Rectification of Accounting

Errors
Inter Paper 103
Anil 79
INTRODUCTION
• No man is above error. In financial accounting, every single event
occurring in monetary terms is recorded. Sometimes, it just so happens
that some events are either not recorded or it is recorded in the wrong
head of account or wrong figure is recorded in the correct head of
account.
• Whatever the reason may be, there is always a chance of error in the
books of accounts. These errors in accounting require rectification.
• The procedure adopted to rectify errors in financial accounting is
called "Rectification of error".
• Accountants prepare trial balance to check the correctness of accounts.
If total of debit balances does not agree with the total of credit balances,
it is a clear-cut indication that certain errors have been committed while
recording the transactions in the books of original entry or subsidiary
books.
• It is our utmost duty to locate these errors and rectify them, only then we
should proceed 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
affect the total of trial balance. So these cannot be located with the help
of trial balance.
• An accountant should invest his energy to locate both types of errors and
rectify them before preparing trading, profit and loss account and
balance sheet. Because if these are prepared before rectification these
will not give us the correct result and profit and loss disclosed by them,
shall not be the actual profit or loss.
Objectives of rectification of errors
a) Presenting correct accounting records;
b) Ascertaining correct profit or loss for the accounting period; and
c) Exhibiting a true financial position of the concern on a particular
date.
CLASSIFICATION OF ERRORS
• The errors can be classified as follows:
• Clerical Errors
• Errors of Principle
Clerical Errors
i. Errors of omission:
• When a transaction is either wholly 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 original entry or with regard to omission to post a
transaction from the books of original entry to the account concerned in the
ledger.
• A complete error of omission does not affect the agreement of trial balance
whereas partial error of omission may or may not affect the agreement of
trial balance.
• For example, Rs. 100 paid to Ram is neither recorded in the cash book nor in
the account of Ram, this error will not affect the agreement of trial balance.
Only the total of the trial balance would be short by Rs. 100. But if posting is
not done in one of the accounts, this will affect the agreement of trial
balance.
ii. Errors of commission
• When an entry is incorrectly recorded either wholly or partially-
incorrect posting, calculation, casting or balancing. Some of the errors
of commission effect the trial balance whereas others do not. Errors
affecting the trial balance can be revealed by preparing a trial balance.
• If a sum of Rs. 500 paid to Suresh is credited to Sohan’s account such
an error is an error of commission.
iii. Error of Original Entry
• The errors in which recording is in correct account but the figure is
incorrect are called errors of original entry.
• For example, a receipt of Rs. 50,000 from a debtor is recorded as Rs.
5,000 in his account.
• If a sum of Rs. 255 received from Hari is credited to his account as Rs.
525.
iv. Compensating errors
• Sometimes an error is counter-balanced by another error in such a way
that it is not disclosed by the trial balance. Such errors are called
compensating errors.
• These errors, also called self-balancing or equalising errors, are a group
of errors, the total effect of which is not reflected in the trial balance.
These errors are of a neutralizing nature.
• Amitabh’s account is credited with Rs. 500 instead of Rs. 600; Abhijit’s
account credited with Rs. 160 instead of Rs. 100 and Abhijit’s account
credited with Rs. 150 instead of Rs. 110. Here the first error of under-
credit of Rs. 100 is covered by second and third errors of overcredit of
Rs. 60 and Rs. 40 respectively.
Errors of Principle
• When a transaction is recorded against the fundamental principles of
accounting, it is an error of principle.
• For example, if revenue expenditure is treated as capital expenditure
or vice versa.
• A sum of Rs. 50 paid on the repairs of furniture should be debited to
repairs account, but if it is debited to the furniture account, it will be
termed as an error of principle.
LOCATION OF ERRORS
1. Errors which do not affect the agreement of Trial Balance
• Errors of omission, errors of compensating nature and errors of
principle do not affect the agreement of the trial balance. Their
location is, therefore, a difficult task.
