Page 136 - DEBK-XI(2020)

Rectification of Errors 17.3

Solution:
RECTIFYING JOURNAL ENTRIES
Date Particulars L.F. Dr. (`) Cr. (`)
(i) Ramesh ...Dr. 360
To Purchases A/c 360
(Being the rectification of a purchase of ` 1,040 from Ramesh
passed as ` 1,400)
(ii) Samples or Advertisement A/c ...Dr. 5,000
To Purchases A/c 5,000
(Being the goods distributed as samples omitted to be recorded,
now recorded)
(iii) Plant and Machinery A/c ...Dr. 350
To Wages A/c 350
(Being the wages for additions to machinery wrongly treated as revenue
expenditure, now rectified by capitalising the same)

Effect on Net Profit or Effect of Errors on Final Accounts

For calculating the effect of errors on net profit, it is essential to know that only
those accounts which are taken to Trading Account or Profit and Loss Account,
i.e., Nominal Accounts, affect the profits. For example, Stock Account, Purchases
Account, Wages Account, Salaries Account, Commission Account, Bad Debts
Account, etc., affect the Net profit because they are shown either in Trading
Account or Profit and Loss Account. If any of these accounts is debited in the
rectification entry, it reduces the Profit and if any of these accounts is credited
then it increases the Profit.

Balances of Personal and Real Accounts form part of a Balance Sheet, so errors in such
types of accounts will affect Balance Sheet only, not Profit and Loss Account.

3. Rectify the following errors and show their effect on profit:
(i) A return of goods worth ` 5,000 by a customer was taken into stock but no
entry was passed in the books.

(ii) A credit purchase of goods worth ` 15,000 from Mohan & Co. was not passed
in the books although the goods were taken into stock.

(iii) A return of goods worth ` 5,000 by Mohan was entered in the Purchases
Return Book.
(iv) A return of goods worth ` 8,000 to Sohan was passed through the Sales
Return Book.
(v) A Bills Receivable of ` 2,000 received from Ram was passed through the Bills
Payable Book.