Concept And Meaning Of Rectification Of Accounting Errors And Its Methods
Rectification Of Accounting Errors
Once an error is located, it should be properly corrected. The correction of accounting errors in a systematic manner is called the rectification of errors. In other words, the process of systematically correcting the accounting errors is known as rectification of errors. The presence of accounting errors affects accuracy of the profit and loss and the financial position of the business shown by the final accounts, therefore, no error should be left uncorrected.
Methods Of Rectification Of Accounting Errors
The following method should be followed to rectify the accounting errors
- Rectification Of Errors Located Before Preparation Of Trial Balance
Errors may be detected in the process of closing books and accounts for preparation of trial balance. The errors detected in the process may be either one-sided errors or two-sided errors. However, once such errors are located they must be rectified immediately.
- Rectification Of One-sided Errors Located Before Preparation Of Trial Balance
One-sided errors are those errors which affect only one side of an account. Wrong totaling of subsidiary books, posting a wrong amount, posting on the wrong side are some of the examples of one-sided errors. Since two accounts are not involved in these errors, journal entry can not be passed for rectifying such errors. The one-sided error is rectified by making an additional posting on the affected side of the ledger account.
- Rectification Of Two-sided Errors Located Before Preparation Of Trial Balance
The errors that affect two or more accounts are called two-sided errors. Correction of such two-sided errors needs to make rectification journal entries since such errors involve two or more accounts. Therefore, one account is debited and another account is credited to rectify two-sided errors. The rules of debit and credit are applied to rectify these errors.
The following three steps are taken to rectify the two-sided errors.
- Identify correct entry
- Rewrite wrong entry
- Find rectifying entry by making adjustment of correct entry and wrong entry
- Rectification Of Errors After Preparation Of Trial Balance
Sometimes, errors may be detected after an accounting year is over. Those are the errors detected after preparation of trial balance. The errors detected after the completion of accounting year may be one-sided and two-sided errors. Rectification of the errors seen after preparation of trial balance can be made by preparing rectifying journal entries in the subsequent year only.
Double entry system is followed to rectify the errors detected after preparation of trial balance. Two accounts are affected by the two-sided errors. Therefore, one account is debited and another affecting account is credited for such errors. But one-sided errors are rectified by opening ‘Suspense Account’.
Why Rectification Of Errors Is Required?
Whenever an error occurs, it should be rectified through proper rectification. Otherwise the books of accounts cannot exhibit the true and correct view of the state of affairs of a business and its financial results.
So it is very important that we identify and rectify all material errors in the books of accounts.
Points Of Time At Which Errors Can Be Detected
The errors may be detected:
- Before preparation of the trial balance;
- After preparation of the trial balance but before preparation of final accounts; and
- After preparation of final accounts.
Rectification of Errors which Influences the Trial Balance
These kinds of errors do not get corrected by passing a single general entry, in addition with that the suspense account needs to be opened which is created to fill up the gap arrangement till error detected and rectified.
When we use a suspense account, the following process is adopted to rectify errors.
- Identify the affected account due to error.
- Find the excess or shortage amount troubling the account.
- If the difference is derived because of “excess debit amount” or “short credit amount”, credit the account with the difference amount.
- If the difference is derived because of “excess credit amount” or “short debit amount”, debit the account with the difference amount.
- The entry gets completed by debiting or crediting suspense account.
Types of Rectification of Errors
On the basis of nature
- ERROR OF OMISSION:
It results from a complete or partial omission of recording a transaction.
For example, a transaction may be recorded in the subsidiary book but omitted to be posted to any of the ledger accounts. This is a case of partial omission.
However, if a transaction is totally omitted to be entered in the books then it is a case of complete omission.
A complete omission will not affect the agreement of the trial balance but a partial omission will affect the agreement of a trial balance.
- ERROR OF COMMISSION:
It results from an act of commission i.e. entries wrongly made in the journal or ledger. It may be an
- Error of posting,
- Error of casting,
- Entering wrong amounts,
- Entering a transaction in a wrong subsidiary book etc.
Unless the effects of errors of commission counterbalance each other, the agreement of the trial balance becomes affected.
- ERROR OF PRINCIPLE:
It Is an error occurring due to wrong application of basic Accounting Principles. The main reason behind such an error is incorrect classification of capital and revenue items.
For example, purchase of an Asset may be recorded through the Purchase day book instead of debiting the Asset account. Or wages paid for the installation of an asset may be debited to the wages account instead of debiting the asset account with the amount of wages.
An error of principle will not affect the agreement of a trial balance. However, it will result in misrepresentation of the state of affairs and operational results of a business.
- COMPENSATING ERRORS:
If the effect of an error is counterbalanced or cancelled out by the effect of another error or errors then such errors are known as compensating errors. Since the compensating errors as a whole cancel out the effect of each other, the agreement of trial balance is not affected. Thus it becomes difficult to detect such errors.
On The Basis Of Effects:
- ONE SIDED ERRORS:
One sided error is an error whose effect falls on only one account. It may arise due to
- Wrong casting of any day book;
- Posting made to the Wrong side of the relevant account;
- Duplicate posting of the same amount in an account.
One Sided errors cause a disagreement of the trial balance and hence are easy to detect.
- TWO SIDED ERRORS:
A Two sided error maybe
- Affecting two accounts at the same direction and not affecting the agreement of the trial balance. For example Mr A’s account credited instead of Mr B account for an amount received from Mr B.
- Affecting two accounts at opposite direction and affecting the agreement of the trial balance. For example, Mr A’s account debited instead of Mr B account being credited for an amount received from Mr B.
- MORE THAN TWO SIDED ERRORS:
An error which affects more than two accounts simultaneously falls in this category. This may or may not affect the agreement of a trial balance depending on the situation in each case.