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ACCOUNTING AND AUDITING
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RECTIFICATION OF ERRORS
INTRODUCTION
Unintentional omission or commission of amounts and accounts in the process of recording the transactions are commonly
known as errors. These various unintentional errors can be committed at the stage of collecting financial information/data
on the basis of which financial statements are drawn or at the stage of recording this information. Also errors may occur as
a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight. To check
the arithmetic accuracy of the journal and ledger accounts, trial balance is prepared. If the trial balance does not tally, then
it can be said that there are errors in the accounts which require rectification thereof. Some of these errors may affect the
Trial Balance and some of these do not have any impact on the Trial Balance although such errors may affect the
determination of profit or loss, assets and liabilities of the business.
Illustrative Cases of Errors
(a) Wrong Entry: Let us start from the first phase in the accounting process. Wrong entry of the value of transactions and
events in the subsidiary books, Journal Proper and Cash Book may occur.
Example 1: Credit purchases 17,270 are entered in the Purchases Day Book as 17,720. Credit sales of 15,000 gross less 1%
trade discount are wrongly entered in Sales Day Book at 15,000. Cheque issued 19,920 are wrongly entered in the credit of
bank column in the Cash Book as 19,290.
(b) Wrong casting of subsidiary books: Subsidiary books are totalled periodically and posted to the appropriate ledger
accounts. There may arise totalling errors. Totalling errors may arise due to wrong entry or simply these may be independent
errors.
Example 2: For the month of January, 2020 total of credit sales are `1,75,700, this is wrongly totalled as 1,76,700 and posted
to sales account as 1,76,700.
(c) In case of cash book, wrong castings result in wrong calculation of the balance c/d.
(d) Wrong posting from subsidiary books: In this case, the wrong amount may be posted to the ledger account or the amount
may posted to the wrong side or to the wrong account. For example, purchases from A may be posted to B’s account.
(e) Wrong casting of ledger balances: Likewise Cash Book, any ledger account balance may be cast wrongly. Obviously wrong
postings make the balance wrong; but that is not wrong casting of balances. Whenever there arises independent casting
error as in the case of bank column in the Cash Book that is called wrong casting of ledger balances.
TYPES OF ERRORS
(a) Errors of principle: When a transaction is recorded in contravention of accounting principles, like treating the purchase
of an asset as an expense, it is an error of principle. In this case there is no effect on the trial balance since the amounts are
placed on the correct side, though in a wrong account. Suppose on the purchase of a computer, the office expenses account
is debited; the trial balance will still agree
(b) Clerical errors: These errors arise because of mistake committed in the ordinary course of the accounting work. These
are of three types:
(i) Errors of Omission: If a transaction is completely or partially omitted from the books of account, it will be a case of
omission. Examples would be: not recording a credit purchase of furniture or not posting an entry into the ledger.
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(ii) Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong side or the totals are
wrong or a wrong balance is struck, it will be a case of “errors of commission.”
(iii) Compensating Errors: If the effect of errors committed cancel out, the errors will be called compensating errors. The trial
balance will agree.
STAGES OF ERROR DETECTION
Errors should never be corrected by overwriting. If immediately after making an entry it is clear that an error has been
committed, it may be corrected by neatly crossing out the wrong entry and making the correct entry. If however the errors
are located after some time, the correction should be made by making another suitable entry, called rectification entry. In
fact the rectification of an error depends on at which stage it detected. An error can be detected at any one of the following
stages:
a) Before preparation of Trial Balance.
b) After Trial Balance but before the final accounts are drawn.
c) After final accounts, i.e., in the next accounting period.
The method of rectification of errors depends on the stage at which the errors are detected.
If the error is detected before the preparation of trial balance, rectification is carried out by making the statement in the
appropriate side of the concerned account.
In case of the errors detected after the preparation of the trial balance, we open a suspense account with the amount of
difference in the trial balance. Then complete journal entries can be passed for rectifying the errors.
For rectifying the errors detected in the next accounting period, a special account correction of all amounts concerning
nominal accounts, i.e., expenses and incomes should be through a special account styled as “Prior Period Items” or “Profit
and Loss Adjustment Account”. The balance in the account should be transferred to the Profit and Loss Account
IMPORTANT TRMINOLOGIES
1) UNDERCAST = UNDERESTIMATE
2) OVERCAST = OVERESTIMATE
