Rectification of Errors

Learning Objectives

·        Explain Types of Errors and their examples

·        Rectification the Errors :

·        Two sided i.e. Errors not affecting Trial Balance one sided i.e. Errors which affect Trial Balance.

·        To Explain Meaning and Utility of Suspense A/c

·        Maintain Suspense A/c.

INTRODUCTION

For example if a credit sale is omitted to be entered in the Sales Book, it will not affect> the trial balance because both the Debit and the Credit aspects of this transaction are not recorded. In other words errors in the records may or may not affect Trial Balance.

Important : The errors whether affecting the Trial Balance or not must be detected and rectified.

Need of Rectification :

1.      For the preparation of correct Accounting Records.

2.      Preparation of P & L A/c with corrected figures to ascertain correct Profit or Loss.

3.      To find out the true financial position of the firm by preparing Balance Sheet with corrected figures.

CLASSIFICATION OF ERRORS
(on the basic of Nature)

Type of Error with Meaning	Sub-Types with Examples
I. Error of Omission completely or partially omitted to be recorded in the books)	(a) Error of Complete Omission Goods sold to X on Credit but not recorded in Sales Book. *(b) Partial Omission Goods sold to X on Credit recorded in Sales Book but not posted to the A/c of X, thus sales A/c is credited but X is not debited creating short debit. This error will affect Trial Balance.
II. Error of Commission (These errors are caused due to wrong recording of transactions wrong totaling of subsidiary books or Ledger A/cs, Wrong posting and wrong carry forward)	(a) Error of Recording in the Book Of Original Entry Goods purchased from Ravi for Rs. 450, recorded as Rs. 540, in the Purchase Book. (This error will not affect Trial Balance as same amount will be posted in both the A/cs, Purchase A/c as well as Ravi.) *(b) Wrong Totaling of Subsidiary Book. Example : Purchase Book has been undercast (short totaled) by Rs. 100, Purchase A/c will be debited short by Rs. 100, decreasing the debit side of Trial Balance by Rs. 100. (c) Error in Totaling or Balancing of Ledger A/cs* Example : Creditors A/c has been balanced short by Rs. 500, then Trial Balance will Rs. 500 short in Credit side. (d) Error of Posting *(i) Posting to the wrong side but correct account. Goods sold to X for Rs. 550, entered to the credit of X's A/c instead of posting to the debit side of his account. *(ii) Posting with wrong amount. *(iii) Posting twice in an A/c. (iv) Errors in posting to the wrong A/c but correct side don't affect Trial Balance. *(e) Error in carrying forward. Total of purchase book Rs. 2,500 is carried forward as Rs. 2050 Creating short debit of Rs. 450, in Purchase A/c and in turn short debit in Trial Balance.
III. Errors of Principles. (These errors are caused due to the violation of accounting principles i.e. allocation between Capital and Revenue Items.	(a) Treating capital items as revenue item Example : Wages paid for the installation of a new machinery charged to Wages A/c instead of Machinery A/c. (b) Treating Revenue Items as Capital Item Example : Rs. 200 paid for the repairs of an old Machinery but debited to Machinery A/c instead of Repairs A/c.
IV. Compensation Errors (Two or more errors committed in such a way that the net effect of these errors of the debit and credits of A/cs is nil).	Example : On July, 1st 2011 a sum of Rs. 2,000 paid to Mohit is posted as Rs. 200 to the Debit of his A/c and on July 20th, 2011 a sum of Rs. 200 paid to Sonil has been posted as Rs. 2,000 to the Debit of his A/c. Net Effect will be zero.

Important 1 :

1. Errors of Principles and compensating Errors don't affect Trial Balance.
2. Errors shown by star in the above table affect Trial Balance.

TYPES OF ERRORS FROM RECTIFICATION

POINT OF VIEW

From Rectification point of view, errors are classified into the following two categories only :
Case I : Errors which don't affect the Trial Balance
or
Two Sided Errors
Case II : Errors which affect the Trial Balance
or
one Sided Errors.

Errors don't Affecting Trial Balance

(1) Errors of complete omission.
(2) Wrong recording in the books of original entry.
(3) Complete omission from posting to the A/cs.
(4) Errors of posting to the wrong A/c but on the correct side.
(5) Compensating errors.
(6) Errors of principle.

Errors  Affecting Trial Balance Shown by star in the table showing
Errors : Types and Examples.

(1) Errors in totaling of Subsidiary books or ledger A/c s - i.e. overcast or under cast.

