RECTIFICATION OF ERRORS

Specimen & key points of the chapter

Errors causing disagreement of trial balance:
1. Double posting of a transaction from journal to ledger.
2. Wrong posting or omission of posting one aspect of a transaction in ledger.
3. Wrong entry or omission of entry in journal but correct posting in the
ledger.
4. Posting a transaction on the wrong side of an account.
5. Error in casting special journals.
6. Error in balancing a ledger account.
7. Error or omission in transferring a ledger account balance in trial balance.
8. Casting error of trial balance .
9. Recording a ledger account balance twice in trial balance.
 ERRORS NOT CAUSING
DISAGREEMENT OF TRIAL BALANCE

1. Errors of omission in original book of entry.

2. Wrong amount recording in original book of accounts.
3. Errors of commission.
4. Errors of principal.
5. Compensating errors.
 AGREEMENT OF TRIAL BALANCE BY
OPENING “SUSPENESE ACCOUNT”:
The word “Suspense” means uncertainty. A suspense
account, therefore, is an account in which are entered
transaction, which cannot be placed to their proper accounts
for want of sufficient information.
Further sometimes a trial balance may not agree, under
such circumstances, the difference may be placed to a
suspense account and the trial balance thus made to tally. If
credits exceed the debits. The suspense account would appear
among debit balance and vise versa. When the mistakes are
discovered subsequently, they are rectified through the
suspense account. As soon as all mistakes are discovered and
rectified, the suspense account is automatically closed.
 HOW THE ERROR ARE
RECTIFIED?
The errors in books of accounts must first of all be located and then rectified. But
the question is how to certify the errors. The errors are generally rectified through
journal entries-the wrong figures must not be canceled or erased. If, however, an error
is detected instantly, the wrong figure must be canceled and correct figure should be
written in its place. In that case the accountant put his initial as an authentication of
cancellation and correction of the errors. No clear cut rules for rectification of errors
can be laid down.
The errors may be detected in any of the following three stages.
1. Before preparation of trial balance.
2. After preparation of trial balance but before preparation of final account.
3. After preparation of final account.
 ERRORS EFFECTING ONE
ACCOUNT OR ONE-SIDE – ERROR:
As we know every business transaction is posted at
least in two different accounts, on the debit side of one
account and the credit side of other account. If only
one account is affected or disturbed bacuse of the error
or mistake and the other concerned account/accounts
are correct, such an error is know as “one-side error”.
It means the transaction has been wrongly recorded on
one side, but correctly recorded on the other side.
Generally, these errors are (a) Errors of casting (b)
Errors of carry forward (c) Errors of posting (d)
omission from trial balance.
 ERRORS AFFECTING TWO OR MORE
ACCOUNTS OR TWO-SIDED ERRORS:
These are the errors due to which, two or more
accounts are affected or disturbed. Such errors are as
follow:
a) Errors of omission.
b) Errors of posting to wrong account.
c) Errors of principal.
 CORRECTIN OF ONE-SIDE ERRORS IF
DETECTED BEFORE PREPARATION OF
THE TRIAL BALANCE
For the rectification of such errors, if detected before the preparation of the trial
balance, no journal entries are required. Simply the required amount is put on the debit
or credit side of the concerned account where the error has occurred.
Correction of two-sided errors after preparation of the trial balance, but before the
preparation of the final account.
There will be no suspense A/C in rectifying journal entry, if the errors dose not
cause any discrepancy in the trial balance and there will be suspense A/C in the
rectifying journal entry.
To rectifying these errors, the following three aspects should be noted.
a) What should have been the correct entry?
b) What entry has already been passed?
c) What should be the rectifying journal ?
 EFFECTS OF ERRORS ON THE FINAL
ACCOUNTS OR THE FINANCIAL
STATEMENT:
It has already been discussed that best efforts should be
made to locate and rectify the errors before preparation of
final accounts for the year. But in certain cases when an
accountant fails to locate and rectify the errors, and he is a
hurry to prepare the final account of the business for filing the
returns to income tax department for income tax or sales tax
purposes, he prepares the final account by placing the
difference in the trial balance to suspense A/C. in the next
accounting period. The error are located and rectified and
profit of the previous year is adjusted.
Effects of errors on net profit:
It must be remembered that only those errors affects the profit of the business
which are related to trading and profit and loss account. It means that only
mistakes in “expenses Account” and “revenue account” will affect the net profit of
the business. Errors in these accounts will either increase or decrease the existing
profit.
1. if any expense A/C or revenue A/C wrongly debited, the profit will
beProfit is and when it is rectified the
decrease profit will increase.
understand

2. if any expense A/C or revenue A/C wrongly credited, it will be

increase the profit and when the error is rectified, the profit will be
Profit isby deducting the
adjusted amount of error from the profit.
overstated
 EFFECTS OF ERRORS ON
BALANCE SHEET
If the error is committed in assets A/c, liabilities
A/c or capital A/c it will have its impact on the
balance sheet only, because all these items are shown
in the balance sheet and the balance sheet is prepared
after the profit and loss account has been prepared. So
if there is any errors in cash A/c, furniture A/c,
machine A/c, debtor A/c creditor A/c, bank A/c etc. it
will affects only the balance sheet.