In financial accounting, every single event occurring in monetary terms is recorded. Sometimes, it just so happens that some events are either not recorded or it is recorded in the wrong head of account or wrong figure is recorded in the correct head of account. Whatever the reason may be, there is always a chance of error in the books of accounts. These errors in accounting require rectification. When there is a difference in a trial balance a suspense account is opened with the amount of the difference so that the trial balance agrees (pending the discovery and correction of the errors causing the difference).

Here paid rent to landlord Rs. 2,400, debited to Land Lord’s A/c by Rs. 2,004. Thus the land lords account is undercasted by 2,400 – 2,004 = Rs. 396

So the rectifying entry will be

Entry for dishonour should be to reduce the bank balance and to make reversal of discount allowed. further we have to make Hari Ram debit again for Rs. 720.

Errors of principle, omission and commission all types may occur at time of recording transactions in journal.

Sale or return is a term sale, where the seller sold goods on the basis of return, there might be a chance of return of goods, or acceptance of goods, or acceptance of part of goods. This method is also called the Sale on Approval basis.

When the transactions of sending the goods on sale or return basis are few, the seller may treat it as normal sale and record it in the books accordingly. However, if the goods are sent on sale or return basis, the unsold goods must be included in the inventory at cost.

The sale price of the goods sent = Rs. 600

Let the cost price be x

So sales price = 600 = x + 20% of x = 1.2x

Or x = Rs. 500

Assets such as automobiles, computer equipments, and office furniture, are customarily traded in for new assets of the same kind. The trade-in-allowance (commonly known as exchange value) granted by the dealer or manufacturer differs from the book value of the old asset. If the dealer grants an exchange value greater than the book value, then a gain is realized on exchange of the asset. If the dealer grants an exchange value lesser than the book value, then a loss is realized on exchange of the asset. As per prudent and accepted accounting practices, the loss will be taken to the profit and loss account of the year concerned, and profit on exchange will be deducted from the value of the new asset.

Here The old machinery has been valued at Rs. 800 for exchange purpose.

Thus loss on exchange will be book value of asset less exchange value = 5,000 – 800 = Rs. 4,200

Average Profits Method: Under this method goodwill is calculated on the basis of the average of some agreed number of past years. The average is then multiplied by the agreed number of years. This is the simplest and the most commonly used method of the valuation of goodwill.

Goodwill = Average Profits × Number of years of Purchase

Before calculating the average profits the following adjustments should be made in the profits of the firm:

(a) Any abnormal profits should be deducted from the net profits of that year.

(b) Any abnormal loss should be added back to the net profits of that year.

(c) Non operating incomes e.g. Income from investments etc should be deducted from the net profits of that year.

Profit of the year 1 : 20,000

Profit for the year 2 : 18,000

Profit for year 3 : 9,000

Loss for the year 4 : 2,000

Loss for the year 5 : 5,000

Average profit of last 5 years = (20,000 + 18,000 + 9,000 – 2,000 – 5,000)/5 = Rs. 8,000

Goodwill = 8,000 × 1.5 = Rs. 12,000.

A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation’s bank statement, as supplied by the bank, and the corresponding amount shown in the organization’s own accounting records at a particular point in time.

Such differences may occur, for example, because a cheque or a list of cheques issued by the organization has not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the organisation’s books, or either the bank or the organization itself has made an error.

On admission of a partner, unrecorded investments worth Rs. 5,000 and unrecorded liability towards suppliers for Rs. 1,500 will be recorded in Revaluation A/c because old partner will only get profit or loss through all business activities were done before coming of new partner. If there is any increase or decrease in these unrecorded assets and liabilities through revaluation account, it will be distributed between old partners.