Rectification Of Errors

Introduction

Every concern is interested in ascertaining its true profit/loss and financial position at the close of the trading year. The effort of the accountant is to prepare the final accounts in such a fashion which exhibits true picture of the business. The basic information for the preparation of final accounts is supplied by the trial balance. Thus, the accuracy of the trial balance determines to a great extent the accuracy or otherwise of the information provided by final accounts. However, the trial balance is prepared to ensure the arithmetical accuracy of the records of a business and also to ensure that for every debit entry a credit of an equal amount has been recorded. Thus, a trial balance in which the total of the debits does not equal the total of credits can be taken as an evidence for the existence of some errors in the records. On the other hand, a trial balance in which the total of the debits equal the total of credits is not a conclusive proof of accuracy of the records. Certain errors may not affect the agreement of a trial balance as the erroneous entries may not violate the dual aspect concept. It means that even if the trial balance agrees, steps should be taken to ensure that the records are free from errors. It, therefore, becomes utmost important to locate such errors and rectify them so that the correct financial position of the concern may be ascertained. So whenever errors in accounting records come to notice, they should be rectified without waiting till the end of the accounting year when trial balance is to be prepared. The objectives of rectification of errors are as follows:

a) Presenting correct accounting records;

b) Ascertaining correct profit or loss for the accounting period; and

c) Exhibiting a true financial position of the concern on a particular date.

Classification Of Errors

The errors can be classified as follows:

· Clerical Errors

· Errors of Principle

Clerical errors

Clerical errors are those errors which are committed by the clerical staff during the course of recording the business transactions in the books of accounts. These errors are:

a) Errors of omission

b) Errors of commission

c) Compensating errors

a) Errors of Omission When a transaction is either wholly or partially not recorded in the books of accounts, it is an error of omission. When a transaction is omitted completely, it is called “complete error of omission” and when a transaction is partly omitted, it is called a “partial error of omission”. A complete error of omission does not affect the agreement of trial balance whereas partial error of omission may or may not affect the agreement of trial balance. For example, Rs. 100 paid to Ram is neither recorded in the cash book nor in the account of Ram, this error will not affect the agreement of trial balance. Only the total of the trial balance would be short by Rs. 100. But if posting is not done in one of the accounts, this will affect the agreement of trial balance.

b) Errors of Commission

Errors of commission take place when some transactions are incorrectly recorded in the books of accounts. Such errors include errors on account of wrong balancing of an account, wrong posting, wrong totalling, wrong carry forwards, etc. For example, if a sum of Rs. 255 received from Hari is credited to his account as Rs. 525, this is an error of commission. Similarly, if a sum of Rs. 500 paid to Suresh is credited to Sohan’s account such an error is an error of commission. Some of the errors of commission affect the agreement of trial balance whereas others do not. Errors affecting the agreement of trial balance can be easily revealed by preparing a trial balance.

c) Compensating Errors

These errors, also called self-balancing or equalising errors, are a group of errors, the total effect of which is not reflected in the trial balance. These errors are of a neutralizing nature. One error is compensated by the other error or by errors of an opposite nature. For example, Amitabh’s account is credited with Rs. 500 instead of Rs. 600; Abhijit’s account credited with Rs. 160 instead of Rs. 100 and Jaya’s account credited with Rs. 150 instead of Rs. 110. Here the first error of under-credit of Rs. 100 is covered by second and third errors of over credit of Rs. 60 and Rs. 40 respectively.

Errors of Principle

When a transaction is recorded against the fundamental principles of accounting, it is an error of principle. These errors arise because of the failure to differentiate capital and revenue items i.e. a capital expenditure is taken as a revenue expenditure or vice-versa. Similarly, a capital receipt may have been taken as a revenue receipt or vice-versa. For example, a sum of Rs. 50 paid on the repairs of furniture should be debited to repairs account, but if it is debited to the furniture account, it will be termed as an error of principle. Repair of furniture is revenue expenditure. If it is debited to furniture account, it has been taken as a capital expenditure. Such errors do not affect the agreement of the trial balance because they are correctly recorded so far as the debit or credit side of the wrong class of account is concerned. It would be appreciated that such an error arises through lack of knowledge of principles of accountancy.