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MIND BENDING ENTRY

SAHIL (Chartered Accountant/ CFP / B.com(AF)/ NCFM) (760 Points)

22 April 2010

HI EVERY1! I ALONGWITH A TEAM OF 3 CA's HAVE CUM 2 MUMBAI AS CENTRAL STATUTORY AUDITORS OF A BANK.

WHILE SCRUTINISING THE LEDGER,I CAME UP WITH AN ENTRY THAT SET EVERY1 PONDERING OVER IT.

IN ONE OF THE DEPARTMENTS,WHILE BOOKING THE PREPAID EXP. FOR YR. 08-09, THE ACCOUNTANT WRONGLY CREDITED THE 'PREPAID.EXP. A/C' AND DEBITED THE 'EXP A/C'. THEN FURTHER, WHEN IN THE NEXT YEAR STARTING, THE REVERSAL WAS 2 B PASSED FOR PREPAID EXP., HE AGAIN WRONGLY DEBITED 'PREPAID EXP.' A/C AND CREDITED THE 'EXP.'A/C.............

NOW WE'V 2 PASS THE RECTIFICATION ENTRY IN THE CURRENT YR., AND V'R THINKING OVER IT RIGHT NW N WILL SOON REACH THE RIGHT CONCLUSION. MEANWHILE IF ANY1 CAN SUGGEST THE RIGHT ENTRY,HE'S MOST WELCOME HERE...................

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28 Replies

Nicky (Chartered Accountant) (245 Points)
Replied 22 April 2010

Assume the Prepaid expenditure Rs. 100

a) Prepaid Expenditure A/c Dr...200

To Profit & Loss Appropiation A/c 200

(Being Rectification entry being passed for erreoneous entry..... u can detail as much as you want)

It will have to go to appropiation account as the expenditure head for last year has been closed...

Let me know what you people conclude..

And Sahil it has got to be 3 CA's and me and not the way.... (just a thought no harsh feelings)

SAHIL (Chartered Accountant/ CFP / B.com(AF)/ NCFM) (760 Points)
Replied 22 April 2010

HMMMM.............WELL I THINK IT SHOULD BE

EXP A/C DR.

TO EXP. RELATED TO PRIOR YEAR A/C

WHAT U PPL SAY?

CA Gandharv Sharma (Financial and Taxation consultant) (514 Points)
Replied 22 April 2010

lets thought it simple way:-

exp assumed - rs. 100

1. wrong entry passed (previous year)-

Exp a/c dr. 100

to PP Exp a/c. 100

2. Right Entry shud be passed (previous year)-

PP Exp A/c dr. 100

to Cash A/c. 100

3. Rectification Entry to be passed(in current year)(recommended)-

PP Exp A/c dr. 200

To prior period Exp. A/c (Exp. A/c) 100

To cash A/c 100

4. Current status - assuming expenditure has been incurred in current year, now the entry no 1 will be passed (recommended):-

Exp. A/c dr. 100

To PP Exp. A/c. 100.

Thus in the current year only entry no 3 and 4 will be passed. Prior period entry will be shown in profit and loss a/c as a separate head as per disclosure requirements of AS-5. Ultimately cash effect will have to be generated by crediting cash or in other words, one entry to be passed:-

PP Exp. A/c dr. 100

to cash a/c. 100 (Not recommended)

Shiva Kumar (CA Final) (208 Points)
Replied 22 April 2010

FIRST Things first. NEVER EVER say your clients name in a public fora. Never, I am saying it NEVER.

Now to your question.

Let us assume the Prepaid Expenses is Rs.10,000/-

Rectification Entry is as follows

Expenses A/c Dr 10,000

Prepaid Expenses A/c Dr 10,000

To Prior Period Income A/c 20,000

Note:

1. First, as it was prepaid in the 08-09, it is Current Year Expenses in 09-10, hence the respective expense account needs to be debited

2. Prepaid Expense was Credited in the Last year and now it is Debited, SO the effect is nullified

3. Prior period Income:

See, while incurring the expense I have already debited expenses a/c Say,

Expense A/c Dr 20,000

To Bank 20,000

Now, they should have passed the entru as (ASSUMED 50% as prepaid)

Prepaid A/c Dr 10,000

To Expense A/c 10,000

Instead they Debited the expense by Rs.10,000

So, the Expense SHOULD Have been Rs.10000 (Rs.20000 Dr-Rs.10000Cr)

Instead the Expense is NOW RS.30000(Rs.20000Dr+Rs.10000Dr)

Hence Excess Expense is Rs.20000/-, this needs to be given Credit For.

NOTES TO ACCOUNTS

IF according to your audit team the amount involved is SO MATERIAL as para in Notes to accounts indicating the errors need to be given.

Also, the prior period items is to be shown separately.

I REPEAT Again, never say your audit name again.

Good Luck

Shiva

1 Like

Shiva Kumar (CA Final) (208 Points)
Replied 22 April 2010

Originally posted by : Gandharv
	lets thought it simple way:- exp assumed - rs. 100 1. wrong entry passed (previous year)- Exp a/c dr. 100 to PP Exp a/c. 100 2. Right Entry shud be passed (previous year)- PP Exp A/c dr. 100 to Cash A/c. 100 3. Rectification Entry to be passed(in current year)(recommended)- PP Exp A/c dr. 200 To prior period Exp. A/c (Exp. A/c) 100 To cash A/c 100 4. Current status - assuming expenditure has been incurred in current year, now the entry no 1 will be passed (recommended):- Exp. A/c dr. 100 To PP Exp. A/c. 100. Thus in the current year only entry no 3 and 4 will be passed. Prior period entry will be shown in profit and loss a/c as a separate head as per disclosure requirements of AS-5. Ultimately cash effect will have to be generated by crediting cash or in other words, one entry to be passed:- PP Exp. A/c dr. 100 to cash a/c. 100 (Not recommended)

Dear Ghandarav, Please forgive me, you cannot pass this entry. Where was the mistake in cash in the first place.

