Accountants put in order trial balance to check the correctness of accounts. If total of debit balances does not agree with the total of reputation balances, it is a clear-cut indication that confident errors have been committed while recording the transactions in the books of customary entry or subsidiary books. It is our utmost duty to locate these errors and rectify them, only then we should tiptoe for establishment final accounts. We also know that all types of errors are not revealed by trial balance as some of the errors do not follow the total of trial balance. So these cannot be settled with the help of trial balance. An accountant should spend his energy to locate both types of errors and rectify them before establishment trading, profit and loss list and balance sheet. Because if these are prepared before rectification these will not give us the literal, follow and profit and loss disclosed by them, shall not be the actual profit or loss.
All errors of accounting policy can be classified as follows:
Marshalls Home Goods Store
1. Errors of Principle
When a transaction is recorded against the fundamental system of accounting, it is an error of principle. For example, if income expenditure is treated as capital expenditure or vice versa.
2. Clerical Errors
These errors can again be sub-divided as follows:
(i) Errors of omission
When a transaction is whether completely or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of customary entry or with regard to omission to post a transaction from the books of customary entry to the list involved in the ledger.
(ii) Errors of commission
When an entry is incorrectly recorded whether completely or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission follow the trial balance whereas others do not. Errors effecting the trial balance can be revealed by establishment a trial balance.
(iii) Compensating errors
Sometimes an error is counter-balanced by an additional one error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.
From the point of view of rectification of the errors, these can be divided into two groups :
(a) Errors affecting one list only, and
(b) Errors affecting two or more accounts.
Errors affecting one account
Errors which affect can be :
(a) Casting errors;
(b) error of posting;
(c) carry forward;
(d) balancing; and
(e) omission from trial balance.
Such errors should, first of all, be settled and rectified. These are rectified whether with the help of journal entry or by giving an explanatory note in the list concerned.
Rectification
Stages of improvement of accounting errors
All types of errors in accounts can be rectified at two stages:
(i) before the establishment of the final accounts; and
(ii) after the establishment of final accounts.
Errors rectified within the accounting period
The proper recipe of improvement of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives follow to the entry that should have been passed. But while errors are being rectified before the establishment of final accounts, in confident cases the improvement can't be done with the help of journal entry because the errors have been such. Normally, the policy of rectification, if being done, before the establishment of final accounts is as follows:
(a) improvement of errors affecting one side of one list Such errors do not let the trial balance agree as they follow only one side of one list so these can't be corrected with the help of journal entry, if improvement is required before the establishment of final accounts. So required estimate is put on debit or reputation side of the involved account, as the case maybe. For example:
(i) Sales book under cast by Rs. 500 in the month of January. The error is only in sales account, in order to literal, the sales account, we should report on the reputation side of sales list 'By under casting of. Sales book for the month of January Rs. 500".I'Explanation:As sales book was under cast by Rs. 500, it means all accounts other than sales list are correct, only reputation balance of sales list is less by Rs. 500. So Rs. 500 have been credited in sales account.
(ii) allowance allowed to Marshall Rs. 50, not posted to allowance account. It means that the estimate of Rs. 50 which should have been debited in allowance list has not been debited, so the debit side of allowance list has been reduced by the same amount. We should debit Rs. 50 in allowance list now, which was omitted previously and the allowance list shall be corrected.
(iil) Goods sold to X wrongly debited in sales account. This error is effecting only sales list as the estimate which should have been posted on the reputation side has been wrongly settled on debit side of the same account. For rectifying it, we should put duplicate the estimate of transaction on the reputation side of sales list by writing "By sales to X wrongly debited previously."
(iv) estimate of Rs. 500 paid to Y, not debited to his personal account. This error of effecting the personal list of Y only and its debit side is less by Rs. 500 because of omission to post the estimate paid. We shall now write on its debit side. "To cash (omitted to be posted) Rs. 500.
Correction of errors affecting two sides of two or more accounts
As these errors affect two or more accounts, rectification of such errors, if being done before the establishment of final accounts can often be done with the help of a journal entry. While correcting these errors the estimate is debited in one account/accounts whereas similar estimate is credited to some other account/ accounts.
