CHAPTER 19

RECTIFICATION OF ERRORS

 Trial Balance and Errors

If the Trial Balance agrees, then it should not be taken for granted that there

is absolutely no errors. In fact, there do exist some errors that are not revealed

by a Trial Balance like, wrong recording, transaction omitted to be recorded in

the books of journal and complete omission of posting of a transaction from

journal to ledger.

However, errors like, incomplete posting of journal into ledger, posting of

wrong amount in an account from journal to ledger, wrong balancing of ledgers

etc. can be detected with help of a Trial Balance, as in the presence of these

errors the Trial Balance will not agree.

 Objectives of Rectifying Errors

 Keeping the books of accounts free from errors

 Ascertaining true profit and loss

 Ascertaining true financial position of the business

 Making authenticity and reliability of the accounting information

 Types of Errors

 Principle Errors
These errors occur on account of violation of accounting principles. These
happen due to ignorance or lack of proper knowledge of accounting principles.
These are not disclosed by the Trial Balance. The following circumstances give
rise to such errors.
 When revenue expenditures are considered as capital expenditures or vice
versa.
 When revenue receipts are considered as capital receipts or vice versa
 When household expenses are considered as business expenses or vice versa
 When expenses paid for the subsequent accounting period or for the
preceding accounting period are considered as an expense of the current
period, etc.
Examples:
 Purchase of machinery was recorded as purchases of goods.
 Purchases of house hold items were considered business expenses.

 Errors of Omission
These errors are committed when:
 a transaction is completely omitted to be recorded in the books of original
entry (i.e. Journal Book) and/or
 a transaction is recorded in the books of original entry but omitted to be
posted in its respective accounts.
 Examples:
 Sold goods for Rs 2,000 to Prakash were not recorded in the Sales
Book.
 Rs 500 paid as salary was not recorded anywhere.
 Cash Rs 250 was deposited in the bank but omitted to be posted.

 Errors of Partial Omission

These errors are committed when: a transaction is partially posted and/or
 total of subsidiary books or balances of accounts are omitted to be
forwarded from one page/place to the other page/place.

Examples
Sold goods for Rs 5,000 to Anshu were only posted in the Sales Account but
omitted to be posted in Anshu’s account.
 Total of the Purchases Book is Rs 550 in page no. 12 but omitted to be
forwarded to page no. 13.
 Balance of Depreciation Account of Rs 1,500 at the end of May omitted
to be forwarded to the next month.

 Errors of Commission
These are manual errors unconsciously committed by the clerks and the
accountants. These are committed while:
 journalising with wrong amount
 posting with wrong amount but in correct account posting in wrong
account
 totaling (wrong casting) of Subsidiary books
 forwarding wrong total of Subsidiary books from one page to another
 balancing (errors in balancing) of the ledgers
 Errors of Trial
Errors Examples
Commission Balance

Journalising with When the transaction is No effect Sold goods of Rs 2,000 on

wrong amount recorded with the (same) cash but were wrongly
wrong amount both in the recorded in the Sales
debit and credit side in Book as Rs 200
the Journal Book
When the transaction is Effects Sold goods of Rs 2,000 for
recorded with different cash were recorded in the
wrong amounts both in Cash Account as Rs
the debit and credit side 20,000 and in the Sales
in the Journal Book Account as Rs 200
When the transaction is Effects Sold goods of Rs 2,000 on
recorded with wrong cash were recorded in the
amounts either in the Sales Account with the
debit or in the credit side correct amount but in the
in the Journal Book Cash Account as Rs 200
Posting in wrong When posting from No Effect Paid commission of Rs
account Journal is done in the 500 for purchases of
wrong account but in the goods were wrongly
right column (debit or debited to the Purchases
credit) Account instead of
Commission Account.
When posting from Effects Paid commission of Rs
Journal is done in the 500 on Purchases was
right account but in the wrongly credited to the
wrong column (debit or Commission Account
credit) instead of debiting.
 When posting from May or May The total of Sales Book

Subsidiary Book is done in Not Effect Rs 12,000 was posted to

the wrong account Purchases Account

instead of Sales Account

Posting of wrong When posting from May or May Sale of goods to Rakesh
amount Journal is done in the Not Effect Rs 500 were correctly
correct account but with posted in the Sales
the wrong amount Account but posted in
the Rakesh Account with
wrong amount of Rs 50
Error in totaling When the total of the Effects Sales Book undercast by

(casting of Subsidiary Books (Sales Rs 200

Subsidiary Books) Book, Purchases Book,

etc) are wrong, i.e. wrong
casting
Error in When the wrong total of Effects The total of the Sales
forwarding Subsidiary Book is Book Rs 2,020 on page
forwarded from one page no. 11 was wrongly
to another. In other forwarded to page no. 12
words, when wrong as Rs 2200
balance is carried
forwarded.
Errors while While balancing the Effects Machinery Account
balancing the accounts shows balance of Rs 5,000

ledgers instead of Rs 5,500

 Compensating Errors
When effects of one error are cancelled by the effects of another error of an
equal amount, then compensating errors are committed. For example, Mr. A’s
Account was credited by Rs 2,000 instead of 200 and Mr. B’s Account was
credited by Rs 200 instead of 2,000. In this case, the error in Mr. A’s Account
will be compensated by the error in Mr. B’s Account.

 Detection and Rectification of Errors

The different stages in which errors can be detected and rectified are:
 Before preparation of Trial Balance
 After preparation of Trial Balance but before Financial Statements are
prepared
 After preparation of Financial Statements

 Classification of Errors

 Rectification of Errors Before Preparation of Trial Balance

 One Sided Errors
These errors affect only one account. These errors can be rectified either
by passing necessary journal entries or by making necessary adjustments in
the accounts by giving explanatory notes.
 Two Sided Errors
These errors affect more than one account simultaneously. These errors are

generally rectified by passing necessary Journal entries, as it is easier than

rectifying by giving explanatory notes.

 Rectification of Errors After Preparation of The Trial Balance but Before
Preparation of Financial Statements
 One Sided Errors
If Trial Balance does not agree, then the difference between the debit and
credit side is shown by opening Suspense Account.
Suspense Account is shown unless the errors are rectified.
 Two Sided Errors
These errors are rectified by passing necessary rectifying Journal entries
without opening Suspense Account

 Suspense Account
When the Trial Balance does not agree, i.e., when the total of the debit column
does not match with that of the credit column, then this difference is transferred
to a temporary account in order to avoid delay in preparation of the Financial
Statements. This temporary account is termed as Suspense Account.
 If the debit column falls short of the credit column, then the Suspense
Account is debited.
 If the credit column falls short of the debit column then the Suspense
Account is credited.

 Rectification of Errors After Preparation of Financial Statements

In this case, the Suspense Account is transferred to the next accounting
period. When these errors are rectified (in the next accounting period), the
effect of rectification is shown by debiting or crediting Profit and Losses
Adjustment Account.

 Locating Errors in the Trial Balance

In case of one sided errors, when the Trial Balance does not agree, then
following flow chart helps in locating the errors.