Rectification of errors_240929_145106.pdf

Rectification of errors

1. RECTIFICATION
OF ERRORS

2. Preparationoftrialbalanceisawaytocheckthearithmeticaccuracyof
recordingandpostingoftransactionsinthebooksofaccountbutisitisnota
conclusiveproof.Thetallyofdebitandcreditsideoftrialbalancesignifiesthe
accuracyofaccountingrecords,thisnotionisonlypartiallycorrect.Despitethe
agreementbetweendebitandcreditsideaccountingrecordsmaysufferfrom
certainerrors.Butthisagreementbetweenthedebitandcreditsideoftrial
balance,definitelysignifiesthepresenceoferrorinaccountingrecords.Thusin
bothcaseswhetherdebitandcreditsideoftrialbalancetalliesornot,error
maypresentinaccountingrecords.

3. Topresentthetrueandfairpictureofprofitabilityandfinancialpositionof
businessunit,rectificationoferrorisnecessary.Sucherrorsarerectifiedby
passingtheentriesofrectification.Theobjectiveoftheprocessofrectification
oferroristoneutralizetheimpactofwrongentryandincorporatethecorrect
impactintheaccountingrecords.Itneedsandunderstandingofdifferenttype
ofaccountingerrors,waystoidentifytheseerrorsandmethodsofrectification
oferrors.

4. Types of Errors
•Errors of Omission
•Errors of Commission
•Errors of Principle
•Compensating Errors

5. Errors of Omission:
Whenatransactionisomittedfromthebooksofaccounts,sucherrorisknownas
errorofomission.Errorofomissionoccurseitheratthetimeofrecordingthe
transactionsorpostingthesetransactiontoLedger.Whenanerrorisoccurredatthe
timeofrecordingthetransactions,itaffectsbothsidesoftrialbalanceandthereforeit
becomesdifficulttotracesucherrorfromthetrialbalance.Forexample,ifasales
transactionofRs.12,000hasbeenomittedfromrecordinginjournal,itwouldneither
affectthesalesaccountnorcashaccountandthetrialbalanceTallywouldnotbe
affected.Sucherrorcanbeidentifiedonlyatthetimeofpresentingastatementof
accountingtodebtorsorreceivingthesamefromcreditors.Thiserrorisalsoknownas
errorofcompleteomissionbecauseinthiscasetheentiretransactionshasbeen
omittedfromaccountingrecords.

6. Ontheotherhand,anomissionatthetimeofposting,atransactioncanbe
tracedthroughtrialbalancesinceitmayaffectonlyonesideoftrialbalancee.g.
ifpostingofacreditpurchasetransactionfrompurchasebooktodebtors
accountisomitted,itwouldaffectonlyonesideoftrialbalance.Sucherroris
knownaserrorofpartialomission.Andcanbetracedthroughtrialbalance.
Thus,errorofomissionareoftwotypes:
A.Errorofcompleteomission
B.Errorofpartialomission

7. Errors of Commission:
Errorsduetowrongcarryforwardoftotalatthetimeofrecordinga
transactionorwrongpostingfromjournaltoledgerorwrongtotalingofan
accountorwrongbalancingofanaccountcomesunderthecategoryoferrors
ofcomission.Sincesucherrorsmayaffecttheagreementoftrialbalance,these
errorscanbeeasilyidentified.Forexample,ifanamountofRs.750iswrongly
postedasRs.570,itwouldhaveanimpactonagreementoftrialbalance.This
errorismostlyoccursduetoclericalmistake,thereforeitalsofallsunderthe
categoryofclericalnatureerror.

8. Errors of Principle:
ErroroccurredduetoviolationofaccountingPrinciplesisknownaserrorof
principle.Forexample,ifthepersonwhoisrecordingpurchaseofmachinery,
identifiespurchaseofmachineasofrevenuenatureanddebittherespectiveamount
tothePurchaseaccount,itwouldbeknownaserrorsofprinciple.Itisdifficultto
locatesucherrorsinceitmaynotaffecttheagreementoftrialbalancebutsucherror
seriouslyaffectsthefinancialresultsshownbyfinancialstatement,likeintheabove
mentionexamplethroughitwouldbedifficulttolocatetheerrorbutthiserrorwould
reducetheamountofprofitaswellasvalueofassetsinthebalancesheet.Acareful
analysisofthebusinesstransactionatthetimeofrecordingthetransactionwouldhelp
inreducingsucherrors.