Correction of errors in next accounting period
As stated earlier, that it is advisable to locate and rectify the errors before establishment the final accounts for the year. But in confident cases when after requisite search, the accountant fails to locate the errors and he is in a hurry to put in order the final accounts, of the business for filing the return for sales tax or income tax purposes, he transfers the estimate of contrast of trial balance to a newly opened 'Suspense Account'. In the next accounting period, as and when the errors are settled these are corrected with reference to suspense account. When all the errors are discovered and rectified the suspense list shall be complete automatically. We should not forget here that only those errors which follow the totals of trial balance can be corrected with the help of suspense account. Those errors which do not follow the trial balance can't be corrected with the help of suspense account. For example, if it is found that debit total of trial balance was less by Rs. 500 for the speculate that Wilson's list was not debited with Rs. 500, the following rectifying entry is required to be passed.
Difference in trial balance
Trial balance is affected by only errors which are rectified with the help of the suspense account. Therefore, in order to speculate the contrast in suspense list a table will be prepared. If the suspense list is debited in' the rectification entry the estimate will be put on the debit side of the table. On the other hand, if the suspense list is credited, the estimate will be put on the reputation side of the table. In the end, the balance is calculated and is reversed in the suspense account. If the reputation side exceeds, the contrast would be put on the debit side of the suspense account. follow of Errors of Final Accounts
1. Errors effecting profit and loss account
It is leading to note the follow that an en-or shall have on net profit of the firm. One point to remember here is that only those accounts which are transferred to trading and profit and loss list at the time of establishment of final accounts follow the net profit. It means that only mistakes in nominal accounts and goods list will follow the net profit. Error in the these accounts will whether increase or decrease the net profit.
How the errors or their rectification follow the profit-following rules are helpful in comprehension it :
(i) If because of an error a nominal list has been given some debit the profit will decrease or losses will increase, and when it is rectified the profits will increase and the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but the estimate debited to machinery repairs list -this error will reduce the profit. In rectifying entry the estimate shall be transferred to machinery list from machinery repairs account, and it will increase the profits.
(il) If because of an error the estimate is omitted from recording on the debit side of a nominal account-it results in increase of profits or decrease in losses. The rectification of this error shall have reverse effect, which means the profit will be reduced and losses will be increased. For example, rent paid to landlord but the estimate has been debited to personal list of landlord-it will increase the profit as the expense on rent is reduced. When the error is rectified, we will post the requisite estimate in rent list which will increase the expenditure on rent and so profits will be reduced.
(iil) profit will increase or losses will decrease if a nominal list is wrongly credited. With the rectification of this error, the profits will decrease and losses will increase. For example, investments were sold and the estimate was credited to sales account. This error will increase profits (or reduce losses) when the same error is rectified the estimate shall be transferred from sales list to investments list due to which sales will be reduced which will follow in decrease in profits (or increase in losses).
(iv) profit will decrease or losses will increase if an list is omitted from posting in the reputation side of a nominal or goods account. When the same will be rectified it will increase the profit or reduce the losses. For example, commission received is omitted to be posted to the reputation of commission account. This error will decrease profits ( or increase losses) as an income is not credited to profit and loss account. When the error will be rectified, it will have reverse follow on profit and loss as an supplementary income will be credited to profit and loss list so the profit will increase ( or the losses will decrease). If due to any error the profit or losses are effected, it will have its follow on capital list also because profits are credited and losses are debited in the capital list and so the capital shall also increase or decrease. As capital is shown on the liabilities side of balance sheet so any error in nominal list will follow balance sheet as well. So we can say that an error in nominal list or goods list effects profit and loss list as well as balance sheet.
2. Errors effecting balance sheet only
If an error is committed in a real or personal account, it will follow assets, liabilities, debtors or creditors of the firm and as a follow it will have its impact on balance sheet alone. Because these items are shown in balance sheet only and balance sheet is prepared after the profit and loss list has been prepared. So if there is any error in cash account, bank account, asset or liability list it will follow only balance sheet.
Rectification Of Accounting Errors
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