Rectification of Errors in Accounting

Nature and Types of Errors with Rectification Guidelines

INTRODUCTION
In this article we are going to discuss the process of rectification of errors which can crop
up into the bookkeeping process. Since bookkeeping is a manual process, when
transactions are recorded it may so happen that some mistakes or errors creep into the
records.
The errors maybe either clerical or related to accounting principles.
Some of these errors will affect the agreement of the trial balance and some others will
not.
WHY RECTIFICATION OF ERRORS IS REQUIRED?
It is the primary objective of the accounting process to provide correct information to the users of
financial statements. If any material error remains unidentified then the results communicated by
the financial statements will be misleading.
Whenever an error occurs, it should be rectified through proper rectification. Otherwise
the books of accounts cannot exhibit the true and correct view of the state of affairs of a
business and its financial results.
So it is very important that we identify and rectify all material errors in the books of
accounts.
POINTS OF TIME AT WHICH ERRORS CAN BE DETECTED
The errors may be detected:
1. Before preparation of the trial balance;
2. After preparation of the trial balance but before preparation of final accounts;
and
3. After preparation of final accounts.
The rectification of the errors will be guided by
 the nature and effect of the errors and
 the point of time at which the errors have been detected.
TYPES OF ERRORS

A. ON THE BASIS OF NATURE

1. ERROR OF OMISSION:
It results from a complete or partial omission of recording a transaction.
For example, a transaction may be recorded in the subsidiary book but omitted to be
posted to any of the ledger accounts. This is a case of partial omission.
However, if a transaction is totally omitted to be entered in the books then it is a case of
complete omission.
A complete omission will not affect the agreement of the trial balance but a partial
omission will affect the agreement of a trial balance.
2. ERROR OF COMMISSION:
It results from an act of commission i.e. entries wrongly made in the journal or ledger. It
may be an
 error of posting,
 error of casting,
 entering wrong amounts,
 entering a transaction in a wrong subsidiary book etc.
Unless the effects of errors of commission counterbalance each other, the agreement of
the trial balance becomes affected.
3. ERROR OF PRINCIPLE:
It Is an error occurring due to wrong application of basic Accounting Principles. The
main reason behind such an error is incorrect classification of capital and revenue items.
For example, purchase of an Asset may be recorded through the Purchase day book
instead of debiting the Asset account. Or wages paid for the installation of an asset may
be debited to the wages account instead of debiting the asset account with the amount of
wages.
An error of principle will not affect the agreement of a trial balance. However, it will
result in misrepresentation of the state of affairs and operational results of a business.
4. COMPENSATING ERRORS:
If the effect of an error is counterbalanced or cancelled out by the effect of another error
or errors then such errors are known as compensating errors. Since the compensating
errors as a whole cancel out the effect of each other, the agreement of trial balance is not
affected. Thus it becomes difficult to detect such errors.

B. ON THE BASIS OF EFFECTS:

1. ONE SIDED ERRORS:
One sided error is an error whose effect falls on only one account. It may arise due to
 Wrong casting of any day book;
 Posting made to the Wrong side of the relevant account;
 Duplicate posting of the same amount in an account.
One Sided errors cause a disagreement of the trial balance and hence are easy to detect.
2. TWO SIDED ERRORS:
A Two sided error maybe
 Affecting two accounts at the same direction and not affecting the agreement
of the trial balance. For example Mr A’s account credited instead of Mr B
account for an amount received from Mr B.
 Affecting two accounts at opposite direction and affecting the agreement of
the trial balance. For example, Mr A’s account debited instead of Mr B
account being credited for an amount received from Mr B.
3. MORE THAN TWO SIDED ERRORS:
An error which affects more than two accounts simultaneously falls in this
category. This may or may not affect the agreement of a trial balance depending on the
situation in each case.
EFFECTS OF ERRORS ON TRIAL BALANCE
Depending on its effect on the trial balance, the errors may be divided into two
categories-
1. Errors affecting the agreement of trial balance; and
2. Errors not affecting the agreement of trial balance.
Errors affecting the agreement of Trial Errors not affecting the agreement of
Balance (TB will not agree) Trial Balance (TB will agree)

