Rectification of errors
What is the Rectification of errors?
In accounting, errors are the ‘mistakes’ committed by the book-keeper or accountant. These mistakes may occur while classifying the accounts, writing the subsidiary books, posting the entries to ledger accounts, casting totals, balancing the accounts, carrying the balances forward and so on. The process of finding and correcting these mistakes is called rectification of errors.
Rectification of errors can be addressed by answering the questions what, why and how.
Classification of Errors
The errors may broadly be classified into two types:
1. Intentional errors:
Intentional errors are generally strategic in nature. Such errors are committed at the management level and not at the clerical level. For example, stock (inventory) is recorded at the market price which is higher than the cost price to increase the current ratio and to create confidence in the creditors. knowing fully well that the stock should be recorded in the books at cost or market price whichever is less. Sometimes the balance sheet of the concern is “window dressed’ to depict a rosy picture to the shareholders and the public. Such intentional errors attract legal remedies than rectification. Therefore, intentional errors are kept out of the preview of our discussion in this article.
2. Unintentional errors
Our prime focus is on unintentional errors which occur at the clerical level during the normal course of recording, classifying, posting, casting and so on. Unintentional errors are the mistakes which are to be rectified to maintain accounts correctly, i.e., true and fair. Therefore, in this article whenever we refer to rectification of errors, we mean unintentional errors.
Classification of Unintentional Errors
Unintentional errors are classified on the basis of disclosed errors, undisclosed errors, how they affect the accounts, and their nature.
Unintentional errors are classified on many bases. One of the classifications is on the basis of disclosed errors and undisclosed errors. This classification is to prove that the trial balance is not the absolute proof of the accuracy of ledger accounts, although it proves arithmetical accuracy. A trial balance is able to disclose the following errors:
1. Wrong totaling of subsidiary books
2. Posting of the wrong amount
3. Posting of the amount on the wrong side of the account
4. Posting twice to a ledger
5. Omission of an account from the trial balance
6. Wrong additions or balancing of ledger accounts
7. Balance of account written to the wrong side of the trial balance
8. Errors made in preparing the list of debtors and creditors
9. Errors made in carrying forward the total from one page to another page
10. Where double entry is incomplete
11. Omission of an account in the opening entry
12. Wrong amount of capital in the opening entry
13. Wrong casting of trial balance totals
Another classification of errors can be on the basis of how they affect the accounts:
1. Errors affecting one account only can be errors of posting, casting, or carry forward and omission of the balance of any one account in the trial balance.
2. Errors affecting two or more accounts can be errors of posting to the wrong account, errors of omission, errors of principle and compensating errors.
One other popular classification of errors is based on their nature. They are as follows:
How to locate errors
Locating errors is like searching for the black cat in a dark room with black spectacles even though there is a need to locate the errors by some means or the other.
A trial balance is prepared to check arithmetical accuracy, hence the work of locating errors should start from this statement itself. Earlier we have mentioned that some errors are disclosed by trial balance while others are not. If the trial balance is in disagreement, then it is an indication that the errors prevail in the books of accounts.
Steps to locate errors
The steps mentioned here, if meticulously followed, will help in locating errors that are committed unintentionally:
- The totals of the trial balance can be checked once again. Suppose, the total of debit is not equal to the total of credit (vice versa), find out the difference between the debit and credit totals and divide that difference by two and see whether such an amount appears in the trial balance. If a similar figure exists, check whether it is entered in the correct column. Suppose, the figure is entered in the wrong column, then there will be a difference to the extent of double the amount.
- Check whether the cash and bank balances are correctly listed and properly entered in the trial balance.
- Check whether the opening balances are correctly brought forward.
- Check whether all the closing ledger balances are correctly recorded in the trial balance.
- Recheck the totals in the list of sundry debtors and sundry creditors.
- If necessary, recompute the account balances.
- Once again. check the castings and carry forwards of the subsidiary books.
- Check whether the postings of the individual items from the books of original entry are made properly,
- We cannot rule out the possibility of the error still existing due to transposition or transplacement of figures. To locate such an error, divide the difference by 9, If the difference is easily divisible by 9, there prevails a chance of the error existing due to transposition or transplacement. Transposition indicates that the individual figures in an item are interchanged and the error is caused, whereas, in transplacement, the digit is either moved forward or backward to cause the error. For example, see the following tabular representation.
