Accountants get ready trial equilibrium 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 find these errors and rectify them, only then we should jaunt for making ready final accounts. We also know that all types of errors are not revealed by trial equilibrium as some of the errors do not effect the total of trial balance. So these cannot be located with the help of trial balance. An accountant should invest his vigor to find both types of errors and rectify them before making ready trading, behalf and loss list and equilibrium sheet. Because if these are prepared before rectification these will not give us the spoton effect and behalf and loss disclosed by them, shall not be the actual behalf 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 basal principles of accounting, it is an error of principle. For example, if revenue 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 fully 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 concerned in the ledger.
(ii) Errors of commission
When an entry is incorrectly recorded whether fully or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission effect the trial equilibrium whereas others do not. Errors effecting the trial equilibrium can be revealed by making ready 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 located 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 correction of accounting errors
All types of errors in accounts can be rectified at two stages:
(i) before the making ready of the final accounts; and
(ii) after the making ready of final accounts.
Errors rectified within the accounting period
The proper formula of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. But while errors are being rectified before the making ready of final accounts, in confident cases the correction 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 making ready of final accounts is as follows:
(a) correction of errors affecting one side of one list Such errors do not let the trial equilibrium agree as they effect only one side of one list so these can't be corrected with the help of journal entry, if correction is required before the making ready of final accounts. So required estimate is put on debit or reputation side of the concerned 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 spoton 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 equilibrium 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 located 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 making ready 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 find and rectify the errors before making ready the final accounts for the year. But in confident cases when after critical search, the accountant fails to find the errors and he is in a hurry to get ready the final accounts, of the enterprise for filing the return for sales tax or revenue tax purposes, he transfers the estimate of disagreement of trial equilibrium to a newly opened 'Suspense Account'. In the next accounting period, as and when the errors are located these are corrected with reference to suspense account. When all the errors are discovered and rectified the suspense list shall be closed automatically. We should not forget here that only those errors which effect the totals of trial equilibrium can be corrected with the help of suspense account. Those errors which do not effect the trial equilibrium can't be corrected with the help of suspense account. For example, if it is found that debit total of trial equilibrium was less by Rs. 500 for the calculate that Wilson's list was not debited with Rs. 500, the following rectifying entry is required to be passed.
Difference in trial balance
Trial equilibrium is affected by only errors which are rectified with the help of the suspense account. Therefore, in order to calculate the disagreement 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 equilibrium is calculated and is reversed in the suspense account. If the reputation side exceeds, the disagreement would be put on the debit side of the suspense account. effect of Errors of Final Accounts
1. Errors effecting behalf and loss account
It is prominent to note the effect that an en-or shall have on net behalf of the firm. One point to remember here is that only those accounts which are transferred to trading and behalf and loss list at the time of making ready of final accounts effect the net profit. It means that only mistakes in nominal accounts and goods list will effect the net profit. Error in the these accounts will whether increase or decrease the net profit.
How the errors or their rectification effect the profit-following rules are helpful in comprehension it :
(i) If because of an error a nominal list has been given some debit the behalf 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 cut 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 behalf 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 behalf as the price on rent is reduced. When the error is rectified, we will post the critical estimate in rent list which will increase the expenditure on rent and so profits will be reduced.
(iil) behalf 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 cut 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 effect in decrease in profits (or increase in losses).
(iv) behalf 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 behalf or cut 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 revenue is not credited to behalf and loss account. When the error will be rectified, it will have reverse effect on behalf and loss as an further revenue will be credited to behalf and loss list so the behalf will increase ( or the losses will decrease). If due to any error the behalf or losses are effected, it will have its effect 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 equilibrium sheet so any error in nominal list will effect equilibrium sheet as well. So we can say that an error in nominal list or goods list effects behalf and loss list as well as equilibrium sheet.
2. Errors effecting equilibrium sheet only
If an error is committed in a real or personal account, it will effect assets, liabilities, debtors or creditors of the firm and as a effect it will have its impact on equilibrium sheet alone. Because these items are shown in equilibrium sheet only and equilibrium sheet is prepared after the behalf and loss list has been prepared. So if there is any error in cash account, bank account, asset or liability list it will effect only equilibrium sheet.
Rectification Of Accounting Errors
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