Errors are obvious to occur but we need to systematically correct the accounting errors. The correcting or rectifying of the error is known as ‘Rectification of Errors’.
Financial accounting deals with records and maintains the monetary transaction of a business unit. Sometimes, certain entries might be recorded incorrectly or used in the wrong place. In financial accounting, the process of correcting such mistakes is known as Rectification of Errors.
Rectification of Errors in Accounting
In accounting, errors are the ‘mistakes’ committed by the accountant. These mistakes may occur while classifying the accounts, writing the subsidiary books, posting the entries to ledger accounts, totalling, balancing the accounts, carrying the balances forward and so on. The process of finding and correcting these mistakes is called rectification of errors in accounting.
Accounting principle says that debit is always equal to the credit. With the occurrence of the bookkeeper or accountant’s mistake, if this basic principle is violated at any time or any stage, the errors are to be recognised and rectified. To prove arithmetical accuracy of accounting, the trial balance is prepared to confirm that the debits are equal to the credits. The agreement of the trial balance and errors may continue to prevail even with the best effort by the accountant. If such errors are left uncorrected, they affect the final accounts of the unit and thereby give wrong numerical figures to the business unit and in turn, hamper it’s functioning, hence errors are too rectified. This is done through this system of rectification of errors.
Types of Rectification of Errors
There are several types of errors in accounting. Accounting errors are generally unintentional mistakes made when an accountant is recording the journal entries. Small accounting errors may not affect the final numbers in financial statements but they cause major distortions in the overall figures. These types of errors require lots of time and resources to find and correct them.
Since accounting errors can disrupt the business, all kinds of business organisations should know the most common types of accounting errors so that it’s easier to spot and correct them. Following are the types of accounting errors-
Subsidiary Entries
Transposition Errors
Rounding Errors
Error of Omission
Errors of Principle
Errors of Reversal
Errors of Commission
Suspense Account
Suspense account records the difference. An entry is needed as the error affects the difference. As there is no ledger entry for the other side of the correction, the trial balance is simply amended or changed to give the effect that the errors are rectified.
When the trial balance does not tally due to the one-sided errors in the books, an accountant puts the difference between the debit and credit side of the trial balance on the shorter side as the Suspense Account. As and when we locate and rectify the errors, the balance in the Suspense A/c reduces and at the end becomes zero. It is a temporary account and can have debit or credit balance depending upon the rectified situation.
Suspense Account Entry
We make an entry in the suspense account with journal entries. First, we need to open a suspense account in the general ledger. Next, we enter the full amount to be rectified. The form of suspense account entries will be either a credit or debit. This closes out the suspense account and posts the transaction to the correct account.
In case, the trial balance debits are larger or more than the credits, the difference is recorded in the suspense account as a credit. If the trial balance credits are larger or more than the debits, the difference is recorded in the suspense account as a debit. In the case of one-sided errors, if they are to be rectified through journal entries, the suspense account can be used for the required debit or credit depending upon the nature of the error. For example, the purchase book is undercast by Rs.500. The journal entry will be as follows-
Trial Balance and Rectification of Errors
To prepare the statements, an accountant can take the balances of all accounts from the trial balance without much of the hustle of going through the whole ledger. This is to be noted that the trial balance is usually prepared with the balances of accounts. Hence the balance of the account should be error-free thus rectifying the errors becomes utmost to record the same in the trial balance.
It is important for an accountant that the trial balance should tally. Normally, a tallied trial balance means that both the debit and the credit entries have been made correctly for each transaction. When the trial balance is not tallied, then comes the rectification of errors in the play. However, the agreement of trial balance is not absolute proof of the accuracy of accounting records. A tallied trial balance only proves, to a certain extent, that the posting to the ledger is arithmetically correct.
FAQs on Rectification of Errors
1. What is the rectification of errors in Class 11 Accountancy?
Rectification of errors refers to the process of correcting unintentional mistakes made in the accounting records after they have been identified. These errors can occur during the recording of transactions in the journal, posting to the ledger, or balancing accounts. The main objective is to amend the books of accounts to ensure the Trial Balance agrees and the financial statements present a true and fair view of the business's financial position.
2. What are the four main types of accounting errors that require rectification?
The four primary categories of errors found in accounting are:
- Errors of Omission: These occur when a transaction is either completely or partially omitted from the books of accounts. For example, not recording a credit sale at all.
- Errors of Commission: These arise due to incorrect recording, posting, or calculation. For instance, posting Rs. 500 instead of Rs. 5,000.
- Errors of Principle: These happen when a transaction is recorded in violation of fundamental accounting principles, such as treating a capital expenditure (e.g., purchase of machinery) as a revenue expenditure (e.g., office expenses).
- Compensating Errors: These are a set of two or more errors that cancel out each other's effect on the Trial Balance. For example, an over-debit in one account is neutralised by an over-credit of the same amount in another account.
3. Can you explain the rectification of an error of commission with an example?
An error of commission occurs when a transaction is recorded with an incorrect amount, posted to the wrong account (but on the correct side), or has a calculation mistake. For example, if a credit sale of Rs. 10,000 to Rohan was correctly recorded in the Sales Book but was posted to Rohan's account as Rs. 1,000. This is an error of commission. The rectification entry would be to debit Rohan's account with Rs. 9,000 to correct the short debit, thus bringing his account balance to the correct value.
4. What is the key difference between one-sided errors and two-sided errors?
The key difference lies in their impact on the Trial Balance. A one-sided error affects only one account, causing the debit and credit totals of the Trial Balance to disagree. An example is an error in casting or carrying forward a balance. In contrast, a two-sided error affects two or more accounts simultaneously in such a way that the Trial Balance still agrees. For instance, completely omitting a transaction from the books is a two-sided error as both the debit and credit aspects are missing.
5. Why is a Suspense Account used to rectify some errors but not others?
A Suspense Account is a temporary account used exclusively to rectify one-sided errors. These errors cause a mismatch in the Trial Balance totals. The Suspense Account is used to make the Trial Balance agree temporarily, allowing for the preparation of financial statements while the error is being located. Once the specific error is found, a rectifying entry is passed to debit or credit the relevant account against the Suspense Account, thereby closing it. It is not used for two-sided errors because these errors do not affect the agreement of the Trial Balance, and they can be corrected by passing a direct journal entry between the affected accounts.
6. At what stages can errors be rectified, and how does the method change?
Errors can be rectified at three distinct stages, and the method of rectification changes accordingly:
- Before preparing the Trial Balance: Simple one-sided errors can be corrected by debiting or crediting the affected account directly in the ledger without a formal journal entry.
- After preparing the Trial Balance but before Final Accounts: All errors, whether one-sided or two-sided, are rectified by passing a proper journal entry. One-sided errors are corrected using the Suspense Account.
- After preparing the Final Accounts (in the next accounting period): Errors are rectified by passing a journal entry through a special account called the 'Profit & Loss Adjustment Account' to ensure the current year's profit is not affected by the previous year's errors.
7. How does failing to rectify an 'error of principle' impact a company's financial statements?
Failing to rectify an error of principle leads to a fundamental misrepresentation of a company's financial health, even though the Trial Balance may agree. For example, if the installation charges for a new machine (a capital expenditure) are incorrectly debited to the 'Wages' account (a revenue expenditure), it has two major impacts: the Balance Sheet will understate the value of assets, and the Profit & Loss Account will overstate expenses, leading to an understatement of the net profit for the period. This violates the core accounting principle of matching costs with revenues.
