Accountants prepare the trial balance to verify the correctness of the accounts. If the total of the debit balances does not agree with the total of the credit balances, it is a clear indication that certain errors have been made when recording the transactions in the original entry books or subsidiary books. It is our maximum duty to locate these errors and correct them, only then should we proceed to the preparation of the final accounts. We also know that the trial balance does not reveal all types of errors, since some of the errors do not affect the trial balance total. Therefore, these cannot be located with the help of the trial balance. An accountant must invest his energy in locating both types of errors and correcting them before preparing the trading, profit and loss account, and balance sheet. Because if these are prepared before the rectification, they will not give us the correct result and the profit and loss they reveal will not be the actual profit or loss.
All accounting procedure errors can be classified as follows:
1. Errors of Principle
When a transaction is recorded contrary to the fundamental principles of accounting, it is an error of principle. For example, if revenue expenses are treated as capital expenses or vice versa.
2. Administrative errors
These errors can be further subdivided as follows:
(i) Errors of omission
When a transaction is not fully or partially recorded in the books, it is an error of omission. It may be with respect to the failure to record a transaction in the original receipt books or with respect to the failure to record a transaction from the original receipt books to the account in question in the general ledger.
(ii) Commission errors
When an entry is incorrectly recorded, either the posting, calculation, casting or adjustment is totally or partially incorrect. Some of the commission errors affect the trial balance while others do not. Errors affecting the trial balance can be disclosed when preparing a trial balance.
(iii) Error compensation
Sometimes an error is offset by another error in such a way that it is not revealed in the trial balance. These errors are called offset errors.
From the point of view of correcting errors, these can be divided into two groups:
(a) Errors affecting a single account, and
(b) Errors affecting two or more accounts.
Errors affecting an account
The errors that affect can be:
(a) Throwing errors;
(b) publication error;
(c) carry on;
(d) balance; and
(e) omission of the trial balance.
Such errors must first be located and rectified. These are rectified with the help of a journal entry or by giving an explanatory note on the account in question.
Correction
Stages of correction of accounting errors
All types of errors in the accounts can be corrected in two stages:
(i) before the preparation of the final accounts; and
(ii) after the preparation of the final accounts.
Errors corrected within the accounting year
The proper method of correcting an error is to issue a journal entry in such a way that it corrects the error that has been made and also gives effect to the entry that should have been issued. But while the errors are rectified before the preparation of the final accounts, in certain cases the correction cannot be done with the help of journal entries because the errors have been such. Normally, the rectification procedure, if done, before the preparation of the final accounts is as follows:
(a) Correction of errors that affect one side of an account Such errors do not allow the trial balance to agree since they affect only one side of an account, so they cannot be corrected with the help of a journal entry, if they are corrected. requires correction before the preparation of final accounts. Therefore, the required amount is placed on the debit or credit side of the account in question, as the case may be. For example:
(i) Sales book worth Rs 500 in the month of January. The error is only in the sales account, to correct the sales account, we must record on the credit side of the sales account ‘For underestimation of’. sales book for the month of January Rs. 500″. Explanation: As the sales book was understated by Rs. 500, it means that all accounts except the sales account are correct, only the credit balance of the sales account is less than Rs. 500. So it is They have credited Rs 500 to the sales account.
(ii) Discount allowed to Marshall Rs 50, not credited to the discount account. It means that the amount of Rs 50 that should have been debited from the discount account has not been debited, so the debit side of the discount account has been reduced by the same amount. We should debit Rs 50 to the discount account now which was skipped earlier and the discount account will be corrected.
(ii) Goods sold to X incorrectly debited from the sales account. This error affects only the sales account, as the amount that should have been posted to the credit side has been incorrectly placed on the debit side of the same account. To rectify this, we need to put double the amount of the transaction on the credit side of the sales account by writing “For sales to X previously incorrectly debited”.
(iv) Amount of Rs 500 paid to Y, not debited from his personal account. This error of making Y’s personal account only and his debit side is less than Rs 500 due to failure to record the amount paid. Now we will write on your debtor side. “To cash (omitted to publish) Rs. 500.
