Accountants put in order trial balance to check the correctness of accounts. If total of debit balances does not agree with the total of prestige balances, it is a clear-cut indication that sure errors have been committed while recording the transactions in the books of former entry or subsidiary books. It is our utmost duty to uncover these errors and rectify them, only then we should tiptoe for preparing final accounts. We also know that all types of errors are not revealed by trial balance as some of the errors do not succeed the total of trial balance. So these cannot be settled with the help of trial balance. An accountant should spend his power to uncover both types of errors and rectify them before preparing trading, behalf and loss account and balance sheet. Because if these are prepared before rectification these will not give us the exact succeed and behalf and loss disclosed by them, shall not be the actual behalf or loss.
All errors of accounting procedure can be classified as follows:
1. Errors of Principle
When a transaction is recorded against the underlying law of accounting, it is an error of principle. For example, if income expenditure is treated as capital expenditure or vice versa.
2. Clerical Errors
These errors can again be sub-divided as follows:
(i) Errors of omission
When a transaction is either fully or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of former entry or with regard to omission to post a transaction from the books of former entry to the account involved in the ledger.
(ii) Errors of commission
When an entry is incorrectly recorded either fully or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission succeed the trial balance whereas others do not. Errors effecting the trial balance can be revealed by preparing a trial balance.
(iii) Compensating errors
Sometimes an error is counter-balanced by an additional one error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.
From the point of view of rectification of the errors, these can be divided into two groups :
(a) Errors affecting one account only, and
(b) Errors affecting two or more accounts.
Errors affecting one account
Errors which work on can be :
(a) Casting errors;
(b) error of posting;
(c) carry forward;
(d) balancing; and
(e) omission from trial balance.
Such errors should, first of all, be settled and rectified. These are rectified either with the help of journal entry or by giving an explanatory note in the account concerned.
Rectification
Stages of improvement of accounting errors
All types of errors in accounts can be rectified at two stages:
(i) before the preparing of the final accounts; and
(ii) after the preparing of final accounts.
Errors rectified within the accounting period
The allowable formula of improvement of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives succeed to the entry that should have been passed. But while errors are being rectified before the preparing of final accounts, in sure cases the improvement can't be done with the help of journal entry because the errors have been such. Normally, the procedure of rectification, if being done, before the preparing of final accounts is as follows:
(a) improvement of errors affecting one side of one account Such errors do not let the trial balance agree as they succeed only one side of one account so these can't be corrected with the help of journal entry, if improvement is required before the preparing of final accounts. So required estimate is put on debit or prestige side of the involved account, as the case maybe. For example:
(i) Sales book under cast by Rs. 500 in the month of January. The error is only in sales account, in order to exact the sales account, we should report on the prestige side of sales account 'By under casting of. Sales book for the month of January Rs. 500".I'Explanation:As sales book was under cast by Rs. 500, it means all accounts other than sales account are correct, only prestige balance of sales account is less by Rs. 500. So Rs. 500 have been credited in sales account.
(ii) discount allowed to Marshall Rs. 50, not posted to discount account. It means that the estimate of Rs. 50 which should have been debited in discount account has not been debited, so the debit side of discount account has been reduced by the same amount. We should debit Rs. 50 in discount account now, which was omitted previously and the discount account shall be corrected.
(iil) Goods sold to X wrongly debited in sales account. This error is effecting only sales account as the estimate which should have been posted on the prestige side has been wrongly settled on debit side of the same account. For rectifying it, we should put duplicate the estimate of transaction on the prestige side of sales account by writing "By sales to X wrongly debited previously."
(iv) estimate of Rs. 500 paid to Y, not debited to his personal account. This error of effecting the personal account of Y only and its debit side is less by Rs. 500 because of omission to post the estimate paid. We shall now write on its debit side. "To cash (omitted to be posted) Rs. 500.
Correction of errors affecting two sides of two or more accounts
As these errors work on two or more accounts, rectification of such errors, if being done before the preparing of final accounts can often be done with the help of a journal entry. While correcting these errors the estimate is debited in one account/accounts whereas similar estimate is credited to some other account/ accounts.
