11. Rectification of Errors

7/31/2019 11. Rectification of Errors

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RECTIFICATION OF

ERRORS


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The procedure followed to

rectify the errors committedand to set right accounting

records is called rectification

of errors.


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OBJECTIVES OF RECTIFYING ERRORS

Preparing correct accounting records.

Ascertaining profit and loss for the

accounting period by preparing the profit andloss account with the correct figures.

Exhibiting a true financial position of theconcern on a particular date by preparingbalance sheet with the correct accountingdata.


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CLASSIFICATION OF ERRORS

ERRORS OF PRINCIPLE

ERRORS OF OMISSION

ERRORS OF COMMISSION

COMPENSATING ERRROS


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ERRORS OF PRINCIPLE

Transaction recorded in contravention ofaccounting principles.

Such errors do not affect Trial Balance. Example : a sale of old furniture of Rs 500

should be credited to the furniture account ,but wrongly credited to sales account.


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ERRORS OF OMISSION

When a transaction is completely or partiallyomitted from being recorded in the books ofaccounts.


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TYPES OF ERROR OF OMISSION

ERROR OF COMPLETE OMISSION :

It arises if a transaction is not

recorded in books or a transaction isrecorded in books but not posted in theledgers.

Such errors do not affect trial balance.

EXAMPLE : purchase of furniture not recordedor not posted it into ledger account.


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ERROR OF PARTIAL OMISSION :

Such errors result in the trial

balance not agreeing .EXAMPLE : A credit sale recorded in the sales

book but not posted into party account , orthe total not carried to the next page.


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ERRORS OF COMMISSION

Errors arising due to wrong recording ,wrong posting , wrong carrying forward ,wrong totalling , wrong balancing etc, affectthe trial balance.

EXAMPLE : a sum of Rs 50 received fromMukesh is credited to his account as Rs 500 ,

or total of side (Rs 996) of an account

carried forward to next page as Rs 699.


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COMPENSATING ERRORS

The errors the effect of which is nullified byanother error of equal amount.

Such errors do not affect trial balance.

EXAMPLE :Shyams account debited with Rs100 instead of Rs 1, 000 while Rams accountdebited with Rs 1, 000 instead of Rs 100. So ,

Shyams account was debited by Rs900 lesswhich got compensated by another error ofRams account being debited excess ofRs900.


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LOCATION OF ERRORS

Locating errors of principle, compensatingnature and omission is difficult as these errorsdo not affect trial balance. Similarly , locatingerrors of commission is easier as they affect thetrial balance.

THUS, errors can be classified into twocategories from the point of view of locatingthem :

(a) errors that affect trial balance.(b) errors that do not affect trial

balance.


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ERRORS AFFECTING TRIAL BALANCE

Posting only one aspect of the journal entry in theledger.

Wrong totalling or balancing of a ledger account.

Wrong totalling of trial balance Posting correct amount in one account and wrong

amount in the other account.

Wrong totalling of subisidiary books.

Omitting to post totals of subsidiary books into theledgers.

Omitting writing the balance of an account in thetrial balance.


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ERRORS NOT AFFECTING TRIAL

BALANCE Errors of principle

Compensating errors

Errors of complete omission Posting the correct amount on the correct

side but in the wrong account.

Recording wrong amount in the books of

original entry. Recording both aspects of a transaction twice

in the books of accounts.


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In view of the errors which are not disclosedby a trial balance , it should be rememberedthat a trial balance is not a conclusive proof ofaccuracy , such errors are considered

LIMITATIONS OF TRIAL BALANCE.


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STEPS IN LOCATING THE ERRORS

The two columns of the trial balance should be totalledagain.

Check whether cash and bank balance have beenwritten in the trial balance or not.

The exact difference in the trial balance should beestablished.

Ledger accounts should be balanced again.

Casting of subsidiary books should be checked againespecially if difference is Re 1, Rs10 , Rs100 or Rs1000etc.

And many other steps and even if there is a differencein trial balance a complete checking is necessary.


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RECTIFICATION OF ENTRIES

Depending upon the time of detection and thetypes of errors , rectification can be done :

1. Before preparing trial balance

(a) one - sided errors

(b) two - sided errors

2. After preparing trial balance

(a) one - sided errors

(b) two - sided errors

3. In the next accounting year.


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RECTIFICATION DONE BEFORE

PREPARING TRIAL BALANCE

ONE SIDED ERRORS :

(1) although it affects trial balance , no

journal entry is required to rectifysuch errors.

It is done by debiting concerned

ledger account for short debit orexcess credit and by crediting for short

credit or excess debit.


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TWO SIDED ERRORS :

here a rectifying entry is passed aserrors have been committed in both

the accounts.


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RECTIFICATION DONE AFTER

PREPARING TRIAL BALANCE

When errors are detected after thepreparation of the trial balance ,

they are rectified by passing a journal entrythrough the SUSPENSE ACCOUNT , in caseof ONE SIDED ERRORS .


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SUSPENSE ACCOUNT

It is an account to which the difference in thetrial balance has been put temporarily . If thecredit side is short , the suspense account willbe credited and if the credit side is bigger ,

this account will be debited.


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UTILITY ( OBJECTIVE ) OF

SUSPENSE ACCOUNT

Apart from using the suspense account to make up thedifference in the trial balance , the amounts are debitedor credited in this account when the exact treatment of

the amount is uncertain.

EXAMPLE :

goods valued Rs 1, 000 were sold to

mohan but the trader forgot the name of

the purchaser , so here the entry will be

passed by opening a suspense account.

Errors that do not affect the trial balance cannot berectified by opening a suspense account.


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DISPOSAL OF SUSPENSE ACCOUNT

Now, when all one sided errors are corrected ,there should be no balance left in thesuspense account and this account shouldstand closed. But if this account cannot beclosed , the balance in it is taken to thebalance sheet on the asset side if there is a

debit balance , or the liability side if there is acredit balance.


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RECTIFICATION OF ERROR IN THE

NEXT ACCOUNTING YEAR

If some errors committed during an accountingyear are not detected and rectified beforefinalising final accounts , suspense account

cannot be closed. its balance is carried forwardto the next accounting year.

When errors committed in one accounting yearare detected and rectified in the next year , the

profit and loss adjustment is debited or creditedin case of expense/ loss and income/ gains toavoid effect on income statement of nextaccounting period.

11. Rectification of Errors

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