- Trial Balance is prepared to check the arithmetical accuracy
- Rectifying entry is passed to remove the effect of existing errors
- Two sided errors means, the errors affects the two accounts simultaneously
- One side errors affect one side only
- Suspense Account creates to balance the total of Trial Balance
Accuracy is considered as the first priority of ascertaining the true profit/loss and financial position of the business concern and accountants gives efforts to prepare the final accounts of the company. Basic elements of final accounts is supplied by the trial balance and accuracy of the trial balance gives the accuracy to the final accounts.
The Trial balance is prepared to ensure the arithmetical accuracy of the records of the business concern. It also ensures that the total debits is equal to total credit. Thus, a trial balance in which the total debit balance and credit balance are not equal, it indicates there is some errors in accounting. On the other hand, a trial balance in which the total debits and credits are equal, it doesn’t indicates the proof of accuracy of the evidence. Certain errors may not affect the agreement of a trial balance as the erroneous entries may not violate the dual aspect concept. It indicates that if the trial balance agrees, steps should be taken to ensure that the records are free from errors. Hence, it is very important to identify such errors and rectify them for getting a true financial position of the company.
So, whenever errors in accounting records come to notice, it should be corrected immediately.
Objectives of rectification of errors
The objectives of rectification of errors are enumerated as follows:
- Presenting correct accounting records
- Ascertaining correct profit or loss for the accounting period, and
- Presenting a true financial position of the concern on a particular date.
Classification of errors
The errors of accounting can be classified as follows:
- Clerical errors
- Errors of Principle
This type of error are committed by the clerical staff during the course of recording the business transactions in the books of accounts. The clerical errors can also be classified as follows:
- Errors of omission
- Errors of commission
- Compensating errors
Errors of omission
When a transaction is not recorded (wholly/partially) in the books of accounts is called an error of omission. When a transaction is omitted completely, it is called “complete error of omission” and when a transaction is omitted partially is called “partial errors of omission.” Compete errors of agreement does not affect the agreement of trial balance whereas errors may or may not affect the agreement of trial balance. For Example, a transaction RS.1000 paid to Nikhil is not recorded in the cash book nor in the account of Nikhil, this error will not affect the agreement of trial balance. Only the total of trial balance will short by RS.1,000. But if posting is not done one of any accounts (Nikhil or Cash), this will affect the agreement of trial balance.
b) Errors of Commission:
Errors of commission happens when some transactions are recorded incorrectly in the books of the company. Such errors would wrong balancing of an account, wrong posting, wrong totaling, wrong carry forwards etc. For example, Mr. John received Tk 525 from Mr. Leo is credited to his account as $ 525. Similarly, money paid to BL Trade but wrongly credited to LB Trade A/c. Errors of commission some times affect the agreement of trial balance whereas others do not. Errors affect the agreement of trial balance can be easily revealed by preparing a trial balance.
c) Compensating Errors:
These errors also called as self-balancing or equalizing errors, are a group of errors, the total effect of which is not reflected in the trial balance. These errors are of a neutralizing errors. One error are compensated by the other error or errors of an opposite nature. For example, Amitav account is credited by 3500 instead of 4500. Adams account are credited with 1600 instead of 1000 and Raj is credited with 1400 instead of 1000. Here, the errors are covered by each other,(1000-600-400).
Errors of Principle
Errors of principle happens when an accountant’s doesn’t have clear knowledge regarding the nature of transaction. These errors are occurred when an accountant is failed to differentiate capital and revenue nature of transactions. When the transactions are recorded against fundamental principles of accounting, is called errors of principle. These errors arises due to lack of knowledge of principles of accountancy.
Rectification of Errors
Errors can be rectified into two groups:
- Errors affecting one account only
- Errors affecting two or more accounts
Errors affecting one account only:
The following errors affect only one account:
- Errors of posting
- Carry forward
- Omission from Trial Balance
Firstly such errors should be located , than rectified. Rectification can be made either passing the journal entries or giving an explanatory notes in the account concerned.
Errors affecting two or more accounts
Following mentioned errors can affect two or more accounts:
- Errors of omission
- Posting to wrong account
As errors affect more than one account , it can be rectified by passing a journal entry.
Stages of Rectification of Errors
All types of errors can be rectified at two stages:
- Before the preparation of Final Accounts
- After the preparation of Final Accounts
Rectification of errors before the preparation of final accounts:
Errors can be located before or after the preparation of final accounts. If errors is located before the preparation of final accounts, it can be rectified by recording or posting the amount in the respective account or by recording the necessary journal entry to rectify that error. However, errors can be one sided or two sided. If the error is one sided, it can be rectified by recording or posting the necessary amount in that account. If it is two sided, the necessary journal entry is recorded.
Rectification of Errors after the preparation of Final Accounts:
The rectification of errors after the preparation of final accounts depends upon the nature of error. If an error is one sided error, it can be corrected by passing a rectifying entry with the help of the Suspense Account and if the error is two sided, it is rectified by passing a rectifying entry in both the affected accounts and such errors which are not rectified through Suspense Account.
However, total debits equal to total credits is not a conclusive evidence of accuracy of the records. There are some errors which may not affect the agreement of a trial balance as the erroneous entries may not violate the the dual aspect concept. So, it is important to locate such errors and rectify them to ascertain the true financial position of the business. So, whenever errors in accounting records come to notice, it should be rectified immediately. The errors can be clerical or principal. Clerical errors are committed by the accounting clerks during the course of recording the transactions. Errors are principle is the violation of fundamental principles of accounting.