Accounting for Rectification of Errors

Accounting for Rectification of Errors , To err is human! So, it is obvious that while we are doing the accounting of an entity, we can make mistakes. But more important is to analyze & correct the mistakes. So here, we are providing the basics of Accounting for Rectification of Errors. Here, we will have a look on how to rectify the errors if those are found in the same financial year or later on.

Basic features of correct accounting:

All transactions & events must be recorded/ entered.
Transactions & events must be recorded by Double entry system & by following proper accounting Principles.
All entries must be fully & correctly posted to ledger accounts.
There must be arithmetical accuracy:
- in Recording i.e. passing entry,
- in Posting figures in accounts,
- in totaling & balancing of books of Entry &
- in totaling & balancing of ledger accounts.

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ERROR

Meaning of an Error

If in books of account any one or more of the above mentioned basic elements/features of correct accounting is not followed, then we will say an error/mistake has been committed.

Classification of Errors:

Errors of Principle:

That means there is error in applying some accounting Principle,
Such errors will not affect the agreement of trial balance i.e. these are double sided error.

Ex. Treating a revenue expense as capital expenditure or vice versa or the recording of sale of a fixed asset as ordinary sale.

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Clerical Errors:

These are the errors committed in applying the accounting procedure.
Such errors may or may not affect the agreement of trial balance.

Rectification in the same year can be:

Before preparation of Trial Balance i.e. without opening a Suspense a/c or
After preparation of Trial Balance i.e. after opening a Suspense a/c.

Suspense Account:

When trial balance does not tally, the difference is put to an account named as Suspense a/c. Difference is:
- debited to suspense a/c (if debit side of trial balance is short) or
- credited to suspense a/c (if credit side of trial balance is short)
Thus with the help of suspense a/c trial balance is artificially tallied.

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Rectification In Subsequent Years Books

Rectification in the next year:

If errors are located after finalizing the accounts then it should be rectified in the next years accounts.
The difference of Trial balance will also get transferred to next years books under the name Suspense a/c.
This will involve preparation of Profit & Loss Adjustment account.

Profit & Loss Adjustment account:

The rectification entry will be same as passed in case of rectification in same year except that wherever any Income or Expenses a/c. is involved, the Debit/Credit will be made in P&L adjustment a/c. and not in the Income or Expenses a/c.
Otherwise this years profit will be affected by the errors of last year.
The balance in P&L adjustment a/c. will be transferred to capital a/c in the case of proprietorship or partnership concern or to Profit and Loss Appropriation account in the case of a company.

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Forming Rectification Entry:

Steps to be followed for solving a rectification problem are as follows:

An account is not debited or less debited ¬ debit it
An account is not credited or less credited ¬ credit it
An account is wrongly debited or more debited ¬ credit it
An account is wrongly credited or more credited ¬ debit it
After making above if double entry is not yet completed, then make it double entry by debiting or crediting the difference to suspense a/c.
If rectification is being done in subsequent year then in place of income & expenses account, P & L adjustment account will be debited or credited, as the case may be.

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