Rectification of Errors – Location of errors

Location of errors of principle, errors of compensating nature and errors of omission is

slightly difficult because of the fact that such errors do not aiTect the agreement of the Trial Balance and, therefore, their location may he considerably delayed. However, location of errors of commission is comparatively easier because they affect the agreement of the Trial Balance. Thus, the errors can he classified into two categories from the point of view of locating then

(i) Errors which do not affect the agreement of the Trial Balance.

(ii) Errors which affect the agreement of the Trial Balance.

Errors which do not affect the agreement of the Trial Balance. As stated before, errors of omission, errors of commission and ertors of a compensating nature by themselves do not affect the agreement of the Trial Balance. Their location is therefore a difficult process. They are usually found out when statement of accounts are received by the business or sent to the customers or during the course of internal or external audit and sometimes by chance. For example, if a credit purchase of Rs 500 from Ram has not been recorded in the books of accounts, the error will not affect the agreement of the Trial Balance and, therefore, at the time of finalising the accounts it may not be traced out However, this will be found out when a statement of account is sent to Ram showing the money due to him or when a statement of account is received from Ram showing the money recoverable by him.

Definition of Book Keeping

Book Keeping is mainly concerned with recording of financial data relating to the business operations in a significant and orderly manner. It is concerned with the permanent record of all transactions in a systematic manner to show its financial effect on the business. It covers procedural aspects of accounting work and includes record keeping function. It is the science and art of correctly recording of account all those business transactions that result in the transfer of money or money’s worth.

Book Keeping and accounting are often used interchangeably but they are different from each other. Accounting is a broader and more analytical subject. It includes the design of accounting systems which the book keepers use, preparation of financial statements, audits, cost studies, income tax work and analysis and interpretation of accounting information for internal and external end users as an aid to making business decisions. This work requires more skill, experience, and imagination.

Rectification of Error Types

There are a number of errors that might have been made that do not prevent the trial balance from agreeing. These are:

• Errors of omission, where a transaction has been completely omitted from the ledger accounts.

• Errors of commission, where one side of a transaction has been entered in the wrong account (but of a similar type to the correct account, for example, entered in the wrong receivable’s account, or in the wrong expense account).

An error of commission would not affect the calculation of profit, or the position shown by the balance sheet.

• Errors of principle. As for errors of commission, but the correct and incorrect accounts are of different types, for example, entered in the purchases account instead of a non current asset account. This type of error would affect the calculation of profit, and the position shown by the balance sheet.

• Errors of original entry, where the wrong amount has been used for both the debit and the credit entries.

• Reversal of entries, where the debit has been made to the account that should have been credited, and vice versa.

• Duplication of entries, where the transaction has been posted twice.

• Compensating errors, where two or more transactions have been entered incorrectly, but cancelling each other out, for example, electricity debited with $100 too much, and sales credited with $100 too much

Accounting Cycle

Accounting cycle or accounting process includes the following:

1. Identifying the transactions from source documents like purchase orders, loan agreements, invoices, etc.

2. Recording the transactions in the journal or subsidiary books as and when they take place.

3. Classifying all entries posted in the journal or subsidiary books and posting them to the appropriate ledger accounts.

4. Summarising all the ledger balances and preparing the trial balance and final accounts with a view to ascertain the profit or loss made during a particular period and ascertaining the financial position of the business on that particular date.

Joint Venture Accounting – Introduction

MEANING OF JOINT VENTURE

Ajoint venture is an association of two or more than two persons who have combined for the execution ofa specific transaction and divide the profit orloss thereof in the agreed ratio. For example if A and B undertake the job of construction of a school building for a sum of Rs 1,00,000 their coming together for this specific job will be termeci as ajoint venture and each one of them will be termed as a co-venturer. The venture will be over as soon as this transaction is over i.e., the school building is completed. Joint venture agreements can be made for similar other transactions, e.g. joint consignment of goods, underwriting of the shares or debentures issued by a particular company, purchasing and selling of a specific property etc.

The essential features of a joint venture agreement can be put as follows:

(I) There is an agreement between two or more than two persons.

(ii) The agreement is made for the execution of a specific venture.

(ill) The proflt or loss on account of the venture is shared by the venturers in the agreed ratio. However, in the absence of any agreement between the. venturers, the profit. and losses are to he shared equally.

(iv) The agreement regarding the venture is automatically over as soon as the tiansaction is completed.

Consignment Accounting – Loss of Stock

Consignment Accounting  – LOSS OF STOCK 

In the course of consignment transactions some loss of stock may occur. It may be in the course of transit before or after taking delivery of the goods by the consignee or itmay occur at the godown of the consignee. Such loss of stock may be normal or abnormal. Normal Loss is due to inherent characteristics of goods, e.g., loss due to evaporation, sublimation, drying up of goods etc. If lass occurs on account of reasons which are only accidental or which rarely happen the loss is tenned as Abnormal. The examples of such losses are—theft of goods or destruction of goods by fire.

