Rectification of Errors
- Meaning of Errors
Errors are unintentional omission or commission of amounts and accounts in the process of recording transactions.
- Classification of Errors
Keeping in view the nature of error, errors can be classified into the following four categories:
- Errors of commission these are the errors which are committed due to wrong positing of transactions, wrong totaling 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 accuracy of trial balance.
Errors of commission can be classified into following:
- Errors of recording
- Errors of casting
- Errors of carrying
- Errors of posting
Errors of omission this kind of error arises with a transaction is partially or completely omitted be recorded in the books of accounts.
These can be of two types:
- Error of complete omission which does affect the accuracy of trial balance.
- Error of partial omission which affect accuracy of trial balance.
Errors of principle transactions recorded in contravention of the accounting principles, are known as error 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 debits and credits of accounts is nil or nullified, such errors are called compensating errors. These errors do not affect the tallying of trial balance.
- Rectification of Errors
Rectification of errors is the procedure of rectifying the errors committed and to set right the accounting records.
These are various objectives or reasons for which the errors are rectified, they are as follows:
- For the preparation of correct accounting records.
- For ascertainment of correct net profit or loss.
- For exhibiting true financial position of the organization by preparing the balance sheet with correct data.
Rectification of Errors which do not Affect the Trial Balance or Two-sided Errors
Two-sided errors are those errors that have been committed on the both sides, i.e. debit and credit. These are the errors which do not affect the trial balance or are not disclosed by trial balance and are committed in two or more accounts.
Examples of such errors are as follows:
- Errors of complete omission.
- Errors of recording in the books of original entry.
- Errors of posting involving the posting to wrong account on correct side with correct amount.
- Errors of principle.
- Compensating errors.
These errors can be rectified by recording a journal entry giving the correct debit and credit to the concerned accounts which were affected by error.
The rectification process involves the following steps:
Step 1 Wrong Entry Write the entry which has already been passed in the books, i.e. the wrong entry.
Step 2 Reverse of wrong entry write the reverse of the above entry, the wrong entry, to notify the effect of wrong entry.
Step 3 Correct entry write the entry which should have been passed, i.e. the correct entry.
Step 4 Rectifying entry write the net effect in step 2 and step 3.
- Rectification of Errors Affecting Trial Balance or One-sided Errors
One-sided errors are those errors, which have occurred in one-side ‘debit or credit’ of an account. These are the errors which effects trial balance and affects only one account.
Examples of such errors are:
- Error due to partial omission.
- Error of casting.
- Error in carrying forward.
- Error in totaling or balancing of an account.
- Errors of posting
(other than an error of posting a correct amount in the wrong account but on the correct side).
- Omission of posting the total of a subsidiary book.
- Omission of an account from trial balance.
- Entering the balance of an account in the wrong amount column of the trial balance.
- Wrong totaling of the trial balance.
6. Rectification of Errors Depend on the stage at which the errors are located
- Before preparation of trial balance this is a stage, when errors are located and rectified after the closing of accounts, i.e. after transferring the difference in trial balance to suspense account but before the preparation of financial statements.
When one-sided errors are located after the preparation of trial balance, rectifications are carried out by passing a journal entry with the help of respective account which is affected by the error and suspense account.
A suspense account is used to complete the
double entry, as only one account is debited/credited for rectification of one-sided error. It should be noted unless otherwise stated, errors are normally rectified before the preparation of final accounts, i.e. with the help of suspense account.
- Suspense Account
Suspense account is an account used on a temporary basis for any transaction or balance that cannot be identified.
Suspense account is used for rectifying the errors which affect the trial balance, the errors which do not affect the trial balance are not rectified with the help of suspense account.
The errors are rectified by passing their double entry in the debit side or credit side of the suspense account.
- Preparation of Suspense Account
If the debit side of the trial balance exceeds the credit side, the differences is put on the credit side of the trial balance.
In this case, ‘suspense account’ will show a credit balance or if the credit side of the trial balance exceeds the debit side, the difference is put on the debit side of trial balance.
In this case, ‘suspense account’ will show a debit balance.
Opening of suspense account avoids delay in the preparation of financial statements.
- Disposal of Balance of Suspense Account
When the errors which affect the suspense account located, they are rectified with the help of the suspense account, when all such errors are located and rectified, the suspense account stands balanced.
- Treatment of Balance of Suspense Account
When the suspense account cannot be close, i.e. when the errors affecting the trial balance are still to be located and rectified, the suspense account will show outstanding balance.
The balance in the suspense account is taken to the balance sheet on the assets side if there is a debit balance or the liabilities side if there is a credit balance.