RECTIFICATION OF ERRORS

The procedure followed to rectify the errors committed and to set right accounting records is called rectification of errors.

OBJECTIVES OF RECTIFYING ERRORS

Preparing correct accounting records.
Ascertaining profit and loss for the

accounting period by preparing the profit and loss account with the correct figures. Exhibiting a true financial position of the concern on a particular date by preparing balance sheet with the correct accounting data.

CLASSIFICATION OF ERRORS

ERRORS OF PRINCIPLE ERRORS OF OMISSION ERRORS OF COMMISSION COMPENSATING ERRROS

ERRORS OF PRINCIPLE
Transaction recorded in contravention of accounting 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.

ERRORS OF OMISSION

When a transaction is completely or partially

omitted from being recorded in the books of accounts.

TYPES OF ERROR OF OMISSION

ERROR OF COMPLETE OMISSION :

It arises if a transaction is not recorded in books or a transaction is recorded in books but not posted in the ledgers. Such errors do not affect trial balance. EXAMPLE : purchase of furniture not recorded or not posted it into ledger account.

 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 , or the total not carried to the next page.

ERRORS OF COMMISSION

Errors arising due to wrong recording , wrong posting , wrong carrying forward , wrong totalling , wrong balancing etc, affect the trial balance. EXAMPLE : a sum of Rs 50 received from Mukesh 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.

COMPENSATING ERRORS
The errors the effect of which is nullified by another error of equal amount. Such errors do not affect trial balance. EXAMPLE : Shyams account debited with Rs 100 instead of Rs 1, 000 while Rams account debited with Rs 1, 000 instead of Rs 100. So ,

Shyams account was debited by Rs900 less which got compensated by another error of Rams account being debited excess of Rs900.

LOCATION OF ERRORS
Locating errors of principle, compensating nature and omission is difficult as these errors do not affect trial balance. Similarly , locating errors of commission is easier as they affect the trial balance. THUS, errors can be classified into two categories from the point of view of locating them : (a) errors that affect trial balance. (b) errors that do not affect trial balance.

ERRORS AFFECTING TRIAL BALANCE

Posting only one aspect of the journal entry in the

ledger. 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 the ledgers. Omitting writing the balance of an account in the trial balance.

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.

 In view of the errors which are not disclosed by a trial balance , it should be remembered that a trial balance is not a conclusive proof of

accuracy , such errors are considered LIMITATIONS OF TRIAL BALANCE.

STEPS IN LOCATING THE ERRORS

The two columns of the trial balance should be totalled

again. Check whether cash and bank balance have been written in the trial balance or not. The exact difference in the trial balance should be established. Ledger accounts should be balanced again. Casting of subsidiary books should be checked again especially if difference is Re 1, Rs10 , Rs100 or Rs1000 etc. And many other steps and even if there is a difference in trial balance a complete checking is necessary.

RECTIFICATION OF ENTRIES
Depending upon the time of detection and the types 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.

RECTIFICATION DONE BEFORE PREPARING TRIAL BALANCE

ONE SIDED ERRORS :

(1) although it affects trial balance , no journal entry is required to rectify such errors. It is done by debiting concerned ledger account for short debit or excess credit and by crediting for short credit or excess debit.

 TWO SIDED ERRORS :

here a rectifying entry is passed as errors have been committed in both the accounts.

RECTIFICATION DONE AFTER PREPARING TRIAL BALANCE

When errors are detected after the

preparation of the trial balance , they are rectified by passing a journal entry through the SUSPENSE ACCOUNT , in case of ONE SIDED ERRORS .

SUSPENSE ACCOUNT

It is an account to which the difference in the

trial balance has been put temporarily . If the credit side is short , the suspense account will be credited and if the credit side is bigger , this account will be debited.

UTILITY ( OBJECTIVE ) OF SUSPENSE ACCOUNT

Apart from using the suspense account to make up the difference in the trial balance , the amounts are debited or 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 be rectified by opening a suspense account.

DISPOSAL OF SUSPENSE ACCOUNT

Now, when all one sided errors are corrected , there should be no balance left in the suspense account and this account should

stand closed. But if this account cannot be closed , the balance in it is taken to the balance sheet on the asset side if there is a debit balance , or the liability side if there is a credit balance.

RECTIFICATION OF ERROR IN THE NEXT ACCOUNTING YEAR

If some errors committed during an accounting year are not detected and rectified before finalising final accounts , suspense account cannot be closed. its balance is carried forward to the next accounting year. When errors committed in one accounting year are detected and rectified in the next year , the profit and loss adjustment is debited or credited in case of expense/ loss and income/ gains to avoid effect on income statement of next accounting period.