Rectification of Errors

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Rectification of Errors

Or

Rectification of Errors in Accounting

 

Introduction and Meaning

 

In the previous chapter we have learnt that a Trial Balance is prepared to check the arithmetic accuracy of transactions recorded in a Journal posting them into the ledger and balancing the ledger account. If a Trial Balance agrees it is assumed that recording posting etc. have been done correctly. But this is only partly correct because even if Trial Balance agrees there may be some errors in the accounting records.

Accuracy is assured only when there are no errors in the books of accounts. To confirm accuracy errors are identified and rectified. Many business units have shifted from manual accounting to computerized accounting. Yet errors in accounting are unavoidable. Hence errors are to be located and rectified to find out the real profit or loss and financial position.

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Reasons of Errors

 

1. Lack of Accounting Knowledge

 

2. Wrong Data Collections

 

3. Wrong Recording

4. Incorrect Arithmetical Calculations

Need of Rectification

 

For the preparation o correct Accounting Entries/Records.

 

Preparation of Profit & Loss A/c with corrected figures to finalize correct Profit and Loss.

 

To find out the accurate financial position of the firm/enterprise by preparing Balance Sheet with corrected figures.

Types of Errors

 

While writing the Books of Accounts it is likely that some mistakes are committed and they are required to be corrected. Errors can be classified in the following four categories.

Errors of Omission: This kind of error arises when a transaction is partially or completely omitted to be recorded in the books of accounts. e.g. failure to record credit purchases. As a result of this omission neither the creditor’s account is credited nor is the Purchase account debited. This type of error does not affect the agreement of Trial Balance and hence the Trial Balance fails to disclose such type of errors.

 

These can be of two types

 

Error of complete omission which does not affect the agreement of Trial Balance.

Error of partial omission which affects the agreement of Trial Balance.

Errors of Commission: These are the errors which are committed due to wrong Entries or Posting of transactions wrong totalling or wrong balancing of the accounts, wrong casting of the- Subsidiary Books or wrong recording of amount in the books of original entry. These errors affect the agreement of Trial Balance.

 

Errors of commission are classified into following:

 

Errors of Recording

Errors of Casting

Errors of Carrying
Errors of Posting

Errors of Principle: Transactions recorded without following the accounting principles and rules are known as Errors of Principle. An error of principle may occur due to the incorrect classification of expenditure or receipt between capital and revenue as it may lead to under/ over stating of income or assets or liabilities. This error does not affect the Trial Balance as amounts are placed on the correct side but in a wrong account.

 

Compensating Errors: When two or more errors are committed in such a way that the net effect of these errors on the debit and credit of accounts is nil or nullified such errors are called compensating errors. These errors do not affect the agreement of Trial Balance.

 

Errors may also be classified as One Sided Errors and Two Sided Errors.

 

One Sided errors affects only one account and affects the agreement of Trial Balance. These Errors can be rectified by giving a note for debiting or crediting the account, if it is located before preparation of Trial Balance.

 

When One Sided Errors are located after the preparation of Trial Balance then these errors will be rectified with help of Suspense Account.

 

Two sided errors affects two or more accounts and it does not affect the agreement of Trial Balance. It always be rectified with the help of Journal Entries.

Note: Rectified entries are recorded in Journal Proper.

Detection of errors

 

Stages of Detecting Errors

 

Rectifying errors depends generally on when the error is detected. Errors can be detected at any one of the following stages.

 

Stage 1

Before preparation of Trial Balance

 

Stage 2

After preparation of the Trial Balance but before preparing Final Accounts.

Stage 3

After preparing Final Accounts.

Principles for Rectification of Errors

All errors, whatever may be their kind or nature, result in one of the following four positions in one or more accounts.

 

Excess debit in one or more accounts: This must be rectified by ‘crediting’ the excess amount to the respective account or accounts.

 

Short debit in one or more accounts: This must be rectified by a ‘further debit’ to the respective account or accounts involved.

 

Excess credit in one or more accounts: This can be rectified by ‘debiting’ the respective account with the excess amount involved.

 

Short credit in one or more accounts: This can be rectified by a ‘further credit’ to the respective account or accounts involved.

 

The following three steps may be adopted while attempting to rectify an error

 

Ascertain what has actually been done, i.e. what is the error?.

 

Make sure what ought to have been done, i.e., the correct record.

 

Decide what is to be done in view of what has been done and what ought to have been done. i.e., rectification.

 

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Suspense account

 

When the Trial Balance does not tally the amount of difference is located to the debit (when the total of the credit column is higher than the debit column) or credit (when the total of the debit column is higher than the credit column) to a temporary account known as ‘Suspense Account’. Errors effecting only one account is known as one sided errors. These errors will now be rectified with the help of Suspense Account. When all one sided errors are located and rectified Suspense Account automatically closes.

 

When the errors affecting the suspense account are located, they are rectified with suspense account. Suspense account is continued in the books until the errors are located and rectified. Such balance will be shown in the balance sheet. Debit balance will be shown on the asset side and the credit balance will be shown on the liability side.

 

When all the errors affecting the trial balance are located and rectified, the suspense account automatically gets closed.

 

Example

 

Following are some accounting errors, rectify them.

 

Sales for 15,000/- made to Vaishnavi was not entered in the Sales Book.

Salary of 9,000/- paid to Accountant Varundas was debited to his personal account

Old Furniture sold for 3,500/- was entered in the Sales Book.

Carriage paid 500 on purchase of a Machine was debited to Carriage A/c

Cash 45,000/- paid to Aditya Verma was debited to Kumar Verma’s A/c