Accounting processes cannot be fault-free, and businesses are bound to make certain mistakes. Mistakes left unchecked can distort financial reports and influence decision-making. The process of rectifying these mistakes is identifying and rectifying them to ensure all financial bookkeeping has not been distorted in any way. This article will guide you through the types, classifications, and importance of rectifying mistakes, as well as practical insights regarding the impact of mistakes in balance and overall accounting.
What is Rectification of Errors?
Rectification in accounting refers to the error correction of inaccuracies and omissions in the financial records so that all accounts tally with the financial position. This therefore results from human error, oversight, or technical disparities. Immediate rectification ensures the tallies of the trial balance and financial statements remain reliable for stakeholders.
Common Causes of Errors in Accounting
- Incorrect journal entries
- Misposting in ledgers
- Omitted transactions
- Computational mistakes in calculations
Classification of Rectification of Errors
Errors can broadly be classified based on the nature and timing of detection.
Errors Based on Nature
- Errors of Commission: These errors occur when a transaction is recorded incorrectly but in the right category. For example, recording ₹1,000 instead of ₹10,000.
- Errors of Omission: When a transaction is entirely left out of the books, it becomes an error of omission. This could involve forgetting to record a purchase or expense.
- Errors of Principle: These occur when an entry violates accounting principles. For instance, recording a capital expense as a revenue expense.
- Compensating Errors: Here, two or more errors cancel each other out. For example, if the amount debited and credited incorrectly are the same, the trial balance will still match, masking the error.
Types of Rectification of Errors
Errors in accounts can take on many different forms and the method of correction depends on the nature of such an error and the point at which it is noticed. The primary types of errors and their associated rectification methods are as follows:
1. One-Sided Errors
These kinds of errors involve only one side of an accounting ledger: either the debit side or the credit side. They do not affect the trial balance because only one side of the transaction is done wrong.
Common Examples:
- Error in Posting: A purchase is debited in the purchase account but the corresponding credit is missed.
- Error in Casting (Totaling): Adding up figures incorrectly in the ledger or subsidiary book, such as miscalculating the sum of a sales column.
How to Rectify One-Sided Errors:
Since this kind of error affects neither side of the trial balance, errors of this type can be corrected by passing a simple journal entry that corrects the missing entry or wrong entry.
Example:
Let’s say wages of ₹5,000 were debited correctly to the Wages Account, but no corresponding credit was made in the Cash Account.
Rectification Entry:
Cash A/c Dr. ₹5,000
To Wages A/c ₹5,000In this case, we are correcting the missed credit entry by recording it in the Cash Account.
2. Two-Sided Errors
Two-sided errors affect the debit as well as the credit side of the ledger. Since both sides get affected equally, these errors may not bother the trial balance directly and hence are harder to detect.
Common Examples:
- Recording to the Wrong Account: Instead of crediting the Sales Account, a sale was mistakenly credited to the Rent Account. Both the debit and credit sides are balanced but in the wrong accounts.
- Posting to Incorrect Accounts on Both Sides: A transaction for a sales return is recorded as a purchase return, affecting both sides inaccurately but without disturbing the trial balance totals.
How to Rectify Two-Sided Errors:
These errors are rectified by reversing the wrong entry and recording the correct one.
Example:
A sale of ₹10,000 was incorrectly credited to the Rent Account instead of the Sales Account. The rectification entry would cancel out the wrong entry and correct the account:
Rectification Entry:
Rent A/c Dr. ₹10,000
To Sales A/c ₹10,0003. Errors of Omission
As their names would suggest, omission errors occur when a transaction is simply entirely omitted from the books. This could be a partial or complete omission.
- Complete Omission: When a transaction is totally omitted from the books, neither the debit nor the credit entry is made. This has no effect on the trial balance .
- Partial Omission: When one part of a transaction is recorded but its corresponding entry is omitted, it will result in an approximate disagreement between the trial balance.
Common Example: A business purchase is recorded in the Purchase Account, but the corresponding payment is not recorded in the Cash or Bank Account.
How to Rectify Errors of Omission: For complete omissions, the transaction must be fully recorded. For partial omissions, the missing entry needs to be added.
Example (Complete Omission):
A credit purchase of goods worth ₹8,000 was entirely omitted.
Rectification Entry:
Purchases A/c Dr. ₹8,000
To Creditors A/c ₹8,000Example (Partial Omission):
Wages of ₹5,000 were recorded in the Wages Account but not credited in Cash Account.
Rectification Entry:
Cash A/c Dr. ₹5,000
To Wages A/c ₹5,0004. Errors of Commission
Errors of commission are those errors that occur in recording of the amount in the wrong account or wrong amount. This error will affect only certain accounts and not the whole trial balance.
