agrees.
Transposition Where the wrong sequence of the individual character within a number was entered i.e. ₹
Error 127 was entered in account for a transaction amounting ₹ 721.

Rectification of error

errors which do not affect the trial balance errors which affect the trial balance
usually take place in two accounts in such a manner usually affect one account and a journal entry is not
that it can be easily rectified through a journal entry. possible for rectification unless a suspense account
Such errors are also known as two sided errors. has been opened. Such errors are rectified by passing
 a nullifying entry in the respective account
Examples of such errors are – complete omission to Examples of such errors are error of casting, error of
record an entry in the books of original entry, wrong carrying forward, error of balancing, error of posting
recording of transactions in the book of accounts, to correct account but with wrong amount, error of
complete omission of posting to the wrong account posting to the correct account but on the wrong side,
on the correct side and errors of principle. posting to the wrong side with the wrong amount,
omitting to show an account in the trial balance.
The rectification process essentially involves Even if the trial balance does not tally due to the
Cancelling the effect of wrong debit or credit by existence of one sided errors, accountant has to carry
reversing it and Restoring the effect of correct debit forward his accounting process prepare financial
or credit statements. The accountant tallies his trial balance by
putting the difference on shorter side as ‘suspense
account’
When the errors are located and the specific accounts
and amounts involved are identified, the amounts are
transferred from suspense account to the relevant
accounts thereby closing the suspense account

Rectification of Errors in the Next Accounting Year

If some errors committed during an accounting year are not located and rectified before the finalisation
of financial statements, suspense account cannot be closed and its balance will be carried forward to the next
accounting period.

When the errors committed in one accounting year are located and rectified in the next accounting year,
profit and loss adjustment account is debited or credited in place of accounts of expenses/losses and incomes/
gains in order to avoid impact on the income statement of next accounting period