Chapter 15 – Rectification of Errors
Rectification of errors in accounting is the process of identifying and correcting mistakes in financial records to ensure the accuracy and reliability of financial statements. Errors can arise from various stages of the accounting process, such as recording transactions, posting to ledger accounts, totaling, balancing, or carrying balances forward.
Types of Errors
Errors are broadly classified based on their impact on the trial balance:
- Errors Not Affecting the Trial Balance (Two-Sided Errors)
These errors affect two or more accounts in such a way that the debit and credit sides still balance, thus the trial balance agrees despite the error. They require a proper journal entry for rectification.
Error of Omission (Complete): When a transaction is entirely forgotten and not recorded in the books of original entry.
- Example: Credit sales to Rohan were not recorded at all.
- Rectification: Pass the original journal entry that was omitted.
Error of Commission (Wrong Amount/Account on Both Sides): Mistakes made during the recording process, such as posting the wrong amount on both sides, or posting to the wrong accounts but with the correct double-entry effect.
- Example: Sales to Mr. X for ₹10,000 were recorded as ₹1,000 in both the sales book and Mr. X’s account.
- Rectification: Adjust the difference by debiting/crediting the affected accounts.
Error of Principle: When a transaction is recorded in violation of fundamental accounting principles, often by misclassifying an expenditure or receipt.
- Example: Wages paid for the installation of machinery (a capital expenditure) were debited to the Wages Account (a revenue expenditure).
- Rectification: Reverse the incorrect debit/credit and make the correct debit/credit.
Compensating Errors: When two or more errors cancel out each other’s effect on the trial balance. While the trial balance agrees, the individual accounts are incorrect.
- Example: Purchases account is overstated by ₹500, and Sales account is also overstated by ₹
- Errors Affecting the Trial Balance (One-Sided Errors)
These errors affect only one side of an account or cause an imbalance in the trial balance. They are often detected when the trial balance does not tally. Rectification typically involves using a Suspense Account.
Errors in Casting (Totalling): Incorrect totalling of subsidiary books (e.g., purchase book overcast or undercast).
- Example: Purchase book total overcast by ₹1,000. This over-debited the Purchases Account.
Errors in Posting:
- Omission of posting to one ledger account: One part of a double entry is missed.
- Example: Cash received from A was debited to Cash A/c but not credited to A’s A/c.
- Posting to the wrong side of an account: An amount that should be debited is credited, or vice versa.
- Example: Salary paid was correctly debited to Salary A/c but wrongly credited to Cash A/c (instead of debiting Cash).
- Posting with the wrong amount to one account: An amount is posted correctly to one side, but with an incorrect amount to the other.
- Example: Goods sold to B for ₹500 were correctly credited to Sales A/c, but debited to B’s A/c as ₹
Errors in Balancing Accounts: Incorrect calculation of account balances.
Errors in Carrying Forward: Incorrect amounts carried forward from one page/period to another.
Errors Not Affecting the Trial Balance (Two-Sided Errors)
(1) When an account has wrongly been debited in place of another account.
Example: Machinery purchased for Rs5,000 has been debited to Purchases A/c.
Solution:
| Dr. Cr.
MACHINERY A/C |
Dr. Cr.
PURCHASES A/C |
||
| Short by Rs5,000
(This account should have been debited) |
|
Excess by Rs5,000
( This account was debited by mistake) |
|
Rectifying Entry:
Machinery A/c Dr. 5,000
To Purchases A/c 5,000
(For purchase of machinery wrongly debited
to Purchases A/c)
(2) When an account has wrongly been credited in place of another account.
Example: Rs3,000 being the sale proceeds of old furniture has been credited to Sales A/c.
Solution:
| Dr. Cr.
FURNITURE A/C |
Dr. Cr.
SALES A/C. |
||
|
|
Short by Rs3,000
( This account should have been debited) |
|
Excess by Rs3,000
(This account was credited by mistake) |
Rectifying Entry:
Sales A/c Dr. 3,000
To Furniture A/c 3,000
(Sale of old furniture wrongly credited to Sales A/c)
(3) When there is a short debit in one account and a short credit in another account.
Example: Goods purchased from Sanjay for Rs 2,000 was entered in Purchase Book as Rs 200 only.
Solution:
| Dr. Cr.
PURCHASES A/C |
Dr. Cr.
SANJAY A/C |
||
| Short by Rs1,800 | Short by Rs1,800 | ||
Rectifying Entry:
Purchases A/c Dr. 1,800
To Sanjay A/c 1,800
(Goods purchased from Sanjay for 2,000
wrongly entered as 2000)
(4)When there is excess debit in one account and an excess credit in another account.
Example: Goods sold to Mohan for Rs380 on credit was recorded in Sales Book as Rs830.
Solution:
| Dr. Cr.
MOHAN |
Dr. Cr.
SALES A/C |
||
| Excess by Rs450
(830 – 380) |
|
|
Excess by Rs450
(830 – 380) |
Rectifying Entry:
Sales A/c Dr. 450
To Mohan 450
(Sales to Mohan for 380 wrongly entered
as 830)
Errors Affecting the Trial Balance (One-Sided Errors)
Question:
- Purchase book has been undercast by Rs10,000.
- Purchase from X Rs15,000 has been omitted to be posted to his account.
- Purchase from YRs20,000 has been wrongly posted to his account as Rs30,000
- Purchase from Z Rs40,000 has been posted to the wrong side of his account.
Solution:
- “To undercasting of Purchase Book……………………………….Rs10,000 .”
|
Date |
Particulars |
₹ |
Date |
Particulars |
₹ |
| To Undercasting of
Purchase Book |
10,000 |
- “By omission in posting…………………………………..Rs15,000.”
|
Date |
Particulars |
₹ |
Date |
Particulars |
₹ |
| By omission in posting |
15,000
|
- “To excess amount on the credit side……………………Rs10,000.”
|
Date |
Particulars |
₹ |
Date |
Particulars |
₹ |
| To excess amount on credit side |
10,000 |
- “By error in Posting to the wrong side…………………………….Rs80,000
|
Date |
Particulars |
₹ |
Date |
Particulars |
₹ |
| By error in posting to the wrong side |
80,000 |
Suspense Account
Purpose: A temporary account opened when the Trial Balance does not tally. The difference in the Trial Balance (debit or credit side) is transferred to the Suspense Account to force the Trial Balance to agree temporarily.
Nature: It has no specific nature (can have a debit or credit balance) and should eventually become zero once all the errors causing the discrepancy are identified and rectified.
Use in Rectification:
When a one-sided error is discovered, the rectification entry will involve the specific account affected and the Suspense Account.
Example: Purchases Book undercast by ₹1,000.
Suspense A/c Dr. 1,000
To Purchases A/c 1,000
(Being undercasting of purchases book now rectified)
Example: Salaries paid ₹5,000 but posted to the debit side of Cash A/c instead of Salaries A/c.
Salaries A/c Dr. 5,000
To Suspense A/c 5,000
(Being salaries wrongly debited to cash account now rectified through suspense)