To revise a mistake and make amends for it is known as “Rectification of Errors”. Rectification of Errors is basically of two types. One of the most common types of errors are committed on both sides of an entry. This does not influence the trial balance and can be rectified by making a journal entry.
These mistakes can occur while posting the journal entries to the ledger accounts, classifying these accounts, and carrying the balance forward, etc. We will learn in-depth about the types of these errors in our following section.
1. Errors of omission: These errors occur in cases like when the entire transaction has been omitted from the books of accounts. From the word ‘omitted’ this error got the name ‘Errors of Omission’. This normally happens when the transaction is not recorded in the books of original entry.
2. Errors of commission: These errors happen due to any wrong committed by the accountant. Again, from the word ‘commission’ the error got its name as ‘Errors of Commission’. This might happen due to the wrong balances in an account, wrong posting such other accounts, the wrong carryforwards, wrong totaling, etc.
3. Errors of principle: Errors of principle are committed in those cases where a distinction between the revenue and the capital item is not differentiated. This is the error of principle when the accountant denies accepting the principle of common accounting practices.
4. Compensating errors: As indicated by the name, compensating errors are those errors which naturally compensate each other.
In case of an untallied trial balance, we know that at least one error has occurred.
The error or the errors have occurred at one of those stages in the accounting process, while:
(1) totaling the subsidiary books
(2) posting the journal entries in their respective ledger
(3) calculating its account balances
(4) posting the account balances to the trial balance
(5) at the time of totaling the trial balance columns.
This is to be noted that the accounting accuracy is not ensured, although the totals of debit and credit balances are equal as these errors do not affect the equality of the debits and credits.
Rectification of Errors is an important study for the students willing to appear for the CA Foundation level exams. A replica of its question is only to give you an idea about the type of questions asked to form this chapter. The students are requested to join the Vedantu live online classes for more such content.
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After preparing the Final Accounts, the nominal account must not be rectified through the concerned nominal accounts. While the profits which are disclosed in the previous year differs from the genuine profits which are stated before. Therefore, those types of errors are rectified through the Profit and Loss Adjustment Account.
The students must remember that only the rectifying entries are made through the Profit and Loss Adjustment Account which are normally related to the items of the Trading and Profit and Loss Account. Similarly, with the rectification of errors, the balance of the new Profit and Loss Adjustment Account are transferred to the Capital Account.
For the one-sided errors in the books, the trial balance refuses totally, then an accountant puts the difference between the debit and credit side of the trial balance on the shorter side as the Suspense A/c. After locating and rectifying the errors, the balance in the Suspense A/c reduces and consequently ends to become zero. Thus, the Suspense A/C cannot be categorized. This is a temporary account that can have a debit or credit balance depending upon the situation.
When an accountant uses the Suspense A/c to rectify the one-sided errors, he needs to follow the following steps:
Identify the account with the error.
Ascertaining the excess debit or credit.
In case of a shorter debit or an excess credit in an account, the concerned account is thus debited. In case of short credit or an excess debit in an account, we need to credit the similar affected account.
Then pass the necessary journal entry by debiting or crediting the Suspense A/c.
1. What Do You Mean By the Books of Original Entry?
Ans. Books of original entry are nothing but an accounting book or journal where all transactions are recorded initially. All the business transactions, with their details and descriptions, are then first recorded in the book of original entry.
The Books of original entry refers to the accounting journals where the business transactions are initially recorded. The information in these books is again summarized and posted into a general ledger, from this the financial statements are produced.
2. Give an Example of Compensating Error.
Ans. A sale of Rs 500 to Rayan is debited as only Rs 50 to his account, while a sale of Rs 50 to Sharon is debited as of Rs 500 to her account, it is a classic example of compensating error.
Compensating errors are those errors that do not affect the agreement of the trial balance and, therefore, their location also becomes difficult.
This group of two or more errors each of this which will affect individually the trial balance but this will collectively nullify each transaction’s impact is called compensating errors. The rectification entries for the compensating errors are made by correcting each error quite individually.
3. What is a Profit and Loss Adjustment Account?
Ans. Profit and loss adjustment account are actually prepared to record these transactions or the omissions and the errors which were left out while preparing the final accounts, which are then found after the final accounts are prepared and the profits are then distributed among the partners individually.