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RECTIFICATION OF ERRORS

If the books of accounts of a concern are properly maintained according to


the principles of double entry system, both debit and credit columns of trial
balance should be equal. If they are not equal, it means that there may be some
errors. But tallying of trial balance does not always mean that there is no error.
There are certain errors which do not affect the agreement of trial balance. Thuis
errors may be those which affect the agreement of trial balance and which do not
affect the agreement of trial balance.

ACCOUNTING ERRORS

Accounting errors are mistakes and omissions unknowingly made


while recording transactions in the books of accounts. They are innocently made
mistakes which arise at various stages of accounting.

FRAUD

Knowingly made mistakes are called fraud. It is a mistake created with some
intentions.

KINDS OF ERRORS

On the basis of nature, errors can be classified into the following four
categories.

1. Errors of Omission
When a transaction is completely or partially unrecorded in the books
of original entry or not posted to the ledger, it is called errors of omission.
The errors of omission may be;
i) Errors of complete omission
When a transaction is completely omitted to be recorded in the
books, it is an error of complete omission. In this error, both debit and credit
aspect of the transaction remains unrecorded. Such errors will not affect the
agreement of trial balance.
ii) Errors of partial omission
When only one aspect of a transaction is recorded in the books,
it is an error of partial omission. This error happens while posting the entries
to ledger. Such errors will affect the agreement of trial balance.
2. Errors of Commission
When a transaction is incorrectly recorded in the books, it is called
errors of commission. These errors are due to wrong posting, wrong
totaling, wrong balancing, wrong amounts, wrong carry forwards etc.
these errors will affect the agreement of trial balance.
3. Errors of Principle
When a transaction is recorded by violating an accounting principle, it
is called an error of principle. Here transactions are recorded on the
correct side, but wrong heads of account. Such errors will not affect
the agreement of trial balance.
4. Compensating errors
The errors which compensate each other are called compensating
errors. A compensating error is one where an error or a group of error
is cancelled by another error or group of errors. These errors will not
affect the agreement of trial balance.

RECTIFICATION OF ERRORS

Rectification of accounting errors is the process of correcting the errors


committed while recording transactions in the books of accounts. Errors should not
be corrected by erasing or overwriting. It should be corrected by passing journal
entries to neutralize its effect. The journal entries passed to rectify and neutarlise
the effect of errors are called rectifying entries.

For the purpose of rectification, errors are classified into two.

i) Errors which do not affect the agreement of trial balance (Two sided errors)

Errors which affect two accounts at a time are called two sided errors. Such
errors will not affect the agreement of trial balance. The important two sided errors
are errors of complete omission, errors of principle and compensating errors. These
errors can be corrected by passing entries in the journal proper.
i) Errors which affect the agreement of trial balance ( One sided errors)
Errors which are committed in only one aspect of a transaction are called
one sided errors. Such errors will affect the agreement of trial balance. The
important one sided errors are errors of partial omission and errors of commission.
These errors can be corrected by providing an explanatory note or by passing a
journal entry with the help of suspense account.

1. Rectification before the preparation of trial balance

An error in the book of original entry or ledger can be rectified by


passing an explanatory note in the particulars column called rectification statement.

2. Rectification after the preparation of trial balance

If trial balance is prepared before the rectification of one sided errors,


it will show disagreement. Hence, the difference in trial balance is temporarily
placed in an account called suspense account.

Suspense account

Suspense account is an account in which the difference in trial balnce is


temporarily placed, so that the trial balance is made to tally. Is trial balance is short
pof an amount on the debit side, the difference will be placed on the debit side of
suspense account by writing the difference in trial balance and vice versa.

Utility of suspense account

1. It helps in preparing final accounts even when the trial balance does not agree.

2. It helps in rectifying the errors after the preparation of trial balance.

Objectives of rectification of errors

1. To prepare accurate accounting records.

2. To compute correct profit and loss for the period by preparing profit and loss
account with exact figures.

3. To exhibit true financial position of the firm by preparing the balance sheet with
exact figures.