Meaning of Rectification of Error
To revise a mistake and make amends for it is known as “Rectification of Errors”. Rectification of Errors is basically of two types. One of the most common types of errors are committed on both sides of an entry. This does not influence the trial balance and can be rectified by making a journal entry.
These mistakes can occur while posting the journal entries to the ledger accounts, classifying these accounts, and carrying the balance forward, etc. We will learn in-depth about the types of these errors in our following section.
Types of Rectification of Errors
Errors of omission: These errors occur in cases like when the entire transaction has been omitted from the books of accounts. From the word ‘omitted’ this error got the name ‘Errors of Omission’. This normally happens when the transaction is not recorded in the books of the original entry.
Errors of commission: These errors happen due to any wrong committed by the accountant. Again, from the word ‘commission’ the error got its name as ‘Errors of Commission’. This might happen due to the wrong balances in an account, wrong posting of other accounts, the wrong carryforwards, wrong totaling, etc.
Errors of principle: Errors of principle are committed in those cases where a distinction between the revenue and the capital item is not differentiated. This is the error of principle when the accountant denies accepting the principle of common accounting practices.
Compensating errors: As indicated by the name, compensating errors are those errors which naturally compensate each other.
Errors of omission: These errors occur in cases like when the entire transaction has been omitted from the books of accounts. From the word ‘omitted’ this error got the name ‘Errors of Omission’. This normally happens when the transaction is not recorded in the books of the original entry.
Errors of commission: These errors happen due to any wrong committed by the accountant. Again, from the word ‘commission’ the error got its name as ‘Errors of Commission’. This might happen due to the wrong balances in an account, wrong posting of other accounts, the wrong carryforwards, wrong totaling, etc.
Errors of principle: Errors of principle are committed in those cases where a distinction between the revenue and the capital item is not differentiated. This is the error of principle when the accountant denies accepting the principle of common accounting practices.
Compensating errors: As indicated by the name, compensating errors are those errors which naturally compensate each other.
Trial Balance and Rectification of Errors
In case of an untallied trial balance, we know that at least one error has occurred.
The error or the errors have occurred at one of those stages in the accounting process, while:
totaling the subsidiary books
posting the journal entries in their respective ledger
calculating its account balances
posting the account balances to the trial balance
at the time of totaling the trial balance columns.
This is to be noted that the accounting accuracy is not ensured, although the totals of debit and credit balances are equal as these errors do not affect the equality of the debits and credits.
CA Foundation Rectification of Errors Solutions
Rectification of Errors is an important study for the students willing to appear for the CA Foundation level exams. A replica of its question is only to give you an idea about the type of questions asked to form this chapter. The students are requested to join the Vedantu live online classes for more such content.
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Rectification of Errors after Preparing Final Accounts
After preparing the Final Accounts, the nominal account must not be rectified through the concerned nominal accounts. While the profits which are disclosed in the previous year differ from the genuine profits which are stated before. Therefore, those types of errors are rectified through the Profit and Loss Adjustment Account.
The students must remember that only the rectifying entries are made through the Profit and Loss Adjustment Account which are normally related to the items of the Trading and Profit and Loss Account. Similarly, with the Rectification of Errors, the balance of the new Profit and Loss Adjustment Account is transferred to the Capital Account.
Rectification of Errors Suspense Account
For the one-sided errors in the books, the trial balance refuses totally, then an accountant puts the difference between the debit and credit side of the trial balance on the shorter side as the Suspense A/c. After locating and rectifying the errors, the balance in the Suspense A/c reduces and consequently ends up becoming zero. Thus, the Suspense A/C cannot be categorized. This is a temporary account that can have a debit or credit balance depending upon the situation.
When an accountant uses the Suspense A/c to rectify the one-sided errors, he needs to follow the following steps:
Identify the account with the error.
Ascertaining the excess debit or credit.
In case of a shorter debit or an excess credit in an account, the concerned account is thus debited. In case of short credit or an excess debit in an account, we need to credit the similar affected account.
Then pass the necessary journal entry by debiting or crediting the Suspense A/c.
More about Rectification of Errors
Rectification of Errors is defined as the revising of mistakes in the entries. The errors can occur through various things like - posting entries to ledger accounts, classifying accounts, carrying balance forward, etc.
On the basis of Rectification of Errors, they can be classified into the following two broad categories:
Errors influencing the trial balance
Errors that influence the trial balance
Rectification of Errors Not Influencing the Trial Balance
Errors that do not influence the trial balance include errors that involve errors on both sides of debit and credit and can be corrected by passing a journal entry.
These errors affect two or more than two accounts simultaneously and are therefore known as two-sided errors. These errors can occur both on the debit and credit side of the account and need to be rectified by passing a journal entry to correct the debit and credit.
By reversing the impact of the wrong entry on the debit and credit side and then restoring the correct debit and credit entry, the errors can easily be rectified.
If there is excess credit or shortage in debit, then debiting of the concerned account is done, similarly if there is a shortage of credit and excess of debit, then the concerned account should be credited.
Example
Question: Credit sales to Amit of ₹ 15,000 were not recorded in the sales book. Rectify the error.