1. An error of Partial Omission 1. An error of complete omission

2. An error of commission whose effect is not

2. Compensating Errors
cancelled out by a compensating error

3. Error in balancing an account or casting a

3. Error of Principles
subsidiary book

4. An error of wrong posting unless the correct 4. An error of wrong posting of the correct
amount is posted to the right side of a wrong amount to the right side of a wrong
account. account.

SUGGESTED GUIDELINES FOR RECTIFICATION OF ERRORS

GUIDELINES FOR RECTIFICATION OF ONE SIDED ERRORS
EXAMPLE 1

Cash paid to Ram Rs 1000, debited to Ram Account as Rs 100

Note: We have to assume that Cash Account has been correctly credited
Solution:

Point of
Guideline for Rectification Remarks
Detection

Rectify Ram Account directly in

Before Trial the Ledger by posting shortfall Only Ram Account was
Balance of Rs (1000-100) = 900 in the underdebited by Rs 900
debit side

After Trial Pass the rectification entry: Since it is a one sided error,
Balance but the Trial Balance will not agree.
before Final Ram Account……. Dr Rs 900 Thus the excess credit of Rs
 Accounts To Suspense Account Rs 900 900 must have been made
good by introduction of
Suspense A/c with a debit
balance of Rs 900.
Now by rectification, the
suspense account is being
abolished.

If the account involved with

one sided error is a nominal
account then we will use the
Same as above i.e pass the P&L Adjustment Account.
rectification entry: For example, if salary account
After Final
was involved instead of Ram
Accounts
Ram Account……. Dr Rs 900 account then the rectification
To Suspense Account Rs 900 entry would have been:

P&L Adj Account..Dr Rs 900

To Suspense Account Rs 900

GUIDELINES FOR RECTIFICATION OF TWO SIDED

ERRORS AFFECTING TWO ACCOUNTS IN THE SAME DIRECTION
EXAMPLE 2
Cash paid to Ram Rs 1000, wrongly debited to Shyam Account
Note: We have to assume that Cash Account has been correctly credited
Solution:

Point of Guideline for

Remarks
Detection Rectification

Before Trial The correct account is to be One account debited in

 Balance debited & the wrong account place of another account
is to be credited by the
following entry:

Ram Account Dr Rs 1000

To Shyam Account Rs 1000

Please note that the

After Trial
Suspense Account was
Balance but
Same as above not used here as the
before
agreement of the Trial
Final Accounts
Balance was not affected.

If the rectification involves

one Nominal Account, use
P&L Adj Account.
After Final
Same as above BUT------->
Accounts
However, If both the accounts
are nominal accounts then
no entry is required.

GUIDELINES FOR RECTIFICATION OF TWO SIDED

ERRORS AFFECTING TWO ACCOUNTS IN THE OPPOSITE
DIRECTION
EXAMPLE 3
Cash paid to Ram Rs 1000, wrongly credited to Shyam Account
Note: We have to assume that Cash Account has been correctly credited
Solution:

Point of Guideline for Remarks

 Detection Rectification

Make the corrections directly

in the ledger accounts of Ram
The effects are in the
and Shyam.
opposite direction so the
Before Trial
rectification cannot be
Balance Eg. In Ram A/c
done with a journal
"To Error Rectified 1000"
entry.
In Shyam A/c
"To Error Rectified 1000"

Credit instead of a debit

Rectify by passing the
resulted into Suspense
After Trial following entry:
Account with double
Balance but
amount in the Trial Balance.
before Ram A/c Dr Rs 1000
This Suspense A/c is now
Final Accounts Shyam A/c Dr Rs 1000
being set off with the
To Suspense A/c Rs 2000
rectification entry.