• If a credit sale of Rs. 2000 to Suresh has not been recorded in the
books of accounts, the error will not affect the agreement of the trial
balance and therefore, at the time of finalizing the accounts it may not
be traced out.
2. Errors which affect the agreement of Trial balance
• The errors which cause a mismatch in the trial balance totals are
frequently referred to as errors disclosed by a trial balance. However,
the mismatch does not automatically point out the actual errors. It is
only the diligence and ingenuity of the person preparing the accounts
which would help in the location of errors.
Methods of Detection of Errors
i. The totals of the trial balance itself should be thoroughly rechecked
in order to find out exact or correct difference.
ii. Make sure that the balances of cash and bank are included.
iii. The difference of the two sides of the trial balance should be found
and be divided by two and then find out whether a figure equal to
the same (i.e. half the difference) appears in the trial balance. This
procedure would enable to locate the amount placed on the wrong
side.
iv. See that there is no mistake in balancing of the various accounts.
v. If the error remains undetected, divide the exact difference by 9.
If it is divisible by 9, this will mean that there may be transposition error
or slide error. A transposition error is committed when the digit of an
amount is misplaced.
• For example, machinery account has a balance of Rs. 5689, but it has
been written as Rs. 5869 in the trial balance. The resulting error is Rs.
180, which is divisible by 9. A slide error is committed when the
decimal point is placed incorrectly. For example, Rs. 3670 is copied as
Rs. 36.70. The resulting error is Rs. 3633.30 which is also divisible by
9.
vi. The schedules of debtors and creditors should be scrutinized so as
to find out that all the debtors and creditors have been included in these
schedules; their totals are correct.
vii. If the difference is of a substantial amount, compare the figures of
trial balance of the current year with the trial balance of the preceding
year and see whether there is any abnormal difference between the
balances of important accounts of the two trial balances.
viii. The total of subsidiary books should be checked and it should be
seen whether posting has been done from these books correctly to
respective accounts in the ledger or not.
ix. It should be checked that opening balances have been correctly
brought forward in the current year’s books.
x. If the difference is still not traced, check thoroughly the books of
original entry and their posting into the ledger and finally the
balancing of various accounts.
xi. If the error still remains undetected, repeat the above steps with the
help of other members of the staff, who are not involved in
maintaining the books of accounts.
RECTIFICATION OF ERRORS
a) Errors affecting one account only.
b) Errors affecting two or more accounts.
Errors affecting One Account
• The following errors affect only one account:
(a) Errors of posting
(b) Carry forward
(c) Balancing
(d) Omission from trial balance
(e) Casting
• Such errors should first of all be located and rectified. These are rectified
either with the help of journal entry or by giving an explanatory notes in
the account concerned and not by simply crossing the wrong amount and
inserting the right one.
Errors affecting two or more accounts
• The following errors affect two or more accounts:
(a) Errors of omission
(b) Posting to wrong account
(c) Principles
• As there errors affect two or more accounts, rectification of such errors
is done with the help of a journal entry.
STAGES OF RECTIFICATION OF
ERRORS
• All types of errors can be rectified at two stages:
i) Before the Preparation of Final Accounts.
ii) After the Preparation of Final Accounts.
Rectification of errors before the preparation
of final accounts
• If the error is located before the preparation of final accounts, it is
either rectified by recording or posting the necessary amount in the
respective account or by recording the necessary journal entry to
rectify that error.
• If the error is one sided, it can be rectified by recording or posting the
necessary amount in that account.
• If it is two sided, the necessary journal entry is recorded.
a) Rectification of One sided errors
• These are the errors which affect one account and will affect the agreement
of trial balance. Such errors are rectified by debiting or crediting the
affected account in the ledger. For example:
i) Purchase Book has been undercast by Rs. 2,000.
• The error is only in purchases account. If Rs. 2000 is now posted in the
debit side of purchase account as “To undercasting of Purchase Book”, the
error will be rectified.
ii) Amount of Rs. 1000 paid to Hari not debited to his personal account.
