Rectification of Errors
Meaning:- Trial Balance is prepared to check the arithmetical accuracy of the books of account. The two sides of the Trial Balance must be equal, i.e., the total of the debit side must be equal to total of credit side.
Disagreement of a Trial Balance means that there are errors in books of account. Some of the errors affect the agreement of the Trial Balance and are disclosed by the Trial Balance. In the same way some of the errors does not affect the agreement of Trial Balance.

Types of Errors

  • Error of omission
  • Error of commission
  • Error of principles
  • Compensating errors

Errors of Omission:-

Errors which arise due to non-recording of business transactions wholly or partially are called errors of omission. These errors usually occur when a transaction needs to be posted to the books of original entry, i.e., the journal or with regard to omission to post a transaction into the ledger.

Error of Omissions is generally of two types:-

  • Error of Complete omission
  • Error of Partial Omission

Errors of Commission:-

When an entry is incorrectly recorded either wholly or partially for reasons like posting of incorrect amount, posting to incorrect account, wrong calculation, wrong totalling, wrong casting or balancing and similar others, the error are called as errors of commission. For example, if an amount of Rs.2,500 was paid to Suresh and the cash account was correctly credited but the personal account of Suresh was debited with an amount of Rs.250.

Errors of Principle:-

These type of errors come into existence due to non-obedience of principles of accounting. They have no effect on Trial Balance because they do not occur due to faulty recording as discussed above, but due to lack of understanding of fundamental accounting principles.

For examples:-

  • When purchase of an asset (machinery, building, etc.) is debited to Purchases Account and not to Asset Account.
  • When expenses incurred on purchase or installation of assets are debited to expenses account and not to that particular Asset Account.

Compensating Errors:-

Errors which counter balance each other, i.e., cancel the effect of each other are called compensating errors. Such errors do not affect Trial Balance, e.g., Rs.2,000 paid to Sonika is recorded as Rs.20,000 and Rs.20,000 paid to Monika is recorded as Rs.2,000. These type of errors does not affect the trial balance.

Searching of Errors on the basis of affects of Trial Balance

Errors affecting Trial Balance or One Sided Errors

One sided errors affect the Trial Balance as they affect only one account. Examples of one- sided errors are:

  • Error of casting, i.e., when a subsidiary book is under cast or overcast.
  • Error of carrying forward.
  • Wrong totaling or wrong balancing of a ledger account.
  • Error of posting to the correct account but with wrong amount.
  • Error of posting to the correct account but on the wrong side.
  • Error of posting to the wrong side with the wrong amount.
  • Error of partial omission.
  • Error of omission by posting the total of subsidiary book into the respective ledger.
  • Error of omission to show an account in the trial balance.

Errors not affecting Trial Balance or Two Sided Errors

Two-sided errors do not affect the trial balance Examples of two-sided errors are:

  • Errors of complete omission from posting to the account.
  • Errors of posting to the wrong account but on the correct side.
  • Wrong recording in the books of original entry (Subsidiary books).
  • Errors of principles.
  • Compensating Errors.

Effect of Errors on Final Accounts

Nominal Accounts, affect the profits and Personal and Real Accounts affect the Balance Sheet. For example, Stock Account, Purchases Account, Wages Account, Salaries Account, Commission Account, Bad Debts Account, etc., affect the Net profit because they are shown either in Trading Account or Profit and Loss Account. If any of these accounts is debited in the rectification entry, it reduces the Profit and if any of these accounts is credited then it increases the Profit.
Balances of Personal and Real Accounts form part of a Balance Sheet, so errors in such types of accounts will affect Balance Sheet only, not Profit and Loss Account.

Stages of Rectification of Errors

Rectification before the Preparation of Trial Balance: In this stage, errors are located before transferring the difference in the trial balance to Suspense Account. Rectification entries are passed concerning specific accounts.

Rectification after the Preparation of Trial Balance: In this stage, the difference in the trial balance gets transferred to Suspense Account. So, wherever applicable, suspense account is used while passing rectification entries.

Rectification of One Sided Errors before Preparation of Trial Balance

Rectify the following transactions which were detected before preparation of Trial balance:-

  • The total of purchase book has been undercast by Rs.10,000.
  • Payment of salary of Rs.1,000, posted twice in salary account.
  • Depreciation of Rs.2,000 on furniture written off, not recorded in depreciation account.

Solution:-

Total of purchase book undercast, it means the Purchase Account is debited short by Rs.10,000. So, we have to debit Purchase Account by Rs.10,000 to rectify the error.

Salary account is debited Rs.1,000 more, so, to rectify this error we have to credit salary account by Rs.1,000.

Depreciation on furniture Rs.2,000 not recorded in depreciation account, to rectify this error we have to record this in depreciation account on debit side.

Rectification of Two Sided Errors before Preparation of Trial Balance

As these errors affect two accounts simultaneously, they are hence called two-sided errors. They have no effect on Trial Balance. These are mainly errors of recording, errors of principle, error of posting to wrong account and error of complete omission. Rectification of these errors is done with the help of journal entries.

In this process of rectification, for the sake of understanding, three journal entries are passed –

the correct entry, wrong entry, and the rectifying entry.

  • The correct entry denotes the journal entry which should have been recorded.
  • The wrong entry signifies the incorrect entry that has actually been passed in the books.
  • The rectifying entry represents the journal entry passed to rectify the error.

Rectification of Two Sided Errors

 

 

Rectification of Errors after Preparation of Trial Balance but before Preparation of Final Accounts

Sometimes error could not be found before the preparation of trial balance. Thus, in such situation the amount of difference in the Trial Balance is transferred to a newly opened account called Suspense Account. Here also two types or errors:-

  • Two Sided Errors:- Rectified by passing a single journal entry without opening Suspense Account.
  • One Sided Errors:- Rectified by passing a single journal entry by opening Suspense Account.

Suspense Account

When the totals of debit and credit side of Trial Balance do not agree with each other and the errors made in accounts are not detected, then the amount of difference in totals of both sides is transferred to suspense account. As the errors are rectified, the balance of suspense account goes on reducing.

The suspense account is a nominal account. The prime objective of opening this account is to balance the Trial Balance. In the financial statements, the suspense account is shown in the Balance Sheet on either the assets or liabilities side depending on the nature of its balance.

Rectification of One Sided Error after Preparation of Trial Balance

Assuming that a Suspense Account have a balance of Rs.430, correct the following errors which were discovered after the preparation of trial balance and also prepare Suspense Account:

  • Purchases book is carried forward Rs.850 less.
  • Sales book total is carried forward Rs.2,500 more.
  • The total of Rs.7,580 in the purchases book has been carried forward as Rs.8,570.
  • The total of the sales book Rs.6,550 on page 20 was carried forward to page 21 as Rs.5,560.
  • Purchases return book was carried forward as Rs.3,520 instead of Rs.5,320.