Rectification of Errors

Errors are obvious to occur but we need to systematically correct the accounting errors. The correcting or rectifying of the error is known as ‘Rectification of Errors’.

Financial accounting deals with records and maintains the monetary transaction of a business unit. Sometimes, certain entries might be recorded incorrectly or used in the wrong place. In financial accounting, the process of correcting such mistakes is known as Rectification of Errors.

Rectification of Errors in Accounting

In accounting, errors are the ‘mistakes’ committed by the accountant. These mistakes may occur while classifying the accounts, writing the subsidiary books, posting the entries to ledger accounts, totalling, balancing the accounts, carrying the balances forward and so on. The process of finding and correcting these mistakes is called rectification of errors in accounting.

Accounting principle says that debit is always equal to the credit. With the occurrence of the bookkeeper or accountant’s mistake, if this basic principle is violated at any time or any stage, the errors are to be recognised and rectified. To prove arithmetical accuracy of accounting, the trial balance is prepared to confirm that the debits are equal to the credits. The agreement of the trial balance and errors may continue to prevail even with the best effort by the accountant. If such errors are left uncorrected, they affect the final accounts of the unit and thereby give wrong numerical figures to the business unit and in turn, hamper it’s functioning, hence errors are too rectified. This is done through this system of rectification of errors.

Types of Rectification of Errors

There are several types of errors in accounting. Accounting errors are generally unintentional mistakes made when an accountant is recording the journal entries. Small accounting errors may not affect the final numbers in financial statements but they cause major distortions in the overall figures. These types of errors require lots of time and resources to find and correct them.

Since accounting errors can disrupt the business, all kinds of business organisations should know the most common types of accounting errors so that it’s easier to spot and correct them. Following are the types of accounting errors-

1. Subsidiary Entries

2. Transposition Errors

3. Rounding Errors

4. Error of Omission

5. Errors of Principle

6. Errors of Reversal

7. Errors of Commission

Suspense Account

Suspense account records the difference. An entry is needed as the error affects the difference. As there is no ledger entry for the other side of the correction, the trial balance is simply amended or changed to give the effect that the errors are rectified.

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 Account. As and when we locate and rectify the errors, the balance in the Suspense A/c reduces and at the end becomes zero. It is a temporary account and can have debit or credit balance depending upon the rectified situation.

Suspense Account Entry

We make an entry in the suspense account with journal entries. First, we need to open a suspense account in the general ledger. Next, we enter the full amount to be rectified. The form of suspense account entries will be either a credit or debit. This closes out the suspense account and posts the transaction to the correct account.

In case, the trial balance debits are larger or more than the credits, the difference is recorded in the suspense account as a credit. If the trial balance credits are larger or more than the debits, the difference is recorded in the suspense account as a debit. In the case of one-sided errors, if they are to be rectified through journal entries, the suspense account can be used for the required debit or credit depending upon the nature of the error. For example, the purchase book is undercast by Rs.500. The journal entry will be as follows-

Trial Balance and Rectification of Errors

To prepare the statements, an accountant can take the balances of all accounts from the trial balance without much of the hustle of going through the whole ledger. This is to be noted that the trial balance is usually prepared with the balances of accounts. Hence the balance of the account should be error-free thus rectifying the errors becomes utmost to record the same in the trial balance.

It is important for an accountant that the trial balance should tally. Normally, a tallied trial balance means that both the debit and the credit entries have been made correctly for each transaction. When the trial balance is not tallied, then comes the rectification of errors in the play. However, the agreement of trial balance is not absolute proof of the accuracy of accounting records. A tallied trial balance only proves, to a certain extent, that the posting to the ledger is arithmetically correct.