Question

What is the value shown by rectification of errors

Answer 1

INTRODUCTION

In this article we are going to discuss the process of rectification of errors which can crop up into the bookkeeping process.  Since bookkeeping is a manual process, when transactions are recorded it may so happen that some mistakes or errors creep into the records.

The errors maybe either clerical or related to accounting principles.

Some of these errors will affect the agreement of the trial balance and some others will not.

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WHY RECTIFICATION OF ERRORS IS REQUIRED?

It is the primary objective of the accounting process to provide correct information to the users of financial statements. If any material error remains unidentified then the results communicated by the financial statements will be misleading.

Whenever an error occurs, it should be rectified through proper rectification. Otherwise the books of accounts cannot exhibit the true and correct view of the state of affairs of a business and its financial results.

So it is very important that we identify and rectify all material errors in the books of accounts.

 

POINTS OF TIME AT WHICH ERRORS CAN BE DETECTED

The errors may be detected:

Before preparation of the trial balance;After preparation of the trial balance but before preparation of final accounts; andAfter preparation of final accounts.



The rectification of the errors will be guided by

the nature and effect of the errors and

the point of time at which the errors have been detected.

TYPES OF ERRORS



A. ON THE BASIS OF NATURE

1. ERROR OF OMISSION:

It results from a complete or partial omission of recording a transaction.

For example, a transaction may be recorded in the subsidiary book but omitted to be posted to any of the ledger accounts.  This is a case of partial omission.

However, if a transaction is totally omitted to be entered in the books then it is a case of complete omission.

A complete omission will not affect the agreement of the trial balance but a partial omission will affect the agreement of a trial balance.

2. ERROR OF COMMISSION:

It results from an act of commission i.e. entries wrongly made in the journal or ledger.  It may be an

error of posting,error of casting,entering wrong amounts,entering a transaction in a wrong subsidiary book etc.  

Unless the effects of errors of commission counterbalance each other, the agreement of the trial balance becomes affected.

3. ERROR OF PRINCIPLE:

It Is an error occurring due to wrong application of basic Accounting Principles.  The main reason behind such an error is incorrect classification of capital and revenue items.

For example,  purchase of an Asset may be recorded through the Purchase day book instead of debiting the Asset account.  Or wages paid for the installation of an asset may be debited to the wages account  instead of debiting the asset account with the amount of wages.

An error of principle will not affect the agreement of a trial balance. However, it will result in misrepresentation of the state of affairs and operational results of a business.

4. COMPENSATING ERRORS:

If the effect of an error is counterbalanced or cancelled out by the effect of another error or errors  then such errors are known as compensating errors.  Since the compensating errors as a whole cancel out the effect of each other,  the agreement of trial balance is not affected. Thus it becomes difficult to detect such errors.

B. ON THE BASIS OF EFFECTS:

1. ONE SIDED ERRORS:

One sided error is an error whose effect falls on only one account.  It may arise due to

Wrong casting of any day book;Posting made to the Wrong side of the relevant account;Duplicate posting of the same amount  in an account.

One Sided errors cause a disagreement of the trial balance and hence are easy to detect.

2.  TWO SIDED ERRORS:

A Two sided error maybe

Affecting two accounts at the same direction and not affecting the agreement of the trial balance.  For example Mr A’s account creditedinstead of Mr B account for an amount received from Mr B.Affecting two accounts at opposite direction and affecting the agreement of the trial balance.  For example, Mr A’s account debitedinstead of Mr B account being credited for an amount received from Mr B.