Error Rectification in accounting – Explanation with examples

Error Rectification in accounting - Explanation with examples

Error Rectification in accounting:-

An error means the mistake. When we are doing some work here a number of chances to do mistake also. So, while an accountant recording, posting or balancing the ledger account there are numbers of chances that he did mistake in his work this type of mistake is known as the accounting errors. The process of rectifying these mistakes is known as error rectification.

The trial balance is prepared to check the arithmetical accuracy of recording the transactions in the journal, posting to ledger and balancing of ledgers accounts. When the trial balance is agreed then it is assumed that the all process of journalizing, posting and balancing has no error. If the trial balance is not agreed then it is means there are the errors in any above-said processes and efforts are made to detecting an error.

But the agreement of trial balance is not the proof of all error-free accounting there is some type of errors which will not affect the total of trial balance. For example, Non-recording of the whole transactions in the books, it will not affect the total of the trial balance because we recorded neither debit nor credit. So, we can divide all error in the two main headings, i) Error which is revealed by the trial balance and, ii) Error which is not revealed by the trial balance.

Type of Errors: –

In the books of accounts, errors may occur at any stage like journalizing, posting, balancing and preparation of trial balance. So, all the errors, whether affecting trial balance or not, are classified on the basis of their nature into the following four categories:-

  1. Errors of Omission
  2. Errors of Commission
  3. Principle Errors
  4. Compensating Errors

1. Errors of Omission:-

When the transaction is not recorded in the original entry books or not posted into the ledger account is known as an error of omission. An error of omission can be divided into two types i.e. Completely omitted or Partially omitted.

  • Completely omitted: – Those transactions which are completely omitted to record in the books of original entry and thus cannot be posted in the ledger account. These type of errors do not affect the agreement of trial balance. For example, goods purchased from Mr A on credit but not recorded in the purchase book. So, it will also not posted into the ledger account and not shown in the trial balance whole.
  • Partial Omitted:- Those transactions which are record partial in the books of accounts are known as an error of partial omission. In other words, every transaction involves a minimum of two accounts, So, if an accountant missed to post the transaction into the one ledger account and post it in another one account this is known as an error of partial omission. These type of errors do affect the agreement of trial balance. Example: – Goods sold to Mr B posted in the sales account but not posted in the Mr B account then the wrong balance of Mr B account will be transferred to the trial balance.

2. Errors of Commission: –

An error of commission incurred due to the wrong recording of financial transactions in the books of accounts. Like wrong totalling or balance of ledger accounts, wrong posting into the ledger account, the wrong amount carry forwarded and over or under casting the balance of an account. These type of error can be divided into the following type: –

  • Recording Error: – When an accountant record transaction with the wrong amount in the original entry book. For Example – Salary paid to Employee for Rs 10,000/-, But recorded in the cash account and Salary account for Rs 1000/- These type of did not affect the agreement of trial balance.
  • Ledger Balancing Error: – These type of errors are arise due to the wrong balancing of some ledger accounts. These type errors affect the agreement of trial balance. For Example – Balance of the furniture and fixture account taken excess by Rs 1000/-, So due to this error the debit side of trial balance will also be excess by Rs 1,000/-.
  • Posting Error: – These errors arise when the correct transaction is recorded in the original entry book but wrongly posting the ledger account. It may be divided into the following type
    1. Posted with the incorrect amount on the correct side of the ledger,
    2. Posted with the correct amount in the incorrect side of the ledger.
    3. The incorrect amount posted in the incorrect ledger account but on the correct side.
    4. The correct amount posted in the incorrect ledger.
    5. Posting twice in the ledger account.
  • An error of Carrying forward the wrong balance: – This error is rise when an accountant carries forward the wrong balance of the ledger account into the next year or in the trial balance. These type of error will affect the agreement of trial balance.

3.Principle Errors: –

The Errors of principle mean the violation of the GAAP(generally accepted accounting principles) viz incorrect allocation of expenditure or income between capital and revenue Expenditure or income. it is worth mentioning the proper allocation between these two items is very important in the sense that improper allocation would lead to wrong and misleading results through financial statements. These type of error will show the undervalued or overvalued assets, expense, liabilities, or income in the trial balance. it can be a dividend in the following two types

  1. Treating Capital item as the revenue item
  2. Treating Revenue item as a capital item.

4. Compensating Error: –

When two or more errors are raised in such a way that the effect of one error is compensating by the effect of other, is known as compensating error. These error does not affect the agreement of trial balance. For Example – A sum of Rs 1000 paid to Mr A on 01/01/18 but recorded in the books of account of Mr A for Rs 100/-. SO, the effect of this error will be shown in the trial balance as less total of debit side by Rs 900/- because the account of Mr A has to Debit. but on 05/01/18 Rs 100 paid to Mr B but recorded in the books of account of Mr B for Rs 1000/- SO, the effect of this error will be shown in the trial balance as excess in the total of debit side by Rs 900/- because an account of Mr B has to credit. So, in the end, these both errors compensating each other.

Error Rectification: –

So far we discussed various type of accounting Errors and now we will discuss the rectification of these errors.

We can broadly divide the type of errors in two categories i.e.

  1. An error that did not affects the agreement (totalling) of the trial balance.
  2. An error that affects the agreement (totalling) of the trial balance.

