A bill of Rs. 2,000 for old office furniture sold to Mr. Rajesh was entered in the sales book. The book value of furniture sold was Rs. 2,500. What will be the rectified journal entry?

Question

Accepted Answer

The correct option is 2:
The rectification of this transaction involves a compound journal entry to correct the errors committed in the initial recording. The sale of an old office asset like furniture is a capital transaction and should be credited to the Furniture Account (at its book value) and recorded in the Journal Proper, but it was wrongly entered in the Sales Book, which is used only for the credit sale of *goods*. The error entry therefore incorrectly credited the Sales Account with the sale price of Rs. 2,000. To cancel this erroneous credit to Sales Account, we must debit Sales A/c by Rs. 2,000. Secondly, since the book value of the furniture was Rs. 2,500 and the sale price was Rs. 2,000, a loss of Rs. 500 (Rs. 2,500 - Rs. 2,000) was incurred. This loss must be recorded by debiting the Loss on Sale of Furniture A/c by Rs. 500. Finally, to complete the disposal of the asset from the books, the Furniture A/c must be credited with its book value of Rs. 2,500. The total debits (Rs. 2,000 + Rs. 500) match the credit (Rs. 2,500), thus correcting the books.

The incorrect option is 1:
This entry debits the Furniture A/c for Rs. 2,000, which violates the fundamental rule for asset disposal. When a fixed asset is sold, the asset account (Furniture A/c) must be credited to reduce its balance (Credit what goes out) by its book value of Rs. 2,500. Debiting the Furniture A/c would incorrectly inflate the asset balance on the balance sheet. Furthermore, the credit to Sales A/c of Rs. 2,500 is entirely incorrect. The Sales A/c needed to be debited to cancel the original wrong credit of Rs. 2,000, not credited with a larger amount. This option would compound the error by recording an even larger fictitious sale.

The incorrect option is 3:
While this option correctly credits the Furniture A/c with the book value of Rs. 2,500, thereby rectifying the omission of the asset disposal, it incorrectly debits the Sales A/c for Rs. 2,500. The original error was a credit of Rs. 2,000 to the Sales A/c. To cancel this error, the Sales A/c should only be debited with Rs. 2,000. Debiting it with Rs. 2,500 over-rectifies the account, resulting in a net debit balance of Rs. 500 in the Sales A/c. Crucially, this rectification entry also completely ignores the loss of Rs. 500 (Rs. 2,500 - Rs. 2,000) that was incurred on the sale, a necessary entry for the profit and loss determination.

The incorrect option is 4:
This option is incorrect because it debits the Furniture A/c for Rs. 2,500 instead of crediting it, which wrongly increases the asset's balance. This is the opposite of the required accounting treatment for asset disposal. Additionally, it credits the Sales A/c for Rs. 2,500. This is also wrong because the Sales A/c needed to be debited by Rs. 2,000 to cancel the original erroneous credit. By crediting Sales A/c further, the entry incorrectly records more revenue than before. Finally, like Option 3, this entry omits the necessary recording of the Rs. 500 loss on the sale of the furniture.