Chapter 4: Journal Proper, Rectification of Errors, and Adjusted Trial Balance
4.1 Journal Proper (General Journal)
4.1.1 Meaning and Importance
When a business subdivides its primary records into specialized Subsidiary Books (Cash Book, Purchase Book, Sales Book, Purchase Return Book, Sales Return Book, B/R Book, B/P Book), any residual transaction that cannot be recorded in any of those specific books is recorded in the Journal Proper (General Journal / Miscellaneous Journal).
4.1.2 Types of Entries Recorded in Journal Proper
| Type of Entry | Purpose & Standard Specimen Entry |
|---|---|
| 1. Opening Entries | Passed at the beginning of a new accounting year (1st Shrawan) to bring forward the closing balances of Assets, Liabilities, and Capital from the previous year’s Balance Sheet: All Assets A/c (Individually) ……………………… Dr. To All Liabilities A/c (Individually) To Capital A/c (Balancing Figure = Assets - Liabilities) |
| 2. Closing Entries | Passed at the end of the accounting year to close Nominal Accounts (Purchases, Sales, Expenses, Incomes) by transferring them to Trading and Profit & Loss Account: • For Direct Expenses: Trading A/c Dr. To Opening Stock / Purchases / Wages A/c • For Sales & Closing Stock: Sales A/c Dr., Closing Stock A/c Dr. To Trading A/c • For Indirect Expenses: Profit & Loss A/c Dr. To Salary / Rent / Depreciation A/c • For Net Profit: Profit & Loss A/c Dr. To Capital A/c |
| 3. Transfer Entries | Used to transfer an amount from one account to another (e.g., transferring Drawings to Capital at year-end: Capital A/c Dr. To Drawings A/c). |
| 4. Credit Purchase or Sale of Fixed Assets | Since Purchase Book and Sales Book record only trading merchandise, credit purchase/sale of Machinery, Furniture, or Vehicles is recorded here: Machinery A/c Dr. To Supplier’s A/c |
| 5. Adjustment Entries | Passed at year-end to bring unrecorded accruals, prepayments, depreciation, and provisions into the books (covered in Section 4.3). |
| 6. Rectification Entries | Passed to correct accounting errors discovered in the books (covered in Section 4.2). |
| 7. Miscellaneous Entries | Abnormal losses of goods by fire/theft, bad debts written off, goods distributed as free samples, and dishonor/endorsement of bills. |
4.2 Accounting Errors and Their Rectification
4.2.1 Meaning and Classification of Accounting Errors
An Accounting Error is an unintentional clerical or conceptual mistake committed while recording, classifying, posting, casting (totaling), or balancing accounts. (Intentional manipulation is Fraud, not error).
| Classification | Meaning & Examples | Effect on Trial Balance Agreement |
|---|---|---|
| 1. Errors of Omission | (a) Complete Omission: A transaction is completely omitted from the Journal or Subsidiary Books (e.g., credit sale to Sita Rs. 5,000 not recorded at all). (b) Partial Omission: Recorded in primary book, but omitted to be posted to one ledger account. | • Complete Omission: Trial Balance STILL AGREES (Not disclosed). • Partial Omission: Trial Balance DISAGREES (Disclosed). |
| 2. Errors of Principle | Recording a transaction in violation of fundamental accounting principles—specifically confusing Capital and Revenue items (e.g., wages paid for installing new machinery debited to Wages A/c instead of Machinery A/c; or furniture purchased debited to Purchase A/c). | Trial Balance STILL AGREES (Not disclosed by Trial Balance). |
| 3. Errors of Commission | Clerical mistakes committed while recording, posting, or totaling: • Posting to the wrong personal account (Ram instead of Shyam). • Posting a wrong amount (Rs. 540 instead of Rs. 450) or to the wrong side (Dr. instead of Cr.). • Undercasting (under-totaling) or Overcasting (over-totaling) a subsidiary book. | • Wrong Personal Account (correct side & amount): Trial Balance AGREES. • Wrong side, wrong amount in one account, or wrong casting: Trial Balance DISAGREES. |
| 4. Compensating Errors | Two or more independent errors that accidentally cancel out each other’s numerical effect on the Debit and Credit totals (e.g., Purchase Book undercast by Rs. 1,000 Dr. and Sales Book undercast by Rs. 1,000 Cr.). | Trial Balance STILL AGREES (Not disclosed by Trial Balance). |
4.2.2 Methodology for Rectifying Accounting Errors
In accounting, erasing, overwriting, or tearing pages is strictly prohibited. Errors are rectified either:
- Before Preparing Trial Balance (or before opening Suspense Account):
- Two-sided errors are rectified via a standard 3-step Journal Entry (Wrong Entry → Correct Entry → Rectifying Entry).
- One-sided errors (e.g., overcasting/undercasting of a single account) are rectified via an explanatory note on the Dr. or Cr. side of that specific account.
- After Preparing Trial Balance (Using Suspense Account):
- When a Trial Balance fails to agree, the difference is temporarily placed in a Suspense Account (Suspense A/c).