If the rectification involves

After Final
Same as above BUT-------> Nominal Account, use
Accounts
P&L Adj Account.

GUIDELINES FOR RECTIFICATION OF TWO SIDED

ERRORS AFFECTING TWO ACCOUNTS WITH UNEQUAL
AMOUNTS
EXAMPLE 4
Cash paid to Ram Rs 1000, wrongly debited to Shyam Account as Rs 100
Note: We have to assume that Cash Account has been correctly credited
Solution:
 Point of Guideline for
Remarks
Detection Rectification

Make the corrections directly

in the ledger accounts of Ram
The amounts involved
and Shyam.
are unequal so the
Before Trial
rectification cannot be
Balance Eg. In Ram A/c
done with a journal
"To Error Rectified 1000"
entry.
In Shyam A/c
"By Error Rectified 100"

Shortage in Debit column

Rectify by passing the
of Trial Balance of Rs 900
After Trial following entry:
resulted into Suspense
Balance but
Account with same amount.
before Ram A/c Dr Rs 1000
This Suspense A/c is now
Final Accounts To Shyam A/c Rs 100
being set off with the
To Suspense A/c Rs 900
rectification entry.

If the rectification involves

After Final
Same as above BUT-------> Nominal Account, use
Accounts
P&L Adj Account.