Solution:
The rectification of the error is defined as :
Amit 's A/c Dr. 15000
To Sales A/c 15000
(Being credit sales to Amit recorded correctly)
Rectification of Errors Influencing the Trial Balance
Errors that affect the trial balance occur on any one side of the trial balance and such errors can only be rectified or corrected by passing a journal entry along with the opening of a suspense account.
These errors are known as one sided errors as only one side of the account (either debit or credit) is affected by these errors. These errors can be simply rectified by adding a note in the account or by passing a journal entry by creating a Suspense account.
The process of rectification is as follows:
Identifying the account having the error.
Determination of the shortage or excess in the account.
If there is an excess credit and shortage in debit, then the difference should be debited from the account with the difference amount as determined earlier..
If the difference is found due to excess debit and shortage of credit, then credit the account with the difference.
At last, the rectification is completed by debiting or crediting the suspense account.
Example
Question: Depreciation written off on machinery ₹8000 not recorded in Machinery account. Rectify the error.
Solution:
Suspense A/c Dr. 8000
To Machinery A/c 8000
FAQs on Types of Rectification of Errors in Accounting
1. What are the main types of errors in accounting from a rectification perspective?
In accounting, errors are broadly classified into four main types based on their nature. Understanding these is the first step in rectification:
- Errors of Omission: These occur when a transaction is completely or partially forgotten and not recorded in the books of original entry.
- Errors of Commission: These are mistakes made during the recording process, such as posting the wrong amount, posting to the wrong account, or incorrect balancing.
- Errors of Principle: These happen when a transaction is recorded in violation of fundamental accounting principles, like treating a capital expenditure as a revenue expense.
- Compensating Errors: This involves two or more errors that cancel out each other's financial effect, thus not affecting the Trial Balance agreement.
2. How are accounting errors categorised based on their effect on the Trial Balance?
Based on their impact on the Trial Balance, errors are divided into two categories:
- Two-Sided Errors: These are errors that do not affect the agreement of the Trial Balance because they involve incorrect entries in two or more accounts, with the debit and credit effects being equal. Examples include errors of principle and compensating errors.
- One-Sided Errors: These errors affect the agreement of the Trial Balance because they impact only one side of an account or transaction, causing a mismatch between total debits and credits. Examples include wrong casting or posting to the wrong side of an account.
3. What is the difference between an error of commission and an error of principle?
The key difference lies in the nature of the mistake. An error of commission is a clerical or procedural mistake, such as writing ₹5,000 instead of ₹500. An error of principle is a conceptual mistake where an accounting rule is violated, for example, debiting 'Wages' (a revenue expense) for the installation of new machinery instead of debiting the 'Machinery' account (a capital expenditure). The former is a calculation or posting mistake, while the latter is a misapplication of accounting theory.
4. How are two-sided errors rectified in the books of accounts?
Two-sided errors are rectified by passing a rectifying journal entry. Since these errors affect two or more accounts simultaneously without disturbing the Trial Balance, a new journal entry is created to reverse the incorrect debit and/or credit and apply the correct debit and/or credit. This process does not require the use of a Suspense Account.
5. What is a Suspense Account and why is it used to rectify errors?
A Suspense Account is a temporary account used to park the difference in a Trial Balance when the total debits do not equal the total credits. Its primary purpose is to facilitate the correction of one-sided errors. By placing the difference amount in the Suspense Account, the Trial Balance can be artificially tallied, allowing for the preparation of financial statements while the specific error is being located. Once the error is found, it is rectified by debiting or crediting the relevant account and clearing the corresponding amount from the Suspense Account, which should ideally become zero after all such errors are corrected.
6. If a Trial Balance is tallied, does it guarantee that the books are completely error-free? Explain why.
No, a tallied Trial Balance does not guarantee 100% accuracy. It only confirms that the total debits equal the total credits. Several significant errors, known as two-sided errors, do not affect this equality and will remain undetected. These include:
- Complete omission of a transaction.
- Recording a correct amount in the wrong accounts on both the debit and credit sides.
- Errors of principle (e.g., treating a capital item as revenue).
- Compensating errors where one error cancels out another.
Therefore, while a tallied Trial Balance is a good indicator of arithmetical accuracy, it is not conclusive proof of error-free accounting.
7. Why is it crucial to rectify accounting errors before preparing the final financial statements?
Rectifying errors is crucial because it ensures the financial statements (the Trading and Profit & Loss Account and the Balance Sheet) present a true and fair view of the business's profitability and financial position. Uncorrected errors can lead to an incorrect calculation of profit or loss and a misrepresentation of assets and liabilities. This can mislead stakeholders like investors, creditors, and management, resulting in poor business decisions and potential legal issues.
8. How does the rectification process change if an error is discovered after preparing the final accounts?
If an error affecting a nominal account (like expenses or incomes) is found after the final accounts of a year are closed, the rectification cannot be done through the original nominal account as it has already been closed. Instead, a special account called the Profit and Loss Adjustment Account is used. This account records all adjustments for past errors, and its final balance is transferred directly to the Capital Account, thereby correcting the owner's equity without disturbing the current year's profit and loss figures.