- Two-sided errors are rectified by debiting and crediting the two affected accounts (Suspense A/c is NOT used).
- One-sided errors are rectified by passing a formal Journal Entry using Suspense Account as the opposite leg.
4.2.3 Three-Step Technique for Two-Sided Errors
| Step 1: Wrong Entry (What was wrongly done) | Step 2: Correct Entry (What should have been done) | Step 3: Rectifying Entry (Reverse Wrong + Keep Correct) |
|---|---|---|
| Example 1 (Error of Principle): Machinery purchased for Rs. 50,000 was wrongly debited to Purchase A/c. Purchase A/c ……… Dr. 50,000 To Cash A/c ……………. 50,000 | Machinery A/c …… Dr. 50,000 To Cash A/c ……………. 50,000 | Machinery A/c ……………… Dr. 50,000 To Purchase A/c ………………….. 50,000 |
| Example 2: Repair to building Rs. 8,000 was wrongly debited to Building A/c. Building A/c ……….. Dr. 8,000 To Cash A/c ……………… 8,000 | Repair A/c ………….. Dr. 8,000 To Cash A/c ……………… 8,000 | Repair A/c ……………………. Dr. 8,000 To Building A/c …………………….. 8,000 |
| Example 3: Credit sale of goods to Bina Rs. 12,000 was wrongly recorded through Purchase Book. Purchase A/c ……… Dr. 12,000 To Bina’s A/c ………….. 12,000 | Bina’s A/c ………….. Dr. 12,000 To Sales A/c …………… 12,000 | Bina’s A/c …………………….. Dr. 24,000 To Purchase A/c ………………….. 12,000 To Sales A/c ……………………….. 12,000 |
| Example 4 (Short/Excess Amount): Goods sold to Hari for Rs. 6,400 was recorded in Sales Book as Rs. 4,600 (Short by Rs. 1,800). | Both Hari (Dr.) and Sales (Cr.) were under-recorded by Rs. 1,800. | Hari’s A/c …………………….. Dr. 1,800 To Sales A/c ……………………….. 1,800 |
4.2.4 Worked Numerical Example: Rectification After Trial Balance & Suspense Account
Illustration 4.1 (NEB 5-Mark / 8-Mark Standard):
The Trial Balance of Chitwan Emporium showed an excess Debit of Rs. 10,000, which was placed to the Credit of a Suspense Account. Subsequently, the following errors were located:
- Sales of old furniture for Rs. 15,000 was credited to the Sales Account.
- The Purchase Book was undercast by Rs. 4,000.
- Cash received from debtor Raju Rs. 3,500 was correctly entered in the Cash Book, but was wrongly posted to the Debit side of Raju’s Account as Rs. 2,500.
- Salary paid Rs. 8,000 was posted twice to the Salary Account.
- Credit purchase of goods from Gita Rs. 9,400 was recorded in the Purchase Book as Rs. 4,900.
Required: (a) Rectifying Journal Entries, and (b) Suspense Account.
Solution:
(a) Rectifying Journal Entries
| S.N. | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 1. | Sales A/c …………………………………………………………. Dr. To Furniture A/c (Being sale of old furniture wrongly credited to Sales A/c, now rectified) | 15,000 | 15,000 | |
| 2. | Purchase A/c …………………………………………………….. Dr. To Suspense A/c (Being undercasting of Purchase Book now rectified) | 4,000 | 4,000 | |
| 3. | Suspense A/c ……………………………………………………. Dr. To Raju’s A/c (Rs. 3,500 correct Cr. + Rs. 2,500 wrong Dr.) (Being cash received from Raju Rs. 3,500 wrongly debited to his account as Rs. 2,500, now rectified) | 6,000 | 6,000 | |
| 4. | Suspense A/c ……………………………………………………. Dr. To Salary A/c (Being double posting of salary to Salary A/c now rectified) | 8,000 | 8,000 | |
| 5. | Purchase A/c (Rs. 9,400 - Rs. 4,900) …………………….. Dr. To Gita’s A/c (Being credit purchase of Rs. 9,400 from Gita recorded as Rs. 4,900 in Purchase Book, now rectified) | 4,500 | 4,500 |
(b) Suspense Account
| Dr. | Particulars | Amount (Rs.) | Cr. | Particulars | Amount (Rs.) |
|---|---|---|---|---|---|
| To Raju’s A/c (Error 3) | 6,000 | By Difference in Trial Balance b/d | 10,000 | ||
| To Salary A/c (Error 4) | 8,000 | By Purchase A/c (Error 2) | 4,000 | ||
| Total | 14,000 | Total | 14,000 |
4.3 Adjusted Trial Balance (Worksheet)
4.3.1 Meaning and Objectives
An Adjusted Trial Balance is a Trial Balance prepared after incorporating all year-end adjustment entries (such as outstanding expenses, prepaid expenses, accrued incomes, unearned incomes, and depreciation) into the unadjusted ledger balances before preparing final financial statements.
