RECTIFICATION OF ERROR
In financial accounting, every single event occurring in monetary terms is recorded. Sometimes, it just so happens that some events are either not recorded or it is recorded in the wrong head of account or wrong figure is recorded in the correct head of account.Once an error is located, it should be properly corrected. The correction of accounting errors in a systematic manner is called the rectification of errors. In other words, the process of systematically correcting the accounting errors is known as rectification of errors. The presence of Accounting errors affects accuracy of the profit and loss and the financial position of the business shown by the final accounts, therefore, no error should be left uncorrected.
Whatever the reason may be, there is always a chance of error in the books of accounts. These errors in accounting require rectification. The procedure adopted to rectify errors in financial accounting is called"Rectification of error".
Methods Of Rectification Of Accounting Errors
The following method should be followed to rectify the accounting errors:
1. Rectification of errors located before preparation of trial balance
2. Rectification of errors after preparation of trial balance
Rectification Of Errors Located Before Preparation Of Trial Balance
Errors may be detected in the process of closing books and accounts for preparation of trial balance. The errors detected in the process may be either one-sided errors or two-sided errors. However, once such errors are located they must be rectified immediately.
Rectification Of One-sided Errors Located Before Preparation Of Trial Balance
One-sided errors are those errors which affect only one side of an account. Wrong totaling of subsidiary books, posting a wrong amount, posting on the wrong side are some of the examples of one-sided errors. Since two accounts are not involved in these errors, journal entry can not be passed for rectifying such errors. The one-sided error is rectified by making an additional posting on the affected side of the ledger account.
Rectification Of Two-sided Errors Located Before Preparation Of Trial Balance
The errors that affect two or more accounts are called two-sided errors. Correction of such two-sided errors needs to make rectification journal entries since such errors involve two or more accounts. Therefore, one account is debited and another account is credited to rectify two-sided errors. The rules of debit and credit are applied to rectify these errors.
The following three steps are taken to rectify the two-sided errors.
- Identify correct entry
- Rewrite wrong entry
- Find rectifying entry by making adjustment of correct entry and wrong entry
Rectification Of Errors After Preparation Of Trial Balance
Sometimes, errors may be detected after an accounting year is over. Those are the errors detected after preparation of trial balance. The errors detected after the completion of accounting year may be one-sided and two-sided errors. Rectification of the errors seen after preparation of trial balance can be made by preparing rectifying journal entries in the subsequent year only.
Double entry system is followed to rectify the errors detected after preparation of trial balance. Two accounts are affected by the two-sided errors. Therefore, one account is debited and another affecting account is credited for such errors. But one-sided errors are rectified by opening 'Suspense Account'.
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HOW TO RECTIFY THESE ERRORS
One way of rectification is that we can simply erase or overwrite the incorrect entry and replace it with the correct one. But this practice is not allowed in accounting. We have to Rectify /correct the mistake by recording another entry.
Types Of Accounting Errors Based On Their Nature
The accounting errors based on their nature can be of the following types:
1. Clerical Errors
2. Errors Of Principe
1. Clerical Errors
The errors which are committed by accounting clerks are called clerical errors. These errors are committed in the process of recording financial transactions. These take place due to the carelessness of the clerk responsible for recording financial transactions. Clerical errors are also called technical errors. The principal types of clerical errors are as follows:
a) Errors Of Omission
The errors committed by not recording a transaction either in the book of original entry or in the ledger book are errors of omission. Such an omission may be either complete or partial.
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Complete Omission
Complete omission takes place if a transaction is not recorded in the journal at all. for example, goods sold to Ali for Rs. 10,000 were not recorded in the sales book at all. A complete omission of transaction may occur due to many reasons such as sales invoice misplaced or lost.
Partial Omission
Partial omission occurs if a financial transaction is recorded only partially. For example, partial error of omission occurs if goods sold to Ali for Rs. 4000 is recorded in sales book but failed to be posted in Ali's account.
b) Errors Of Commission
The errors which are committed while recording or posting a transaction are called errors of commission. Errors of commission may take place either in the journal or in the subsidiary books, or in the ledger. Such errors include posting wrong amounts, posting on wrong side of accounts, wrong totaling or carrying forward, and wrong balancing. For example, if purchase of goods for Rs. 10,000 is entered as Rs. 1000 in the journal or in the ledger, such error is called errors of commission.
c) Compensating Errors
Compensating errors refer to two or more errors which mutually compensate the effects of one another. If one error balances the effect of another error, then the two error are called compensating errors. For example, goods sold for Rs. 5000, but wrongly posted to the customer's account as Rs. 500. Similarly, goods purchased for Rs.5000, but by chance, wrongly posted to the supplier's account as Rs. 500 . The errors in the personal account are compensated by each other, as Rs. 4500 short on the debit side of the customer's account and on the credit side of the supplier's account.
d) Errors Of Duplication
Errors of duplication are those errors which arise because of double recording. Double posting of a transaction from journal or subsidiary books to ledger also create such errors. For example, goods sold to Ali, but this transaction is wrongly entered twice or more in the sales book or wrongly posted twice or more in Ali's account then it is called the errors of duplication.
2. Errors Of Principle
Errors of principle are those errors which occur by violating the principles of accounting. Errors of principle may occur due to wrong allocation between capital and revenue expenditure, or wrong valuation of assets. For example, debiting the wage account instead of machinery account for the wage paid to the mechanics used for the installation of machine and debiting the customer's account instead of cash account for the cash sales made. Errors of principle may also occur due to wrong valuation of assets by higher level staff.
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