Errors are mistakes that we commit while giving accounting treatment either knowingly or unknowingly. An error may be clerical or Error of principle. There are various stages at which an accountant and bookkeeper may commit errors. Rectification of error is very important to know the true financial position of an entity at the close of the financial year.
Rectification of Error
Maintaining the books of accounts is a continuous process. Every entity wants to know its true financial position at the end of the respected financial year.
One shall not correct the errors by overwriting. If after making an entry we find that an error has been committed then it can be corrected by crossing the incorrect entry and making a correct entry.
However, if the errors are located after some time then correction should be made by making a rectification entry. Rectification of errors depends on the stage at which it committed and detected.
We may detect an error at any of the stages as given below:
- Before preparation of trial balance.
- After preparing the trial balance but before preparation of final accounts.
- After the preparation of final accounts i.e. in the next accounting period.
Before Preparation of Trial Balance
We locate these errors before closing the ledger accounts. So, we can rectify such errors without opening a suspense account. We prepare a suspense account when there is a difference in the totals of the debit side and credit side of a trial balance.
In case there is an error at the debit side of an account, we need to make the rectification entry at the debit side of such an account.
Similarly, when there is an error at the credit side of an account then we need to make the rectification entry at the credit side of such an account.
For example, The sales book undercast by Rs. 2000. The effect of such error is that the sales account has been less credited by Rs. 2000.
Since the account is posted by the total of sales book, there is no error in the accounts of the customers since they are posted with the number of individual sales.
Hence only the sales account needs to be corrected. Rectification for this will be done by making an entry for 2000 on the credit side.
Purchase book undercast by Rs. 1500. Rectification entry to be made at the debit side of the purchase account.
Read the Steps to Locate Error here in detail.
After preparing the trial balance but before preparation of final accounts
The method for rectification of errors stated above is appropriate when the errors are located before the ledger accounts are closed (before the end of the accounting period).
After the rectifications, the trial balance agrees. In some cases, when the totals of the debit side and credit side of trial balance do not match each other, we transfer the difference to the suspense account.
However, we shall make efforts on a continuous basis to locate such errors and rectify them as early as possible.
The rule for rectification of errors at this stage is very simple. Errors, for which complete journal entries are not possible at the earlier stage, can be rectified by journal entries with the help of a suspense account.
It is said that each and every error located at this stage can be rectified by a journal entry. Errors, for which it is not possible to rectify them through a journal entry, can be rectified by making a journal entry at this stage. We transfer the difference to the suspense account.
After the preparation of final accounts i.e. in the next accounting period
Sometimes we carry out the rectification of errors in the next accounting period. Thus, we can carry forward or transfer the balance remaining in the suspense account to the capital account.
It is important to rectify the errors related to the previous accounting year. Rectification of such errors should be made in such a manner that the current year’s profit and loss remain unaffected. To achieve this objective we prepare “profit and loss adjustment account”.
Profit and loss adjustment account represents all the accounts which appear in the trading and profit and loss account.
We transfer the balance of Profit and loss adjustment account to the Profit and loss account. However, the Prior period items should be charged after ascertaining the current year net profit.
‘Prior period items’ are incomes or expenses which arise in the current period as a result of an error or omission committed in preparation of financial statement of earlier periods.
We need to disclose the prior period items separately in the financial statements along with the nature, amount and impact of such prior period items on the current year’s profit and loss.
Solved Example for You
Mr. P closes his books of accounts every year on 31st March. When he prepared the trial balance on 31st May 2017. The totals of debit side and credit side of trial balance did not tally (match).
No suspense account opened. Following errors located on 9th June 2017: –
- The total of sales book was short by Rs. 1000
- Discount of 450 allowed to Mr. C was not posted to his account.
Rectify the errors without opening a suspense account.
- We need to make the following posting on the credit side of the sales book: –
“By undercast of sales book Rs 1000”.
2. In this case, Mr. C’s account has been omitted to be credited for discount allowed to him. So, we shall make the following rectification on the credit of Mr. C’s account: –
“By omission in posting the amount of discount allowed of Rs. 450”.