4.3.2 Summary of Year-End Adjustment Entries
| S.N. | Adjustment Item | Adjustment Journal Entry | Effect on Unadjusted Trial Balance |
|---|---|---|---|
| 1. | Outstanding / Unpaid Expenses (e.g., O/S Salary, O/S Rent) | Concerned Expense A/c ………….. Dr. To Outstanding Expense A/c | • Add to the concerned Expense (Dr.) • Show Outstanding Expense in Cr. column |
| 2. | Prepaid / Unexpired Expenses (e.g., Prepaid Insurance) | Prepaid Expense A/c ………………. Dr. To Concerned Expense A/c | • Deduct from the concerned Expense (Dr.) • Show Prepaid Expense in Dr. column |
| 3. | Accrued / Receivable Income (Income earned but not received) | Accrued Income A/c ……………….. Dr. To Concerned Income A/c | • Add to the concerned Income (Cr.) • Show Accrued Income in Dr. column |
| 4. | Advance / Unearned Income (Income received in advance) | Concerned Income A/c ……………. Dr. To Advance Income A/c | • Deduct from the concerned Income (Cr.) • Show Advance Income in Cr. column |
| 5. | Depreciation on Fixed Assets | Depreciation A/c ……………………. Dr. To Concerned Fixed Asset A/c | • Show Depreciation in Dr. column • Deduct from Fixed Asset (Dr.) (or show Provision in Cr.) |
4.3.3 Worked Numerical Example: Six-Column Adjusted Trial Balance
Illustration 4.2 (NEB 5-Mark Standard):
Below is the Unadjusted Trial Balance of Himalayan Trading House as on the last day of Ashadh 2082:
| Account Titles | Unadjusted Dr. (Rs.) | Unadjusted Cr. (Rs.) |
|---|---|---|
| Cash and Bank | 40,000 | — |
| Furniture and Equipment | 1,00,000 | — |
| Purchases and Sales | 2,50,000 | 3,80,000 |
| Salary Expense | 50,000 | — |
| Rent Expense | 30,000 | — |
| Commission Received | — | 15,000 |
| Capital | — | 75,000 |
| Total | 4,70,000 | 4,70,000 |
Adjustments on the last day of Ashadh 2082:
- Salary still outstanding: Rs. 10,000.
- Rent paid in advance (prepaid): Rs. 6,000.
- Provide depreciation on Furniture and Equipment @ 10% p.a. (Rs. 10,000).
- Commission received in advance: Rs. 3,000.
Required: Prepare an Adjusted Trial Balance (Worksheet format).
Solution:
Himalayan Trading House
Adjusted Trial Balance Statement
As on the Last Day of Ashadh 2082
| Account Titles | Unadjusted TB Dr. (Rs.) | Unadjusted TB Cr. (Rs.) | Adjustments Dr. (Rs.) | Adjustments Cr. (Rs.) | Adjusted TB Dr. (Rs.) | Adjusted TB Cr. (Rs.) |
|---|---|---|---|---|---|---|
| Cash and Bank | 40,000 | — | — | — | 40,000 | — |
| Furniture and Equipment | 1,00,000 | — | — | 10,000 | 90,000 | — |
| Purchases | 2,50,000 | — | — | — | 2,50,000 | — |
| Sales | — | 3,80,000 | — | — | — | 3,80,000 |
| Salary Expense | 50,000 | — | 10,000 | — | 60,000 | — |
| Rent Expense | 30,000 | — | — | 6,000 | 24,000 | — |
| Commission Received | — | 15,000 | 3,000 | — | — | 12,000 |
| Capital | — | 75,000 | — | — | — | 75,000 |
| Adjustments Added: | ||||||
| Outstanding Salary | — | — | — | 10,000 | — | 10,000 |
| Prepaid Rent | — | — | 6,000 | — | 6,000 | — |
| Depreciation on Furniture | — | — | 10,000 | — | 10,000 | — |
| Advance Commission | — | — | — | 3,000 | — | 3,000 |
| Total | 4,70,000 | 4,70,000 | 29,000 | 29,000 | 4,80,000 | 4,80,000 |
4.4 NEB Board Exam Practice Questions
Group A: Very Short Answer Questions (1 Mark Each)
- What is Journal Proper?
- Give two examples of Errors of Principle.
- When and why is a Suspense Account opened?
- Define Compensating Errors with an example.
- Pass the adjustment entry for Prepaid Insurance of Rs. 4,500.
Group B: Short Answer & Numerical Questions (5 Marks Each)
- Explain the four types of accounting errors disclosed and not disclosed by the Trial Balance.
- Numerical Problem (Rectification of Errors): Rectify the following errors found in the books of Gorkha Traders after preparing the Trial Balance:
- (a) Wages paid for the installation of new machinery Rs. 12,000 was debited to Wages Account.
- (b) Sales Book was overcast by Rs. 5,000.
- (c) Goods returned by customer Sabina Rs. 3,000 were entered in the Purchase Return Book.
- (d) Cash paid to creditor Ramesh Rs. 7,600 was debited to his account as Rs. 6,700.
- (e) Furniture purchased on credit from National Woodworks for Rs. 20,000 was entered in the Purchase Book.
Worked answers to these exercises are in Chapter 4 Solutions.