Rectification of Errors

Introduction

Rectification of errors is a term that is mostly associated with accounting. It refers to revising a mistake and making amendments to rectify the mistake. These errors can creep in while classifying these accounts, posting the journal entries to the ledger accounts, carrying the balance forward, etc.

It must be noted that the accounts team of an organization usually works diligently to avoid any factual mistake. However, in many cases, they are unable to avoid the mistakes which seem correct at first sight. Therefore, the accounts team must carry on checking data even after these are accounted for. Many times, mistakes in accounting books arise later than expected.

Types of Errors

There are four types of errors that may occur in day-to-day accounting operations. They are classified as follows

Errors of omission

The errors of omission occur when an entire transaction has not been recorded in the books of accounting. It has got the name from the word omitted which means to skip. Therefore, errors of omission are erros which means that some financial information has been skipped by the accounts team due to which the final adjustments cannot be maintained. These are the errors that occur when records do not find tier place in the books of original entry.

Errors of Commission

These errors take place due to mistakes on the part of the accountant. The error has got its name from the word commission which is derived from commitment. Errors of commission often take place due to the wrong posting of other accounts, the wrong balances in an account, mistakes in carryforwards, errors while totaling, etc.

Errors of Principle

When the revenue and the capital are not separated, errors of principle may occur. The name comes from the fact that the accountant responsible for such errors denies to accept the common principles of accounting. This error can be avoided by following common accounting practices in whatever is done by the accountant.

Compensating errors

As the name suggests, compensating errors are the ones that compensate for each other. In such a case, one error is responsible for the occurrence of the other but eventually, they cancel out each other.

Trial Balance and Rectification of Errors

When the trial balance cannot be tallied perfectly, then we must realize that there is some error in the trial balance.

The error or the errors may occur while -

• Totaling the subsidiary books

• Calculating the account balances

• Posting the journal entries in their respective ledger

• Posting the account balances to the trial balance

• Totaling the trial balance columns.

Errors in the trial balance do not affect the equality of debit and credit. So, these errors may creep in even when debit and credit balances are equal.

Rectification of Errors Influencing Trial Balance

Errors affecting the trial balance occur at any one side of the trial balance. These errors can be corrected only by passing a journal entry with the opening of a suspense account.

These errors are also called single-sided or one-sided errors as they occur only on one side of the account (either debit or credit). So, either debit or credit is affected by such errors. These errors can simply be rectified by adding a note to the account or by passing a journal entry with the creation of a Suspense account.

The process of rectification is as follows −

• First, Identify the account having the error.

• Then determine the shortage or excess in the account.

• When we get an excess credit and shortage in debt, then the difference should be debited from the account. The debited amount should be equal to the difference amount as determined earlier.

• When there is excess debit and a shortage of credit, then we should credit the account with the difference.

• Finally, debiting or crediting the suspense account finishes the rectification process.

Rectification of Errors Not Influencing the Trial Balance

This type of error involves errors on both sides of debit and credit and can be rectified by passing a journal entry. These errors are known as two-sided errors as they affect two or more accounts simultaneously. These errors may take place both on the debit and credit side of the account. They can be rectified by passing a journal entry to correct the credit and debit.

These errors can easily be rectified by reversing the impact of the wrong entry on the debit and credit side and then replacing the correct debit and credit entry.

• If there is an excess of credit or a shortage in debit, then debit the concerned account is done.

• If there is a shortage of credit and an excess of debit, then the concerned account should be credited.

Rectification After Final Account is Created

The nominal accounts cannot be used to rectify the mistakes in the final account. As profits disclosed in the previous year’s account differ from the original profit, these types of errors are settled with a profit and loss adjustment account.

Only the rectifying entries are done through the Profit and Loss Adjustment Account. These accounts are usually related to the items of the Trading and Profit and Loss Account. Along with the Rectification of Errors, the existing balance of the new Profit and Loss Adjustment Account is generally shifted to the Capital Account.

Rectification of Errors Suspense Account

When the trial balance refuses totally for the one-sided errors in the books, then the difference between the debit and credit sides should be put on the shorter side as the Suspense A/c. After identifying and rectifying the errors, the balance in the Suspense A/c goes on reducing and eventually ends up becoming zero. That is why, the Suspense A/C cannot be categorized. It is just a temporary account with a debit or credit balance according to the situation.

When the Suspense A/c is used to rectify the one-sided errors, the following steps must be followed −

• First, identify and locate the account with the error.

• Find out the excess debit or credit.

• In case there is a shorter debit or an excess credit in an account, the concerned account should be debited.

• In case of short credit or an excess debit in an account, the affected account should be credited.

• Finally, pass the required journal entry by debiting or crediting the Suspense A/c.

Conclusion

Rectification of errors is a common and important procedure in accountancy. It helps maximize both resource usefulness and profitability. Without having the knowledge of rectification of errors accountants may end up making the books of accounting full of errors which may be very costly for the organization. Hence, the idea of rectification of errors is unavoidable for accountants and managers.

FAQs

Qns 1. What is meant by rectification of errors?

Ans. Rectification of errors is a term that is mostly associated with accounting. It refers to revising a mistake and making amendments to rectify the mistake.

Qns 2. How can errors occur?

Ans. Errors can creep in while classifying the accounts, posting the journal entries to the ledger accounts, carrying the balance forward, etc.

Qns 3. What are one-sided errors?

Ans. Errors that influence the trial balance are also called one-sided errors as they occur only on one side of the account (either debit or credit).