9. Compensating Errors:
Incaseofcompensatingerrors,twoerrorsarecommittedinsuchawaythatoneerror
setofftheeffectofothererror.ForexamplepurchaseofRs.1000iswronglydebited
asRs.100inonecase,whileintheothercasepurchaseofRs.1100hasbeen
overstatedasRs2000.Inthiscase,ononehandfirsterrorisreducingthepurchase
amountbyRs.900butsimultaneouslytheseconderrorisalsoincreasingthePurchase
amountbyRs.900,thustheimpactoffirsterroronpurchasepriceisbeing
compensatedbyseconderror.Sucherrorisknownascompensatingerroranditdoes
notaffecttheagreementoftrialbalance.Therefore,itisdifficulttolocatethiserror.
Thusexcepterrorofcommissionrestothercategoriesoferrorsdonotaffectthetrial
balanceagreementanddifficulttobelocated.

10. Location of Errors
Thepossibilityofidentificationofanerrordependsonthefactwhetherthaterror
affecttheagreementoftrialbalanceornot.Fromthispointofviewerrorscanbe
categorizedasthoseaffectingtheagreementoftrialbalanceandthosewhichdonot
affectthetrialbalance.Sucherrorsshouldbelocatedandrectifiedbeforefinalaccount
preparation.
Thus,fromthepointofviewoflocatinganerrorcanbecategorisedasfollows;
1.Errorshavingimpactontrialbalance
2.Errorsnothavingimpactontrialbalance

11. 1.Errorshavingimpactontrialbalance:Errorofcommissioncomesunderthiscategory.
Primarilythiserrorcanbelocatedbycheckingthetotalofdebitandcreditsideofthetrial
balance.Theabsenceofagreementintosidesoftrialbalanceindicatestheexistenceoferrors.
Oncetheexistenceofanerrorisdetectedfollowingstepsneedstobetakentolocatesuch
errors:
•Totalofdebitandcreditsideoftrialbalanceshouldbere-calculated.
•Theprocessofsummarizingthetransactionsshouldbere-checkedbycomparingtheaccount
headortitleandamountoftrialbalancewiththatoftheledgertodetecttheerrors.
•Thetrialbalanceofcurrentyearshouldbecomparedwiththatofthepreviousyeartocheck
editionsanddetectionsandtracelargeunexpectedandabnormaldifferences.
•Balanceofindividualaccountsshouldbere-checked.

12. •Postingoftransactionsfromjournaltoledgershouldbere-checked.
•Eveniferrorhasnotbeenlocated,thedifferencebetweenthedebitandcreditcolumnshouldbecalculated.
Ifitisdivisibleby2,itispossiblethatanamountequaltothehalfofdifferenceispostedonWrongside.To
tracethatamountallentriesofthatsidethatisdebitorcreditsideshouldbescanned.
•Suchdifferencesindebitorcreditsideofthetransactionmayalsobeduetoomissionofpostinga
transactionwithsimilaramount.Tolocatethaterrortheaccountantshouldrecheckallpostingofthatside
thatisdebitorcreditside.
•Ifthedifferenceofdebitandcreditsideoftrialbalanceisdividedby9theerrorcanbeattributedtothe
transpositionoffiguresorduetowrongplacementofdecimalsforexamplerupee180iswronglydebitedas
rupee108thetrialcreditsidebalancewouldexceedbyrupees72whichisdividedby9.Thesameisalsotrue
incaseofwrongplacementofdecimal.

13. 2.Errorsnothavingimpactontrialbalance:Incaseoferrorofomission,
errorofprincipleandcompensatingerrors,itispossiblethatsucherrorshave
notaffectthetrialbalance.Itisverydifficulttotracesucherrors.Sucherrors
areidentifiedattimeswhenstatementofaccountiseithersubmittedto
creditororreceivedfromdebtororduringinternalorexternalauditorby
chance.

14. Suspense Account
Suspense account is an account wherein differences of trial balance is
transferred temporarily. If the debit and credit side of trial balance is not in
agreement and it is also not possible to locate the errors despite all efforts, the
difference amount of trial balance is transferred to the suspense account. This
account is maintained till the time, one could not locate error. As soon as errors
related to suspense account are located weather at the beginning or during an
accounting year, the suspense account should be closed by entering a reverse
journal entry.

15. Illustration 1
Rectify the following difference:
1.Depreciation written-off on furniture ₹500 was not posted to the furniture
account.
2.Rent paid Rs. 1,000 wrongly debited to Landlord Account.
3.Rs. 5,000 paid to Mohitwere debited to his A/c as Rs. 500.
4.Sales Return Book undercastby Rs. 4,000
5.Salary paid Rs. 3,500 to X were posted to the salary A/c as Rs 2,500