Normal loss. It is not shown in the consignment account. This is included in the value of goods sold and closing stock by inflating the rate per unit. The value of closing stock will, therefore, be that proportion of total value of goods sent which number of units in hand bear to total number of units as diminished by loss (i.e., the units actually received by the consignee). In short cost of goods sent becomes cost of goods received.

Contingent Asset and Contingent Liability

“A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the enterprise.”

Contingent assets are not recognized in financial statements since this may result in the recognition of income that may never be realised. It is usually disclosed in the report of the approving authority where an inflow of economic benefits is probable. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate

“A contingent liability is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. It is a present obligation that arises from past events but ¡s not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be determined”.
Examples of a contingent liability would be an outstanding lawsuit, bank guarantee etc. Suppose, if a company is sued by a former employee for ₹ 5,OO,OOO for age discrimination, the company will have a liability if it is found guilty. However, if the company is not found guilty, the company will not have an actual liability. Such a liability is known as a contingent liability.

 

Accountancy Class 11 – Errors which affect the agreement of the Trial Balance.

Accountancy Class 11 – Errors which affect the agreement of the Trial Balance: Errors which affect the agreement of the Trial Balance. Such errors are easy to be located since they are caught at an early stage. As soon as the Trial Balance does not tally, the accountant can proceed to find out these errors. The procedure to be followed for location of such errors can be put as follows:

  • The difference of the two sides of the Trial Balance should be found out The amount should then be divided by two. The two sides of the Trial Balanc2 should then be checked to find out if there is an amount equal to that figure. It is possible that the amount may have been placed to a wrong side resulting in difference in the totals of the Trial Balance. For example, if the total of the debit side of the Trial Balance is Ps 450 more than the credit side of the Thal Balance, Rs 450 should be divided by 2, thus giving a figure of 225. The debit side should then be checked to find out if there is an amount of Rs 225 appearing on that side. If it is so, it should be seen whether the amount has been correctly put to that side or it should have gone to the credit side.
  • Since, cash and bank account are not maintained usually in the Ledger, it will be also advisable to check whether the balances of the cash and bank accounts have been taken in the Trial Balance or not.
  • The schedules of sundry debtors and sundry creditors should be checked to find qut whether all balances of debtors and creditors have been included in these schedules or not.
  • The totals of the subsidiary books such as the Sales Book, Purchases Book should be checked and it should be seen whether posting has been done from these two books correctly to the Sales, Purchases or other accounts as the case might be.
  • If the error is still not traceable, check thoroughly the books of original entry and their posting into the Ledger and finally the balancing of different accounts.

 

 

Definition of Accounting

Definition of Accounting   

Accounting is used by business entities for keeping records of their monetary or financial transactions. A businessman who invested money in his business would like to know whether his business is making a profit or incurring a loss, the position of his assets and liabilities and whether his capital in the business has increased or decreased during a particular period.

A widely accepted definition of accounting has been provided by the American Accounting Association. According to this definition accounting is the process of identifying, measuring and communicating information to permit judgement and decisions by the users of accounts. This definition implies that –

(1) there should be users of accounts who need relevant information,

(2) the information should enable the users to make judgement and decisions, and

(3) transactions and events are measured and the data are processed and then communicated to the users through accounting.

Accounting may be defined as:

• the classification and recording of monetary transactions;

• the presentation and interpretation of the results of those transactions in order to assess performance over a period and the financial position at a given date;

• the monetary projection of future activities arising from the alternative planned courses of action.

Note the three aspects considered in this definition: recording, reporting and forecasting:

 

Fundamentals of Accounting – Accrual concept

Fundamentals of Accounting – Accrual concept: The measurement of accounting income is also subject to the accrual concept. At the end of the accounting period, when the final accounts are prepared there may be many business activities at different stages of progress. Some of the goods might be lying unsold, some work may be slit I in progress, money may have still to be collected from the debtors etc. In accounting, the revenue is generally treated to be realised when the goods or services are furnished to the customers and not when cash or other valuable consideration has been received from them. It may be possible that some of the items fr which the revenue has been treated as realised may not result in any revenue on account of subsequent non-payments. Thus, the income disclosed by the Income Statement may not be the real income of the business.

Single Entry System Meaning

Single Entry System may be defined as any system which is not exactly the Double Entry System. In other words, Single Entry System may consist of:

(i) double entry in respect of certaintmnsactions such as cashreceivedfromdebtors, cash paid tó,cedit

(ii) Single Entry in respect of certain transactions such as cash purchases,  sales, expenses made fixed assets purchased. etc.,

(iii) No Entry in respect of certain transactions such as depreciation, bad debts; etc. Thus, a business is said to be using Single Entry System if it is not following completely the principles of Double Entry System of Book-keeping. Kohler defines Single Entry System as, “A system of book-keeping in which as a rule only records of cash and of personal accounts are maintained, itis always incomplete double entry varying with the circumstances”.