rectification of errors

Rectification Entries

Sometimes, errors may ocur while recording transactions,posting them into the ledger or while balancing the ledger accounts. In such cases, certain entries should be passed in order to rectify the errors. Such entries are called "Rectification Entries". When there is an error in passing an entry, another entry(rectification entry) should be passed to nullify the effect of the previous incorrect entry.

For example, let us imagine that the firm has paid Rs. 9,500/- as salaries. Instead of noting down the amount as Rs. 9,500/-, let us presume the accountant wrote Rs. 5,900/-. This is an error. In order to rectify this error, we should keep the previous entry as it is, and pass another entry which will balance the difference.

The rectification entry will be as follows:

Salaries a/c      3,600

   To Cash a/c      3,600

(being the error in noting down the salaries amount, now rectified)

This entry must now be posted in the ledger.

- Lasya Ramakrishna

Explanation to the main items in Profit and Loss Account

1.Salaries :- It is the remuneration paid to the employees those who have indirectly participated in the production. Ex: Office staff. These salaries are to be shown on the debit side of the Profit and Loss a/c. This account may sometimes include salaries of selling and distribution staff.

2. Rent, Rates and Taxes :- This includes rent incurred on office, warehouse, showroom, taxes paid to local bodies and Government. This item is an expenditure. Hence, it appears in the debit side of the Profit and Loss a/c.

3.Insurance :- It is premium paid to the Insurance company to cover the risk against fire, theft of material and assets of the firm. Since, this premium is an expenditure, it is to be posted in the debit side of the Profit and Loss a/c. If the firm pays policy premium on the personal life of the proprietor, then it has to be debited to capital a/c (deducted from capital) but not to be debited Profit and Loss a/c.

Contra entry example

Contra Entry :- If a transaction requires entries on both the debit and the credit sides simultaneously, it is called 'Contra entry'.

Example:- When the cheques previously received are deposited now in the bank, They should be recorded in the bank column on the debit side and the cash column on the credit sided of the cash book. Contra entries do not have ledger folio. To indicate that it is a contra entry, the alphabet 'C' is mentioned in the ledger folio column on both the debit and the credit sides. 'C' means contra entry.

Note :-  If cash is withdrawn from the bank for the proprietors personal use, then it is not a contra entry.

Usually, the contra entries will appear in the following occasions.

a. When an account is opened with a bank.
b. The firm's cash is deposited in the bank.
c. The cash is withdrawn from bank for office use.
d. The cheques received from debtors, are deposited in the bank.

In transactions a&b, the cash balance available with the firm is decreased, the cash in bank is increased. In transaction 'c', the cash in the bank is decreased and the cash in the firm is increased.

Note: 1.When cheque received from a debtor is deposited in the bank on the same day, the entry will be as under:

Bank A/c              Dr.

    To Debtors A/c

(Being the cheques received from the debtor is treated as cash)

2. When the cheque received from a debtor is not deposited into bank on the same day, two entries are recorded.

a. When the cheque is received :

Cash A/c              Dr.

    To Debtor A/c

(Being the cheque received from the debtor is treated as cash)

b. When the cheques are sent to the bank next day for collection.

Bank A/c              Dr.

    To Cash A/c

(Being the cheque deposited in the bank)

The above entry 2(b) is called a contra entry.

Convention of Consistency

The convention of consistency signifies that the accounting practices and methods should remain consistent (unchanged) from one accounting year to another. In other words, accounting practises should remain the same from one period to another. Comparison of results from one period to another is possible only when same accounting rules are followed. For example, if a concern adopts Reducing Instalment method of depreciation in one year and Straight Line Method of depreciation in another year, then it will be difficult to make comparison between the results of the two periods. Sometimes, wrong conclusions may be drawn. If change becomes necessary the change and its effect should be stated clearly.

Accrual Concept

Business transactions are recorded when they occur and not when the related payments are received or made. This concept is called accrual basis of accounting and it is fundamental to the usefulness of financial accounting information.

Objective Evidence Concept

The verifiable objective evidence concept states that all accounting transactions should have evidence and must be supported by business documents and vouchers.

Realisation Concept

The realization concept and convention is an important concept in accounting. It basically means that accounts recognize transactions and any profits arising from it at the point of sale or transfer of legal ownership. They do not just recognize the transactions when cash exchanges hands, but also when the transaction occurs at the point of sale, and this is when the transaction becomes legal, as it does not just become legal when the money is transferred. Therefore if a big client of yours just sign a business contract, it can be realised as a legal transaction. Even though you might receive cash months later, the contract here act as a confirmation that the sales will occur and therefore the realisation concept here allows the creation of such transaction.

Matching Concept

The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period. Accordingly, under the matching concept the expenses of a particular accounting period are the costs of the assets used to earn the revenue that is recognized in that period. It follows, therefore, that when expenses in a period are matched with the revenues generated for the same period, the result is the net income or loss for that period.