ILLUSTRATION ON RECTIFICATION OF ERRORS

The following errors have been located from the books of Mr Bajaj:
1. Cash paid to Jeet Rs. 950 has been posted to the debit of his account as Rs. 590.
2. Purchase day book was undercast by Rs. 1000
3. Sales day book was overcast by Rs. 300
4. Wages paid Rupees 600 for the installation of a new machine has been debited to
wages account.
5. Interest paid Rupees 59 has been credited to interest received account.
6. Goods sold to Mr Tom for Rupees 500 has been recorded through the Purchase Day
Book.
Indicate, with reasons, the accounts which have been affected due to each of the above
errors and rectify the errors if those are detected:
(a) Before preparation of the Trial Balance
(b) After preparation of Trial Balance but before preparation of Final Accounts
(c) After preparation of the Final Accounts.
Solution:
1. CASH PAID TO JEET RS. 950 HAS BEEN POSTED TO THE DEBIT
OF HIS ACCOUNT AS RS. 590.
Accounts Effected: Jeet Account
Reason: The entry in the cash book is correct but Jeet Account is debited by Rupees 590
in place of Rupees 950. It is under debited by 950 – 590 = 360. It is a one sided error.
Rectification Before Trial Balance
Jeet Account is to be debited by Rs 360 directly in the ledger. Write “To Error rectified
Rs 360” in the debit side of Jeet Account.
Rectification After Trial Balance but Before Final Accounts
Pass the journal entry:
Jeet Account Debit Rs 360
To Suspense Account Rs 360
Rectification After Final Accounts
Pass the journal entry:
Jeet Account Debit Rs 360
To Suspense Account Rs 360
2. PURCHASE DAY BOOK WAS UNDERCAST BY RS. 1000
Accounts Effected: Purchase Account
Reasons: The total from the Purchase day book, on daily or weekly basis, is posted to the
debit of Purchase Account in the ledger. On the other hand, each transaction of purchase
recorded in the Purchase day book is separately posted to the credit of the relevant
supplier or creditors account. As a result, the undercasting of the Purchase day book will
only affect the debit side of the Purchase account. It will not affect the suppliers or
creditors accounts.
Rectification Before Trial Balance
Purchase Account to be debited with Rs. 1000 directly
Rectification After Trial Balance but Before Final Accounts
Pass the journal entry:
Purchase Account Debit Rs 1000
To Suspense Account Rs 1000
Rectification After Final Accounts
Pass the journal entry:
P&L Adjustment Account* Debit Rs 1000
To Suspense Account Rs 1000
*Since Purchase Account is a Nominal account, the total debit balance of the Purchase
account will be transferred to the Profit and Loss Account during preparation of the Final
Accounts. Thus for making the rectification after preparation of the Final Accounts, the
Profit and Loss Adjustment Account is required to be debited.
3. SALES DAY BOOK WAS OVERCAST BY RS. 300
Accounts Effected: Sales Account
Reasons: Same as above in point 2
Rectification Before Trial Balance
Sales Account to be debited with Rs. 300 directly
Rectification After Trial Balance but Before Final Accounts
Pass the journal entry:
Sales Account Debit Rs 300
To Suspense Account Rs 300
Rectification After Final Accounts
Pass the journal entry:
P&L Adjustment Account* Debit Rs 300
To Suspense Account Rs 300
*Same justification as in point 2 above.
4. WAGES PAID RUPEES 600 FOR THE INSTALLATION OF A NEW
MACHINE HAS BEEN DEBITED TO WAGES ACCOUNT.
Accounts Affected: Wages Account and Machine Account
Reasons: It is an error of principle. And since this error affects two accounts, it is a two
sided error. Wages paid for installation of Machine is a Capital expenditure for which the
Machine Account should have been debited. But wrongly the Wages Account has been
debited. Since the error is in the same direction (i.e the wrong account has
been debited instead of the correct account being debited) the agreement of Trial Balance
will not be affected. We will have to assume that the Cash Book is correct.
Rectification Before Trial Balance
Pass the journal entry:
Machine Account Debit Rs 600
To Wages Account Rs 600
Rectification after Trial Balance but Before Final Accounts
Pass the journal entry:
Machine Account Debit Rs 600
To Wages Account Rs 600
Rectification after Final Accounts
Pass the journal entry:
Machine Account Debit Rs 600
To P&L Adjustment* Account Rs 600
* Since Wages Account is a nominal account.
5. INTEREST PAID RUPEES 59 HAS BEEN CREDITED TO INTEREST
RECEIVED ACCOUNT.
Accounts Affected: Interest Paid Account & Interest Received Account
Reasons: Interest has been paid which is an expense. The Interest Paid Account should
have been debited for the same. However the Interest Received Account has
been credited wrongly. This is a two sided error in the opposite direction. The agreement
of the Trial Balance will be affected by double the amount of the error.
Rectification Before Trial Balance
Debit the Interest Paid Account by Rs 59 directly in the ledger. Also Debit the Interest
Received Account by Rs 59 in the ledger for nullifying the effect of the error made.
Rectification After Trial Balance but before Final Accounts
Pass the entry:
Interest Paid Account Debit Rs 59
Interest Received Account Debit Rs 59
To Suspense Account Rs 118
Rectification After Final Accounts
Pass the entry:
P&L Adjustment* Account Debit Rs 118
To Suspense Account Rs 118
* Interest Paid and Interest Received are both Nominal Accounts
6. GOODS SOLD TO MR TOM FOR RUPEES 500 HAS BEEN
RECORDED THROUGH THE PURCHASE DAY BOOK.
Accounts Affected: Sales Account, Purchase Account & Tom Account
Points to be noted: The correct entry should have been:
Tom Account Debit Rs 500
To Sales Account Rs 500
However, the entry passed (wrong entry) is:
Purchase Account Debit Rs 500
 To Tom Account Rs 500
Trial Balance will agree as a set of double entry has been totally missed. Another set has
been wrongly but totally introduced.
Rectification before Trial Balance:
Pass the entry:
Tom Account Debit Rs 1000
To Purchase Account Rs 500
To Sales Account Rs 500
Rectification after Trial Balance but before Final Accounts:
Same entry as above.
Rectification after Final Accounts:
Pass the entry:
Tom Account Debit Rs 1000
To P&L Adjustment* Account Rs 1000
* As the Purchase and Sales Accounts are nominal accounts.