Details About Rectification of Errors
In this article, we will define rectification of errors, lay down its importance and guiding principles, and classify types of errors, according to their effect on the trial balance.
Rectification of errors can be described as the procedure of revising mistakes made while recording the transactions. While recording a transaction, there are times when there are errors made by the bookkeeper due to common human negligence. These errors result in disruption in tally and unbalance of the final account. Therefore, the rectification of errors is an important part of accounting.
Importance Of Rectification Of Errors
There should be no errors in the recording of transactions to ascertain the true balance of the firm; therefore, it is necessary to have a procedure for revising mistakes.
- It helps to maintain a proper account and balance the final accounts.
- It forms the core of accounting, as any and every error results in disruption in accounts.
- It helps in the preparation of financial statements.
- It helps in presenting the true accounting information.
Guiding Principles
The following principles must be considered while following the procedure of revising mistakes:
- If the error is made in the books of the original entry, then assume that all the entries made thereafter are done following the error.
- If the error is made at the posting stage, then assume the recording in the subsidiary books to be correct.
- If the error is made at the posting stage, in the wrong account, without the mention of either the amount or the side, then assume that the posting is done on the right side with the correct amount.
- If the error is made at the posting stage, in the wrong account, with the wrong amount, without the mention of the side, then assume that the posting is done on the correct side.
- If the error is made at the posting stage, in the wrong account on the wrong side, without the mention of the amount, then assume that the posting is done with the amount mentioned in the original transaction.
- If the error is made at the posting stage, in the wrong account, with the wrong amount, then assume that the posting is done on the right side.
- If the error is made at the posting stage, in the correct account, on the wrong side, without the mention of the amount, then assume that the posting is done with the correct amount mentioned in the original transaction.
- Any error that relates to individual transactions does not involve a sales account, purchase account, sales return account, or purchase return account.
Types Of Errors
Errors can be classified into four major types. These are as follows:
Error of Commission
The errors that occur due to wrong positing, wrong totalling, or wrong balancing of accounts, etc., are known as errors of commission.
Error of Omission
When there is an omission in the books of original entry or while posting in the ledger, it is known as an error of omission. It is of two types-
The error of complete omission – when the transaction is completely missed from recording in the books of original entry, it is called an error of complete omission.
The error of partial omission – when the transaction is partially missed from recording, it is called an error of partial omission.
Error of Principle
The recording of transactions in the books is done according to a set of accounting principles. If these principles are ignored or violated, the mistakes that occur are known as errors of principle.
Compensating Errors
When the net effect of two or more errors is zero, it is called compensating error. Here, one error on one side balances with the other error on the other side, creating zero effect.
Classification of Rectification Of Errors
Rectification of errors can be classified into two categories. They are explained below.
Errors that do not affect the trial balance
Also known as two-sided errors, these errors are found in two or more accounts. These types of errors do not require the formation of an additional account and can be rectified by a journal entry. These include complete omission, wrong transaction, error of principle, etc.
The procedure of revising mistakes involves:
- Cancelling the effect on the debit and credit side by reversing the wrong entry.
- Restoring the correct debit and credit side.
- For this procedure, we need to study the excess and lack of debit or credit in an account.
- The procedure of revising mistakes uses the following steps thereafter:
- Debit the account with the amount that has been debited less or excess credit.
- Credit the account with the amount that has been credited short and excess debit.
Rectification of errors that affect the trial balance.
The errors that affect only one account also affect the trial balance. Therefore, the procedure of revising mistakes needs to be done by explaining on the sides or by recording a journal entry with the help of a suspense account.
Process Of Rectification Of Error For The Next Accounting Year
Sometimes, the errors committed in one financial year are unresolved before the closing of final financial statements. Due to this, the suspense account remains open, and the balance is carried forward to the next accounting year. When the errors are finally located, the adjustments are made in the profit and loss account instead of the income and expenses account. This is done to avoid the impact of last year’s errors on this year’s income.
Conclusion
Rectification of error is an important tool in accounting. It helps in identifying and resolving errors made while recording transactions. It also helps to maintain a clean, clear-cut record and provide the true financial value of an entity. There are two major categories of the procedure of revising mistakes – rectification of errors that affect the trial balance and rectification of errors that do not affect the trial balance. Both the categories have their own set of rules and follow certain principles of rectification.