Chapter 7 Solutions: Accounting Errors and Their Rectification
Answers to the Chapter 7 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, and five marks’ worth of explained points or full working for 5 marks.
Group A: Very Short Answer Questions (1 Mark Each)
1. What are accounting errors?
Accounting errors are unintentional mistakes made by bookkeepers and accountants while recording, posting, totaling or balancing financial transactions, or while transferring balances to the Trial Balance.
2. What is an Error of Principle? Give one example.
An Error of Principle is an error committed by violating a fundamental accounting principle, such as treating capital expenditure as revenue expenditure; for example, debiting the purchase of machinery to Purchase Account instead of Machinery Account.
3. Why is a Suspense Account opened?
A Suspense Account is opened temporarily to put the difference of a disagreed Trial Balance in it when one-sided errors cannot be located immediately and the Final Accounts cannot wait; it closes once those errors are found and rectified.
Group B: Short Answer Questions (5 Marks Each)
1. Explain the four types of errors that are NOT disclosed by the Trial Balance, with one example of each.
Some errors leave the Debit and Credit totals of the Trial Balance equal, because they affect both sides by the same amount or affect neither side. A Trial Balance that agrees is therefore not proof that the books are free of errors. The four types are:
- Errors of Omission: A transaction is completely left out of the book of original entry, so neither its debit nor its credit is recorded and the totals still agree. Example: Goods sold to Sita on credit for Rs. 10,000 were not entered in the Sales Book at all.
- Errors of Commission: Clerical mistakes such as posting to the wrong personal account or recording a wrong figure on both sides. The amounts on both sides stay equal. Example: Goods sold to Ram for Rs. 5,000 were debited to Shyam’s Account.
- Errors of Principle: Errors made by ignoring an accounting principle, mainly by mixing up capital and revenue expenditure. The right amount is debited, but to the wrong kind of account. Example: Wages paid for installing new machinery, Rs. 8,000, were debited to Wages Account instead of Machinery Account.
- Compensating Errors: Two or more errors of equal amount on opposite sides cancel each other’s effect on the Trial Balance. Example: Purchase Account (Dr.) is undercast by Rs. 2,000 and Sales Account (Cr.) is also undercast by Rs. 2,000.
These errors are found only by checking vouchers and books in detail, and are corrected with rectifying journal entries between the accounts concerned, without a Suspense Account.
2. Rectify the following errors by passing Journal Entries (5 Marks):
- (a) Wages paid for installation of Plant Rs. 6,000 was debited to Wages Account.
- (b) Goods purchased from Binod on credit for Rs. 8,500 was recorded in the Purchase Book as Rs. 5,800.
- (c) Repair of office computer Rs. 2,500 was debited to Computer Account.
- (d) Purchase Book was overcast by Rs. 4,000.
- (e) Cash received from Suman Rs. 3,000 was wrongly credited to Sujan’s Account.
Rectifying Journal Entries
| S.N. | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| (a) | Plant Account … Dr. To Wages Account (Being wages paid for installation of plant wrongly debited to Wages Account, now rectified) | 6,000 | 6,000 | |
| (b) | Purchase Account … Dr. To Binod’s Account (Being credit purchase from Binod of Rs. 8,500 recorded as Rs. 5,800, now rectified) | 2,700 | 2,700 | |
| (c) | Repair Account … Dr. To Computer Account (Being repair of office computer wrongly debited to Computer Account, now rectified) | 2,500 | 2,500 | |
| (d) | Suspense Account … Dr. To Purchase Account (Being overcasting of Purchase Book by Rs. 4,000, now rectified) | 4,000 | 4,000 | |
| (e) | Sujan’s Account … Dr. To Suman’s Account (Being cash received from Suman wrongly credited to Sujan’s Account, now rectified) | 3,000 | 3,000 |
Working notes:
- (a) Error of principle: Wages for installing a fixed asset are part of the asset’s cost (capital expenditure), so Plant is debited and the wrongly debited Wages Account is credited.
- (b) Error of commission: The wrong figure went to both Purchase Account and Binod’s Account, so only the shortfall is corrected:
8,500 - 5,800 = 2,700. The Trial Balance was not affected, so no Suspense Account is used. - (c) Error of principle: Repair of an existing asset is revenue expenditure, so Repair Account is debited and the wrongly debited Computer Account is credited.
- (d) One-sided error: An overcast Purchase Book put Rs. 4,000 too much on the Debit side of Purchase Account only. Purchase Account is credited to cancel the excess, and the Suspense Account takes the other side.
- (e) Error of commission: Suman should have been credited (the giver), so Sujan’s Account is debited to cancel the wrong credit and Suman’s Account is credited.