Correction of errors in next accounting period
As stated earlier, that it is advisable to uncover and rectify the errors before preparing the final accounts for the year. But in sure cases when after primary search, the accountant fails to uncover the errors and he is in a hurry to put in order the final accounts, of the company for filing the return for sales tax or income tax purposes, he transfers the estimate of variation of trial balance to a newly opened 'Suspense Account'. In the next accounting period, as and when the errors are settled these are corrected with reference to suspense account. When all the errors are discovered and rectified the suspense account shall be finished automatically. We should not forget here that only those errors which succeed the totals of trial balance can be corrected with the help of suspense account. Those errors which do not succeed the trial balance can't be corrected with the help of suspense account. For example, if it is found that debit total of trial balance was less by Rs. 500 for the theorize that Wilson's account was not debited with Rs. 500, the following rectifying entry is required to be passed.
Difference in trial balance
Trial balance is affected by only errors which are rectified with the help of the suspense account. Therefore, in order to theorize the variation in suspense account a table will be prepared. If the suspense account is debited in' the rectification entry the estimate will be put on the debit side of the table. On the other hand, if the suspense account is credited, the estimate will be put on the prestige side of the table. In the end, the balance is calculated and is reversed in the suspense account. If the prestige side exceeds, the variation would be put on the debit side of the suspense account. succeed of Errors of Final Accounts
1. Errors effecting behalf and loss account
It is leading to note the succeed that an en-or shall have on net behalf of the firm. One point to remember here is that only those accounts which are transferred to trading and behalf and loss account at the time of preparing of final accounts succeed the net profit. It means that only mistakes in nominal accounts and goods account will succeed the net profit. Error in the these accounts will either growth or decrease the net profit.
How the errors or their rectification succeed the profit-following rules are helpful in understanding it :
(i) If because of an error a nominal account has been given some debit the behalf will decrease or losses will increase, and when it is rectified the profits will growth and the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but the estimate debited to machinery repairs account -this error will sacrifice the profit. In rectifying entry the estimate shall be transferred to machinery account from machinery repairs account, and it will growth the profits.
(il) If because of an error the estimate is omitted from recording on the debit side of a nominal account-it results in growth of profits or decrease in losses. The rectification of this error shall have reverse effect, which means the behalf will be reduced and losses will be increased. For example, rent paid to landlord but the estimate has been debited to personal account of landlord-it will growth the behalf as the charge on rent is reduced. When the error is rectified, we will post the primary estimate in rent account which will growth the expenditure on rent and so profits will be reduced.
(iil) behalf will growth or losses will decrease if a nominal account is wrongly credited. With the rectification of this error, the profits will decrease and losses will increase. For example, investments were sold and the estimate was credited to sales account. This error will growth profits (or sacrifice losses) when the same error is rectified the estimate shall be transferred from sales account to investments account due to which sales will be reduced which will succeed in decrease in profits (or growth in losses).
(iv) behalf will decrease or losses will growth if an account is omitted from posting in the prestige side of a nominal or goods account. When the same will be rectified it will growth the behalf or sacrifice the losses. For example, commission received is omitted to be posted to the prestige of commission account. This error will decrease profits ( or growth losses) as an income is not credited to behalf and loss account. When the error will be rectified, it will have reverse succeed on behalf and loss as an further income will be credited to behalf and loss account so the behalf will growth ( or the losses will decrease). If due to any error the behalf or losses are effected, it will have its succeed on capital account also because profits are credited and losses are debited in the capital account and so the capital shall also growth or decrease. As capital is shown on the liabilities side of balance sheet so any error in nominal account will succeed balance sheet as well. So we can say that an error in nominal account or goods account effects behalf and loss account as well as balance sheet.
2. Errors effecting balance sheet only
If an error is committed in a real or personal account, it will succeed assets, liabilities, debtors or creditors of the firm and as a succeed it will have its impact on balance sheet alone. Because these items are shown in balance sheet only and balance sheet is prepared after the behalf and loss account has been prepared. So if there is any error in cash account, bank account, asset or liability account it will succeed only balance sheet.
Rectification Of Accounting Errors
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