When the trial balance tallies it provides us only with the proof of the arithmetical accuracy of the ledger accounts. However, there may still be some errors present. Some errors affect the trial balance while some do not. When the trial balance does not tally, it is a clear indication of the presence of errors. We need to identify and locate these errors. Thus, after locating them Rectification of Errors is also necessary.
Rectification of Errors
On the basis of rectification of errors, we can classify the errors into the following two broad categories:
- Errors not affecting the Trial Balance
- Errors affecting the Trial Balance
The errors need to be categorized in these categories because we can usually rectify the errors not affecting the trial balance by passing a rectification journal entry. While the errors affecting the trial balance affect only one account and for these, we cannot pass a journal entry. However, we can pass a journal entry only by opening a Suspense A/c.
Rectification of Errors not affecting the Trial Balance
These errors affect two or more accounts simultaneously. Thus, these are two-sided errors. We can rectify these by passing a journal entry giving the correct debit and credit to the accounts. In order to rectify an error, we need to cancel the effect of wrong debit or credit by reversing it and restore the effect of correct debit or credit.
When there is short debit or excess credit in an account we need to debit the concerned account. Whereas, when there is short credit or excess debit in an account we need to credit the concerned account.
Complete omission to record an entry in the journal or the subsidiary books, incorrect recording of transactions in the books, complete omission of posting and errors of principle are the examples of these errors.
Rectification of Errors affecting the Trial Balance
These errors affect only one account. Thus, these are one-sided errors. We can rectify these errors by giving an explanatory note in the account or by passing a journal entry with the help of Suspense A/c. When we detect an error before posting to the ledger, we can correct it by simply crossing the wrong amount, writing the correct amount above it and initializing it. Similarly, we can also correct an error in the ledger account.
Errors of casting, errors of carrying forward the balances, errors of balancing the accounts, errors of posting the wrong amount in the correct account, error of posting in the correct account on the wrong side, omitting to show an account in the trial balance, posting in wrong side with wrong amount are the examples of errors affecting the Trial Balance.
When the trial balance does not tally due to the one-sided errors in the books, an accountant puts the difference between the debit and credit side of the trial balance on the shorter side as the Suspense A/c. As and when we locate and rectify the errors, the balance in the Suspense A/c reduces and consequently becomes zero. Thus, we cannot categorize the Suspense A/c. It is a temporary account and can have debit or credit balance depending upon the situation.
While using the Suspense A/c to rectify the one-sided errors, the accountant needs to follow the following steps:
- Identification of the account with the error.
- Ascertainment of the excess debit or credit or short debit or credit in the above account.
- In case of short debit or excess credit in an account, we need to debit the concerned account. Whereas, in case of short credit or excess debit in an account we need to credit the concerned account.
- Pass the necessary journal entry by debiting or crediting the Suspense A/c
Rectification of Errors in the Next Accounting Year
When we cannot locate and rectify the errors before the final accounts, we need to carry forward the balance of the Suspense A/c to the next financial year. When we rectify the errors of the previous accounting year, we need to route them through the Profit and Loss Adjustment A/c for the items of expenses, losses, incomes and gains. This avoids their impact on the current income statement.
Solved Example for You
Q: Trial Balance of M/s Shinde Enterprises did not agree. It puts the difference to the Suspense A/c. Rectify the following errors and prepare the Suspense A/c to ascertain the original difference in the trial balance.
- Amount paid for the installation of the machinery ₹10000 was posted to the Repairs and maintenance A/c.
- Total of Purchases book ₹50000 was not posted to the ledger.
- Goods returned to John ₹3000 were recorded in Sales Book.
- Salary paid to Ram ₹6000 was debited to his personal account.
- Depreciation written-off on furniture ₹500 was not posted to the furniture account.
Ans: In the books of M/s Shinde Enterprises
|Date||Particulars||Amount (Dr.)||Amount (Cr.)|
|To Repairs and Maintenance A/c||10000|
|(Being rectification of the wrong journal entry in the Repairs and maintenance A/c)|
|To Suspense A/c||50000|
|(Being rectification of the omission to post the total of purchases book in the ledger)|
|To Purchases Return A/c||3000|
|(Being rectification of wrong recording of the purchases return in the sales book)|
|To Ram’s A/c||6000|
|(Being rectification of wrong debit to the personal account of an employee)|
|To Furniture A/c||500|
|(Being rectification of omission of posting in the furniture account)|
|Difference as per Trial balance||49500||2.||By Purchases A/c||50000|
|5.||To Furniture A/c||500|