• This error is affecting the personal account of Hari and its debit side is less
by Rs. 1000 because of omission to post the amount paid. We shall now
write on the debit side of Hari Account as “To Cash (omitted to be posted)
Rs. 1000 to rectify this error.
 iii) Goods sold to Khan wrongly debited in Sales account:
• This error is affecting the sales account only as the amount which
should have been posted on the credit side has been wrongly placed on
the debit side of the same account. By putting double the amount of
transaction on the credit side of sales account by writing “By sales to
Khan wrongly debited previously”, this error shall be rectified.
b) Rectification of two sided errors
• As these errors affect two or more accounts, rectification of such
errors can often be done with the help of a journal entry. These type of
errors do not affect the agreement of trial balance.
• For example, if furniture purchased has been recorded through
purchase book, two accounts viz. purchases account and furniture
account are affected.
• Thus, rectification will be made by taking these two accounts. When
such errors are to be rectified, the following procedure should be
followed:
Rectification of errors after the preparation
of final accounts
• The rectification of errors after the preparation of final accounts
depends upon the nature of error.
• If an error is a one sided error, it can be corrected by passing a
rectifying entry with the help of the Suspense Account and
• If the error is two sided, it is rectified by passing a rectifying entry in
both the affected accounts and such errors are not rectified through
Suspense Account.
Suspense Account
• A suspense account is an account temporarily used in general ledger to
carry doubtful amounts which can either be a payment or a receipt.
Despite considerable efforts, if the reason(s) causing these
questionable amounts are not found, the difference in the trial balance
is temporarily transferred to a suspense account till it is properly
analyzed and classified.
• The difference amount is temporarily recorded in a suspense a/c and
should be cleared at some point as it possesses a control risk. A
Suspense account is used to mitigate risk which is addressed and when
the errors are rectified.
•A Suspense account is used only because a proper account for a
particular transaction couldn’t be determined at the time when the
transaction was recorded. When the right account is determined, the
amount shall be moved from the suspense account to its proper account.
Cash received from Unreal Pvt Ltd. for 5,000 is wrongly posted
to Unreal Pvt Ltd’s. account as 50,000, It is however correctly recorded
in the cash account. To correct this entry we will use suspense account.
Cash A/C 5,000
To Unreal Pvt Ltd A/C 50,000
Considering the fact that the proper account couldn’t be determined at
the time of correction, the journal entry for rectification will be
Unreal Pvt Ltd A/C 45,000
To Suspense A/C 45,000
What happens in case a suspense
account is not closed?
•In case a suspense a/c is not closed at the end of an accounting period,
the balance in suspense account is shown on the asset side of a balance
sheet if it is a “Debit balance”. In case of a “Credit balance”, it is shown
on the liability side of a balance sheet.
Rectification of one sided errors
• It may be noted that one sided errors affect the agreement of trial
balance. Hence, one sided errors are rectified through the Suspense
Account.
• For example:
i) An item of Rs. 68 was posted as Rs. 86 in the sales account
• In this case, the sales account has been credited by Rs. 86 instead of Rs.
68, so the entry with the help of Suspense Account shall be as follows:
Sales A/C Dr. 18
To Suspense A/C 18
• (Being Sales account wrongly credited with Rs. 86 instead of Rs. 68,
now corrected)
 ii) The total of purchase book has been taken Rs. 9 short.
• In this case, the purchase book has been undercast by Rs. 9 so we should
further debit the purchase account by Rs. 9.
Purchases A/C Dr. 9
To Suspense A/C 9
• (Being total of purchase book now corrected)
iii) A sum of Rs. 102 written off as depreciation on furniture has not
been posted to depreciation account.
• In this case, depreciation account has not been debited, so the entry shall
be:
Depreciation A/C Dr. 102
To Suspense A/C 102
• (Being depreciation on furniture not posted previously now posted)