Sorry to say, please improve standard.

Good Luck

Shiva

1 Like

(Guest)

EXP A/C DR...

TO P&L APP LIAB A/C...

AMOUNT WILL BE DOUBLE THE ACTUAL AMOUNT AS IT IS A RECTIFICATION / REVERSAL JV PASSED FOR PY..

(BEING PROFIT UNDERSTATED IN PY)

(THIS IS THE ONLY ANSWER TO YOUR PROB)

Mohit Jangid (Article) (141 Points)
Replied 23 April 2010

IN ONE OF THE DEPARTMENTS,WHILE BOOKING THE PREPAID EXP. FOR YR. 08-09, THE ACCOUNTANT WRONGLY CREDITED THE 'PREPAID.EXP. A/C' AND DEBITED THE 'EXP A/C'.

First of all see whether previous year auditor has given moc in this regard and if he has not given the moc then you are required to give moc for this effect. then only you can pass the required entry because the prepaid expenses are incurred in 2008-09.

Entry,

Prepaid Expense A/c Dr.( it means that in 08-09 entry passed is expenses a/c dr. to cash )

To expenses A/c ( for current year rectification )

To P&L Adjustment A/c

Kshitij Saxena (CA Final) (256 Points)
Replied 23 April 2010

@ Shiva Kumar

PERFECT ENTRY FRIEND

Nicky (Chartered Accountant) (245 Points)
Replied 23 April 2010

I guess what I have said is the correct answer..

Just confirming

CA.Paras B Patel (CA) (21 Points)
Replied 23 April 2010

Hey guys, why u r thinking so complicated. I seem a simple way as under :

Prepaid exps =100

2008-09:

(Wrong entry)

Exps. A/C Dr. 100

To Prepaid Exps. 100

(Correct entry would be:)

Prepaid Exps. Dr. 100

To Cash/ Bank 100

2009-10:

Rectification entry:

Prepaid exps Dr. 200

To P&L{ Exps.(wrongly Debited)} 100

To Cash/Bank(omitted to cr.) 100

(New Entry)

Exps. A/C Dr. 100

To Prepaid Exps 100.( Exps of CY)

Note:- These entries are from accounting piont of view and not from Auditor's point of view because an Auditor don't have to pass any rectification entry but have to disclose it in his report. The word Prior Period Item ,etc., in the above replies is for Disclosure purposes in financial stmts. and not for entry purposes.

Because of these, profit of 08-09 would have been reduced by rs.100 and liability increased by 100.

In CY 2009-10 the same is nullified by rectification entry as above and hence profit for CY 09-10 will increase by 100 which is to be Disclosed as PRIOR PERIOD ITEM( added to Profits) IN P&L A/C OF 09-10 as per AS-5. And not the Exps. item can be called Prior period item as it is for the CY2009-10 itself.

In a very very light tone......

1> Not to disclose ur client name,never, keep confidentiality

2> Not only knowledge of AS is imp, but also the skill to apply it is must.

3>Identifying the problem is half the solution. There was no que of CY Exps & Prepaid Exps but only of prepaid exps, and so it was foolish to assume 50%-50% ratio Shiva.

4>While focusing on the query you have to be clear abt ur stand, u have to understand diff between Accountant and Auditor on which ICAI will traping in Exams in ur Audit and A/Cs papers.

SAHIL (Chartered Accountant/ CFP / B.com(AF)/ NCFM) (760 Points)
Replied 23 April 2010

DEAR ALL! THANX 4 UR SUGGESTIONZ, BUT WITH DEEP REGRET, THIS IS 2 INFORM U THAT I DIDN'T POST MY QUERY COMPLETELY EARLIER,SO NOW I'V MODIFIED IT............

ITS A POLITE REQUEST 2 U ALL THAT PLZ READ IT AGAIN NOW.........

I ALSO TOTALLY AGREE WITH SHIVA & PARAS,N I ADMIT MY MISTAKE THAT THE CLIENT'S NAME MUST NOT B MENTIONED HERE..................THANX

CA. Mithilesh kr. Singh (PROFESSIONAL ) (45 Points)
Replied 23 April 2010

let prepaid exp 100

rectification entry for raising prepaid exp

Prepaid exp a/c dr 200

To profif and loss app.a/c a/c 200

(Being error rectified)

Now for writting off prepaid exp

expences a/c dr 200

To prepaid exp 200

please tell me if I am wrong

CA. Mithilesh kr. Singh (PROFESSIONAL ) (45 Points)
Replied 23 April 2010

It may be he has passed adjustment entry for prepaid exp then cash or bank a/c will not be involved

Nicky (Chartered Accountant) (245 Points)
Replied 23 April 2010

Accoding to me cash/bank is not involved had that been the case then the last years bank reconciliation would not have tallied..., Rectifying bank balances is something pretty academical and practical

According to me the query is relatable to passing a reverse entry