(2) Error in the Balancing of Ledger A/cs.

(3) Error in posting to the correct A/c but with the wrong amount or to the wrong side or both.

(4) Errors of Partial omission

(5) Omitting to show an A/c in the Trial Balance.

RECTIFICATION OF ERRORS

When the errors are detected, these have to be rectified in the books of accounts. Rectification of errors depends upon:- The type of error and
- The time of depiction of an error.

Time of Depiciation of an error means

1.      Errors detected before the preparation of Trial Balance.

2.      Errors detected after prepairing Trial Balance but before preparing final Accounts.

3.      Error detected after preparing Final Accounts.

Rectification of Errors detected after preparing Final Accounts is not in the syllabus. Hence we will discuss only type (i) and (ii)

I RECTIFICATION OF TWO SIDED ERRORS

Two sided errors are those errors which affect two sides of Accounts. These errors don't affect Trial Balance as discussed earlier.

These Errors are rectified by passing a Journal entry irrespective of the time of deficiation. In other words their rectifying entry will be same whether (a) the error is depicted before preparing Trial Balance or (b) after the preparation of Trial Balance but before the Final A/cs are prepared.

Steps for Rectification

(1) Locate the Effect of Error on Different Accounts
(2) The Account Showing Excess credit should be Debited.
(3) The Account Showing Excess Debit should be Credited.
(4) The Account Showing short Debit should be Debited.
(5) The Account Showing short Credit should be Credited.

EXAMPLES (with Explanation)

(I) when an account has wrongly been debited in place of another A/c.

Rectification will be done by debiting the correct account and Crediting the A/c which was wrongly debited.

Example : Machinery purchased for Rs. 10,000 has been debited to Purchases A/c

Solution : Here two A/cs are affected

1- Machinery A/c is not debited its debit side is short by Rs. 10,000, where as purchases A/c is debited by mistake purchases A/c debit side is in excess by Rs. 10,000. While rectifying this mistake machinery A/c will be debited by Rs. 10,000

2- because it w as not debited earlier and purchases A/c will be credited be cause it was wrongly debited Hence.

Rectifying Entry is :

Particulars	Dr. Rs.	Cr. Rs.
Machinery A/c ………Dr.	10000
To Purchases A/c		10000
[Being for purchase of machinery wrongly debited to purchase A/c ]

(II) When an account has wrongly been Credited in place of another account.
Example : Rs. 5,000 received from the sale of old furniture has been Credited to Sales A/c.

Solution : This errors also affects the two A/cs

• Furniture A/c is not Credited its credit side is short by Rs. 5,000.
• Sales A/c is credited by mistake its credit side is in excess or Rs. 5,000.
• Therefore for rectifying this mistake Sales A/c will be debited because it was wrongly Credited and Furniture A/c which was not Credited earlier will now be credited by Rs. 5,000.

Hence Rectifying entry is :

Particulars	Dr. Rs.	Cr. Rs.
Sales A/c ………Dr.	5000
To Furniture A/c		5000
[Sale of old furniture wrongly Credited to Sales A/c]

III) - When there is a short dobit in one A/c and a short Credit in another A/c.

Example : Goods sold to Seema for Rs. 540 was entered in the Sales Book as Rs. 450.

Solution :

• Here Seema's A/c is debited by Rs. 90 short and Sales A/c is credited by Rs. 90 short. (Instead of Rs. 540 by Rs. 450)
• Therefore rectification will be done by Debiting Seema's A/c and Crediting Sales A/c. Hence Rectifying entry is :

Particulars	Dr. Rs.	Cr. Rs.
Seema A/c ………Dr.	90
To Sales A/c		90
(Goods sold to Seema for Rs. 540 wrongly entered as for Rs. 450)

(IV) - When there is an Excess Debit in one A/c and Excess Credit in another a/c.

Example : Goods purchased from Mohan for Rs. 300, was recorded in Purchase Book as Rs. 3000.

Solution -

·        Here Purchases A/c is Debited by Rs. 3000, instead of Rs. 300, ie. Rs. 2700, more.

·        Mohan's A/c is also Credited by Rs. 2700 more.

·        Rectification will be done by debiting Mohan's A/c and Crediting purchases A/c by Rs. 2700, ie. the entry in the reverse direction.

Rectifying Entry

Particulars	Dr. Rs.	Cr. Rs.
Mohan A/c ……… Dr.	2700
To Purchase A/c		2700
(Being Purchase of goods from Mohan for Rs. 300 wrongly entered as Rs. 3000)