10. If the error continues to exist after checking of the journal, ledger, subsidiary books and the trial balance totals, then transfer the difference to a temporary account called suspense account, enter that amount in the trial balance, tally the trial balance and go ahead to prepare the final accounts. However, when the error is located (in due course), correction can be incorporated by giving the necessary debit or credit to that account which needs correction and the opposite entry being made into the suspense account. Thus, the suspense account temporarily created gets closed.
Why: The need for rectification of errors
Errors should be rectified otherwise a business enterprise will not be transparent. It will fail to be creditworthy and not show the correct profit or loss. In other words, it will not show the true picture.
Errors should essentially be rectified, but why? Every business organization is interested in finding out its true result in terms of profit or loss from the operational activities and its true financial position at the end of the financial year. The personnel in the accounts department will put in the best of their efforts to maintain the accounts accurately, so that true profits or losses are arrived at and the statement of affairs prepared shows a correct picture.
On the principle of prevention is better than cure, early detection of errors will help the business to be (1) transparent, (2) creditworthy, and (3) show the correct profit or loss and, hence, depict a true picture of the business. In other words, the rectification of errors becomes essential to ensure:
Suppose, the errors (as explained earlier) are left uncorrected, they will have an impact on the profit and loss account and balance sheet. Though the trial balance is prepared to test the accuracy, it will not have disclosed many errors. It is possible that the trial balance might have been made to agree by entering the suspense account balance.
In any case, if the errors are allowed to remain, they will have their adverse effect on the business profits or losses or on assets and liabilities position. Therefore, they should be rectified essentially. Such rectification may be carried out with the help of following steps:
- Before the trial balance is prepared (pre-trial balance stage)
- After the trial balance is prepared with or without the suspense account (pre-final accounts stage)
- After the final accounts are prepared ( post-final accounts stage)
In the case of pre-trial balance stage, post-trial balance stage and pre-final accounts stage. rectification is carried out through rectifying entries (either directly or through suspense account). In the case of post-final accounts stage rectification is carried out through profit and loss adjustment account.
Rectification of errors is done, but how
To ensure that nobody suspects the entries made in the books of account, corrections are not allowed to be done by means of striking off figures, erasing the figures or rewriting. Even overwriting is not allowed. Hence, corrections are incorporated by following the permitted methodology. The permitted methodology is to correct the mistakes through rectifying entries.
Rectification of errors through journal proper
In the books of account, the following are not allowed:
- Striking off figures
- Erasing the figures
- Rewriting or overwriting the figures
Generally, rectification is carried out through journal proper.
1. If the errors are located before the preparation of trial balance, correction can be carried out directly by means of a rectifying entry which may be a single corrective entry or a rectifying journal entry. Whether a rectifying journal entry should be passed or not depends on the nature of the mistake.
For example, sales book is undercast by $1,000. This can be corrected by crediting sales account directly with $1,000. No rectifying journal entry is required. Suppose, the sale of old furniture for $5,000 is credited to sales account, this error cannot be corrected directly by crediting furniture account with $5,000. This requires a rectifying journal entry to carry out the correction in both sales account and furniture account. Thus, the rectifying journal entry will be as follows:
2. If the errors are located after the preparation of the trial balance (post-trial balance stage) with the suspense account, then all the corrections are carried out through rectifying journal entry only. As it is necessary to close the suspense account, the other aspect of debit or credit of the rectification will affect the suspense account. In the previous example, where sales book is under cast by $1,000, the correction is carried out through passing a rectifying journal entry as follows:
Here, the sales account having been given a proper credit, the suspense account gets a debit as rectification.
3. If the errors are located after the preparation of the final accounts, the errors will have had their impact on the profit or loss of the business. Hence, the rectification should be carried out through profit and loss adjustment account. The above example of sales book being undercast by will be corrected with a rectifying entry as follows:
As the sales figure increases the profit, it is necessary to credit the profit and loss adjustment account to rectify this mistake. By debiting the same amount to a suspense account, the balance of the suspense account is reduced to that extent.
For the purposes of clear understanding of the methodology of rectification of errors, the following format may be followed:
1. See what is actually done in the books (i.e., what is the error that has been committed).
2. Correctly analyze what should have been done (i.e., find a correct entry which should have been passed).
3. See what is the correction needed now (i.e., the rectified entry which is recorded by comparing the entries in (i) and (ii). See the following tabular representation.