Financial Accounting Rectification of Errors – tryspring

By | July 21, 2019

Financial Accounting – Rectification of Errors

Financial accounting deals with recording and maintaining every
monetary transaction of an organization. However, sometimes, a
few entries might be either incorrect or used at the wrong place.
In financial accounting, the process of correcting such mistakes
is known as Rectification of Errors.

Types of Errors

Two most common types of errors, which are usually occurred at
the time of preparation of Financial Statements are discussed
below.

Error which Effect only One Account

  • Omission of posting of balance in a Trial Balance.
  • Error of carried forward of balance.
  • Error of casting and posting.

Error which Effect Two or more Accounts

The nature of errors, which occur during the preparation of
Financial Statements are −

  • Error of posting in wrong account.
  • Error of principle.
  • Error of omission.

Methods of Rectification of Errors

There are three types of methods used in rectification of Errors

Replacing Correct Figure by Striking Off the Wrong Figure

For example, cash payment of Rs. 989 on the account of stationery
purchased written as Rs. 998, will be corrected as −

Cash Book

By Stationery A/c

998

989

Through Journal Entry

Normally, there are three types of errors, which can be rectified
by passing Journal Entries −

  • Short credited or debit in one account and excess debit or
    credit in another account. For example, purchase of
    stationery for Rs. 989 wrongly debited to purchase of raw
    material account will be corrected as follows −

Journal Entry

Stationery AccountDr.

To Purchase Account

(Being Cash purchase of stationery wrongly debited to
Purchase account, now rectified)

989

989

  • If, by mistake one account is debited as well as
    credited with wrong amount simultaneously
    . For
    example, Cash purchase of stationery of Rs. 989 booked with
    an amount of Rs. 489 will be corrected as follows −

Journal Entry

Stationery AccountDr.

To Purchase Account

(Being purchase of stationery for Rs. 989 wrongly written
as Rs. 489 now rectified)

500

500

  • If there is an omission of recording a transaction, it can be
    rectified by passing journal entry to book that omitted
    transaction. For example, omission of recording transaction
    of purchase of raw material for Rs. 5000 from Mr. X will be
    recorded and corrected by passing the following journal Entry

Journal Entry

Stationery AccountDr.

To X Account

(Being omitted entry of purchase of Rs. 5000 from Mr. X now
recorded and rectified)

5000

5000

If there is a Mistake that Effects Trial Balance

  • Before closing the books and transferring the difference in
    suspense account and

  • After the agreed difference is transferred into the suspense
    account, following accounting treatment will be done −

    • Earlier entry debited or credited with fewer amount will
      be rectified by repeating that entry with difference
      amount to complete that amount. For example, entry done
      with Rs. 500 instead of Rs. 5000 will be rectified by
      doing same entry with an amount of Rs. 4500. In case,
      where entry wrongly debited or credited to other account
      may be rectified by doing reversal of old entry to
      nullify earlier effect.

If expense booked with less amount entry then −

Particular Expense Account

To Cash/Personal Account

(Being wrong amount of posting, rectified with Difference
amount Rs. 4,500 (5000-500)

Dr

4,500

4,500

If income is booked with less amount, it will be rectified as −

Cash/Personal account

To Income Account

(Being wrong amount of posting now Rectified. 4500
(5000-500)

Dr

4,500

4,500

If posting done in wrong account that will be rectified as
follows −

Stationery AccountDr.**

To Office Expenses Account**

(Being wrongly debited earlier in office account, now
Rectified and posted in stationery account)

In case (ii) where difference has already been transferred to
suspense account, further amount will be debited or credited to
respective account and correspondingly suspense account will be
debited or credited. Thus, these entries would reduce/nil the
balance of suspense account.

Effect of Errors on Agreement of Trial Balance

The errors by which there is no change on both side of trial
balance or wrong effect on trial balance with same amount will
not lead to effect on agreement of Trial Balance. Errors of
omission, error of posting with wrong amount on both side, or
Error of principles are the example of such errors. To find out
such errors is a challenging job for any book keeper or an
accountant.

Effects of Errors on Financial Statements

Effect of error depends on the nature of effected accounts. If
errors relate to nominal account, it will either increase or
reduce the profit and rectification will reduce excess profit or
Loss. Effect of error on Trading and Profit account ultimately
effect the Balance-Sheet of a company too, because reduced profit
or excess profit ultimately transferred to capital account, which
is a part of the Balance Sheet.

There are some errors, which effect Trading or Profit and Loss
account and Balance sheet simultaneously, like entry of
depreciation will affect profit as well as value of the Fixed
Assets.

Some entry may effect on Balance sheet only like, for instance
omission of entry of cash paid to purchase fixed assets will
affect Balance Sheet of a firm only.

Rectification of Errors after Preparation of Final Accounts

To remain unaffected Profit or Loss of the current financial
year, the errors, which took place in last financial years are
adjusted and rotated through a Profit & Loss adjustment
account. Balance of this account directly transferred to capital
account of firm without affecting the current year profit or
loss.

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