1. An error that did not affect the agreement (totalling) of the trial balance.

These errors also known as two sides errors. It includes the following types of errors

  1. The error of Complete omission of the transaction
  2. Wrong recording the books of original entry.
  3. The error of recording the correct amount but in the wrong account.
  4. Principle Errors
  5. Compensating Errors.

Error Rectification process: –

The process of rectification included the following steps: –

  1. What has been done?
  2. What was to be done?
  3. What action should be taken for rectification?
We will rectify it in the three following step: –
  1. Recorded entry (i.e. the entry that has recorded in the books)
  2. Correct Entry (i.e the entry which has to record in the books)
  3. Rectification Entry
For Example: –

Goods sold to Mr A for Rs 1000 but recorded in the Purchase book.

Solution: –

This is an error of wrong recording in the original entry books.

Entry recorded in the books of accounts: –

It is incorrect entry because the transaction of sales accounts recorded in the purchase book.

Purchase a/c   Dr   1,000

To Mr A a/c           1,000

The corrected entry would be: –

Mr A a/c    Dr         1,000

To Sales a/c             1,000

Error Rectification Entry would be: –

So, now we know the correct or incorrect transaction and we will rectify the transaction with the help of a single journal entry.

Mr A a/c     Dr         2,000

To Sales a/c               1,000

To Purchase a/c         1,000

Explanation of Error Rectification Entry: –

We have to debit the Mr A a/c but we had credited it, So now we will Debit the Mr A account with a double amount to eliminate the effect of wrong recording and post the actual transaction.

and Credit the sales a/c to record actually impact of transaction and Credit to purchase account to eliminate the effect of the wrong/incorrect recording of the transaction.

2. An error that affects the agreement (totalling) of the trial balance:-

These errors are also known as side errors. It includes the following types of errors

  1. The error of partial omission of the transaction
  2. Ledger balancing error.
  3. Posting the wrong amount in one side of ledger account or posting the wrong amount in one side only etc.
  4. Balance carry forward.

Error Rectification process: –

One side error can be rectified on the basis at which stage they are detected. These stages can be divided into two types: –

  1. Before the preparation of trial balance
  2. After the preparation of trial balance.
1. Before the preparation of trial balance : –

When the one-sided error is detected before the preparation of trial balance, there is no need to post the journal entry. At this stage, we can be rectifying an error by giving an explanatory note in the affected account.

Steps involved: –

  1. Identify the impact of such error on the account or accounts.
  2. Add in the impacted account, an explanatory note may be given on the debit or credit side, as the case may be. The affected account or accounts are to be debited, it there is a short debit or excess credit and credited if there is short credit or excess Debit.

For Example: –

Salary paid to Employees posted twice in the salary account.

Solution: –

Salary account has excess debit So now we have to rectify it by posting an explanatory note on the credit side of the salary account.

Dr  Salary Account Cr.
Date  Particulars  J.F.  Amount Date  Particulars  J.F.  Amount
By an error of recording, a transaction recorded twice in the salary account, now reversed.
2. After the preparation of trial balance: –

When the one-sided error is detected after the preparation of trial balance, we will create a new account named suspense account and all short/excess debit or credit posted to a suspense account. The actual detected account of error will be debited or credited and suspense account will be reverse debited and credited.

Steps involved: –

  1. Firstly, if the difference appears in the trial balance then we have to create a suspense account and transfer the total difference to the suspense account.
  2. Identify the effect of such error on the account or accounts and calculate the amount of excess Debit or Credit or short debit or credit in the affected account or accounts.
  3. Now to rectify excess Debit or short credit in the affected account or accounts, the affected account or accounts should be credited and suspense account debited with the amount of excess Debit or short credit.
  4. To rectify excess Credit or short Debit in the affected account or accounts, the affected account or accounts should be Debited and suspense account credited with the amount of excess Debit or short credit.
“Suspense Account meaning: – 

Sometimes it is not possible to detect one side error. So, for the time being, we will prepare a temporary ledger account named a suspense account, and putting the difference on the shorter side of the trial balance in it. ”

For Example:-

There is a difference in the following trial balance which is transferred to the suspense account.

Trial Balance 
Particulars  L.F. Debit Balance  Credit Balance 
Purchase Account 25,000
Ram Account 20,000
Suspense Account  5,000
Total  25,000 25,000

Now an error is detected, The credit purchase transaction posted with the wrong amount 20,000 instead of 25,000 in the Ram account. You have to make the rectification entry to match the trial balance without suspense account.

Solution: –

From the above-shown trial balance, it can be observed that the suspense account has a credit balance or Rs 5,000/-. so when the error is found, we have debited the suspense account with the same amount to close it.

There is the short credit to the Ram account, So we have to credit the Ram’s account with the difference amount.

Rectifying Entry: –

Suspense A/c             Dr.       5,000

To Ram account                         5,000

Now dispose of the Suspense account by posting this rectification entry: –

Suspense Account
Date  Particulars  J.F.  Amount  Date  Particulars  J.F. Amount
To Ram Account 5,000 By Balance B/d 5,000
(Difference in Trial Balance)

Posting Rectifying entry in the Ram account. 

Ram Account
Date  Particulars  J.F.  Amount  Date  Particulars  J.F. Amount
To Balance B/d 20,000 By Suspense account 5,000
By Balance C/d (B. Fig) 25,000

Trial balance after Error Rectification

Trial Balance (After Rectification)
Particulars  L.F. Debit Balance  Credit Balance 
Purchase Account 25,000
Ram Account 25,000
Total  25,000 25,000

This is the process of Error Rectification

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