Wrong JV rectification

Let me understand your situation. The company received money from a debtor but it was wrongly credited to an expenditure head instead of the party's account. As a result of this error, the expenditure was suppressed, profit was overshown and the receivable was also overshown. Is my understanding right?

Now the company would like to rectify this error. I assume that it was just an error due to oversight but not due to fraud. I also assume that the error is not material with respect to the transactions of the company, though the amount was in lakhs.

If my assumptions are right, the suggested measure is to credit the party's account and debit prior period adjustments account. The net effect of the prior period adjustments will have to be shown in the profit and loss account. See the AS 5 on this issue.

If the amount is material and adversely affects the profits of the company, auditor may also be required to disclose it in his audit report.

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Dear Sir,

I am still not getting quarry whether it is question of excess booking of expenses in previous year or current year ?

Hello Sir,

If I have understood your query correctly, then instead of passing an Entry of

Party A/c ... Dr

To, Income Account....

U have passed,

Party A/c ..... Dr

To Expense A/c.

which in turn may reduced your Expense, and also doubled your Profit.

If that is the case, then you can pass a rectification entry in the Current Year, and show the difference in Prior Period Adjustment Account which is according to AS5. It is also preferred if you add a note showing clarification as to why this account has arose in your books in the Director's Report.

In case you want to discuss the case on call, you will have to use the option of TALK to a CA, on the Homepage or click on Talk to Rohit R Sharma below.

Hope this clarifies your Query.

Feel Free to get back for any further clarifications.

Thanking You.

Regards,

CA Rohit R Sharma.