Fixed bugs affecting duplex of two or more accounts
As these errors affect two or more accounts, rectification of such errors, if done before the final accounts are prepared, can often be done with the help of a journal entry. By correcting these errors, the amount is debited to one account or accounts, while a similar amount is credited to another account or accounts.
Correction of errors in the next accounting period
As previously stated, it is advisable to locate and correct errors before drawing up the final accounts for the year. But in certain cases, when after considerable searching, the accountant is unable to locate the errors and is in a hurry to prepare the final accounts of the business for filing the sales tax or income tax return, he transfers the amount of the trial balance difference to a newly opened ‘Sub Account’. In the next accounting period, as errors are located, they are corrected with reference to the suspense account. When all errors are discovered and rectified, the transient account will be automatically closed. We must not forget here that only those errors that affect the trial balance totals can be corrected with the help of the suspense account. Errors that do not affect the trial balance cannot be corrected with the help of suspense account. For example, if it is determined that the debit total of the trial balance was less than Rs 500 for the reason that Wilson’s account was not debited with Rs 500, the following rectification entry is required to be passed.
Difference in trial balance
The trial balance is affected only by errors that are rectified with the help of the suspense account. Therefore, to calculate the difference in the transitory account, a table will be prepared. If the suspense account is debited in the rectification entry, the amount will be placed on the debit side of the table. On the other hand, if the suspense account is credited, the amount will be placed on the credit side of the table. At the end, the balance is calculated and invested in the suspense account. If the credit side exceeds, the difference would be placed on the debit side of the suspense account. Effect of errors in final accounts
1. Errors in the profit and loss account
It is important to note the effect that an in-or will have on the company’s net income. One point to remember here is that only those accounts that are transferred to the trading and profit and loss account at the time of preparation of the final accounts affect the net profit. It means that only the errors in the nominal accounts and the assets account will affect the net profit. The error in these accounts will increase or decrease the net profit.
How errors or their rectification affect the profit tracking rules are useful to understand:
(i) If a debit has been made due to an error in a nominal account, the profit will decrease or the losses will increase, and when it is rectified, the profits will increase and the losses will decrease. For example, the machinery is overhauled for Rs 10,000 but the amount is debited from the machinery repair account: this mistake will reduce the profit. At the rectification entry, the amount will be transferred to the machinery account from the machinery repair account, and it will increase the profit.
(il) If due to an error the amount is omitted from recording on the debit side of a nominal account, it results in increased profit or decreased loss. The correction of this error will have an inverse effect, that is, the profit will be reduced and the losses will be increased. For example, the rent paid to the landlord but the amount has been debited from the landlord’s personal account: the profit will increase as the rental expenses are reduced. When the error is corrected, we will post the necessary amount to the rental account, which will increase the rental expense and therefore decrease the profit.
(ii) Profits will increase or losses will decrease if a nominal account is incorrectly credited. With the rectification of this error, the profits will decrease and the losses will increase. For example, the investments were sold and the amount was credited to the sales account. This mistake will increase the profit (or reduce the loss) when the same mistake is rectified, the amount will be transferred from the sales account to the investment account, thus the sales will be reduced, which will result in a decrease in profits. gains (or an increase in losses).
(iv) Gains will decrease or losses will increase if the posting of an account on the credit side of a nominal or property account is omitted. When they are rectified they will increase profits or reduce losses. For example, the commission received is omitted to be posted to the commission credit account. This error will decrease profit (or increase loss) since a revenue is not credited to the profit and loss account. When the error is corrected, it will have a reverse effect on the profit and loss account, as additional income will be credited to the profit and loss account, so the profit will increase (or the loss will decrease). If by some mistake profits or losses are made, it will have its effect on the capital account also because the profits are credited and the losses are charged to the capital account and thus the capital will also increase or decrease. Since principal is shown on the liability side of the balance sheet, any errors in the nominal account will also affect the balance sheet. So we can say that an error in the nominal account or in the asset account affects the profit and loss account as well as the balance sheet.
2. Errors that only affect the balance
If an error is made in a real or personal account, it will affect the assets, liabilities, debtors or creditors of the company and, as a result, will have its impact only on the balance sheet. because these items are shown only on the balance sheet and the balance sheet is prepared after the profit and loss account has been prepared. So if there is any error in the cash account, bank account, asset or liability account, it will only affect the balance sheet.
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