Common Examples:
- Posting the Wrong Amount: Entering ₹1,000 instead of ₹10,000 in either the debit or credit side of the transaction.
- Posting to the Wrong Account: Recording a sales transaction in the Purchase Account instead of the Sales Account.
How to Rectify Errors of Commission:
These errors can be corrected by identifying the difference between the incorrect and correct amounts and making adjusting entries.
Example (Incorrect Amount):
A purchase of ₹9,000 was mistakenly recorded as ₹900 in the Purchases Account. The rectification would involve adjusting the account by the difference.
Rectification Entry:
Purchases A/c Dr. ₹8,100
To Supplier A/c ₹8,100This entry corrects the under-recorded purchase amount.
5. Errors of Principle
Errors of principle arise if there is a deviation in case transactions from the fundamental accounting principles. For example, treatment of capital expenditure as revenue expenditure and vice versa. Or, incorrect classification of assets and liabilities.
Common Examples:
- Treating a Capital Expense as a Revenue Expense: A capital expenditure in the manner of purchasing machines was taken as an ordinary expense.
- Misclassifying revenues: That is classifying it as the receipt of a loan, and here is actually a liability.
How to Rectify Errors of Principle:
To rectify errors of principle, the incorrect entry is reversed, and the correct entry is made according to accounting principles.
Example:
Suppose the purchase of machinery worth ₹50,000 was mistakenly debited to the Repairs and Maintenance Account. To rectify this error, the incorrect entry must be reversed and the correct entry made.
Rectification Entry:
Machinery A/c Dr. ₹50,000
To Repairs & Maintenance A/c ₹50,0006. Compensating Errors
These errors occur when two or more mistakes cancel each other out. While the trial balance will appear correct, the individual accounts will be incorrect.
Common Example: Overstating the Purchases Account by ₹5,000 and understating the Sales Account by ₹5,000 would result in a balanced trial balance despite the errors.
How to Rectify Compensating Errors: Both errors must be corrected with separate entries to bring the accounts back to accuracy.
Rectification Entries:
- Purchases Overstated:
Supplier A/c Dr. ₹5,000
To Purchases A/c ₹5,000- Sales Understated:
Sales A/c Dr. ₹5,000
To Cash/Accounts Receivable A/c ₹5,000Rectification of Errors in Trial Balance
When such errors occur, they may either affect the trial balance by leaving it unbalanced or distort the balances in the ledger with misleading statements in the financial statement. Accounting correction of errors ensures that disparities in the trial balance are corrected to produce correct financial information.
How to Rectify Errors: Methods & Process
The process of rectifying errors depends on the stage at which the error is identified.
1. Before the Preparation of Trial Balance
- One-sided Errors are corrected through journal entries.
For example:
Error: Purchase of machinery of ₹10,000 was posted only to the cash book.
Rectification Entry:
Machinery A/c Dr. ₹10,000
To Cash A/c ₹10,000
2. After the Preparation of Trial Balance
Errors can be corrected using a suspense account if they create a discrepancy with the trial balance. A suspense account is used to temporarily hold the discrepancy until it is identified and corrected.
Example: Sales of ₹5,000 were not credited to the Sales Account.
- Rectification Entry:
Suspense A/c Dr. ₹5,000
To Sales A/c ₹5,000
Importance of Rectification of Errors
- Accurate Financial Statements: It will ensure that the financial data is just.
- Avoids Future Problems: Since the mistake is detected and rectified early, it will avoid penalties with the regulators in the future.
- Helps Balance Trial Balance: Rectification in proper manners ensures that the trial balance will be in agreement.
- Improves Decision-Making: The accuracy of data ensures that managerial decisions are safe and reliable.
Conclusion
Correcting mistakes is an important step toward keeping records of accounts transparent and reliable. Such errors can be seen as accidental or oversight errors that will distort the financial health of a company. A proper and timely rectification ensures that the trial balance is correct, financial statements are reliable, and stakeholders are confident of the financial integrity of the organization.
Rectification of Errors FAQs
What is rectification of errors in accounting?
Rectification of errors involves identifying and correcting inaccuracies in financial records to maintain accurate financial data.
What are the common types of errors in accounting?
Errors include errors of commission, omission, principle, and compensating errors.
How is a suspense account used in the rectification of errors?
A suspense account temporarily holds the balance when the trial balance does not tally, and it is cleared once the errors are identified and corrected.
What is the importance of accounting rectification of errors?
It ensures accurate financial statements, supports sound decision-making, and helps businesses avoid regulatory issues.
How do rectification of errors in trial balance differ from those in final accounts?
Errors in the trial balance are corrected using suspense accounts, while those in final accounts may require adjustments to financial statements or revisions if they significantly affect profit.
