Category: Rectification of Errors

When a trial balance does not agree efforts are made to locate errors and rectify them. However, if reason for disagreement of trail balance cannot be found, a new account called suspense account is opened in order to give trial balance an appearance of agreement. Then final accounts are prepared. Debit balance in suspense account is shown on assets side while credit balance is recorded on liabilities side.

A suspense account is opened in two instances i.e.

(i) To balance a disagreed trial balance — In the trial balance, if the debits are short the difference has to be debited to Suspense Account and if the credits are short, Suspense Account has to be credited to make trial balance agree apparently. Thus trial balance is tallied and final accounts are prepared. Later when errors are detected, the rectifying entries are passed. The suspense account will show balance until all entries are corrected. When all errors affecting the trial balance have been rectified by means of journal entries, the Suspense Account will show no balance.

(ii) To post uncertain items: Sometimes, an item cannot be posted to the correct account because of lack of information. In this case, all the errors are rectified by means of journal entries opening suspense account. Thus, suspense account is opened and is given the debit or credit as the case may be. When debit is short of credit, the difference is debited to Suspense Account making the debits equal to the credits. Similarly, if in a rectifying journal entry, credit is otherwise short of debit, the difference is credited to suspense Account. ‘Ltrer when error’s are detected, the rectifying entries are passed.

Location of errors of principle, errors of compensating nature and errors of omission is

slightly difficult because of the fact that such errors do not aiTect the agreement of the Trial Balance and, therefore, their location may he considerably delayed. However, location of errors of commission is comparatively easier because they affect the agreement of the Trial Balance. Thus, the errors can he classified into two categories from the point of view of locating then

(i) Errors which do not affect the agreement of the Trial Balance.

(ii) Errors which affect the agreement of the Trial Balance.

Errors which do not affect the agreement of the Trial Balance. As stated before, errors of omission, errors of commission and ertors of a compensating nature by themselves do not affect the agreement of the Trial Balance. Their location is therefore a difficult process. They are usually found out when statement of accounts are received by the business or sent to the customers or during the course of internal or external audit and sometimes by chance. For example, if a credit purchase of Rs 500 from Ram has not been recorded in the books of accounts, the error will not affect the agreement of the Trial Balance and, therefore, at the time of finalising the accounts it may not be traced out However, this will be found out when a statement of account is sent to Ram showing the money due to him or when a statement of account is received from Ram showing the money recoverable by him.

There are a number of errors that might have been made that do not prevent the trial balance from agreeing. These are:

• Errors of omission, where a transaction has been completely omitted from the ledger accounts.

• Errors of commission, where one side of a transaction has been entered in the wrong account (but of a similar type to the correct account, for example, entered in the wrong receivable’s account, or in the wrong expense account).

An error of commission would not affect the calculation of profit, or the position shown by the balance sheet.

• Errors of principle. As for errors of commission, but the correct and incorrect accounts are of different types, for example, entered in the purchases account instead of a non current asset account. This type of error would affect the calculation of profit, and the position shown by the balance sheet.

• Errors of original entry, where the wrong amount has been used for both the debit and the credit entries.

• Reversal of entries, where the debit has been made to the account that should have been credited, and vice versa.

• Duplication of entries, where the transaction has been posted twice.

• Compensating errors, where two or more transactions have been entered incorrectly, but cancelling each other out, for example, electricity debited with $100 too much, and sales credited with $100 too much

Accountancy Class 11 – Errors which affect the agreement of the Trial Balance: Errors which affect the agreement of the Trial Balance. Such errors are easy to be located since they are caught at an early stage. As soon as the Trial Balance does not tally, the accountant can proceed to find out these errors. The procedure to be followed for location of such errors can be put as follows:

• The difference of the two sides of the Trial Balance should be found out The amount should then be divided by two. The two sides of the Trial Balanc2 should then be checked to find out if there is an amount equal to that figure. It is possible that the amount may have been placed to a wrong side resulting in difference in the totals of the Trial Balance. For example, if the total of the debit side of the Trial Balance is Ps 450 more than the credit side of the Thal Balance, Rs 450 should be divided by 2, thus giving a figure of 225. The debit side should then be checked to find out if there is an amount of Rs 225 appearing on that side. If it is so, it should be seen whether the amount has been correctly put to that side or it should have gone to the credit side.
• Since, cash and bank account are not maintained usually in the Ledger, it will be also advisable to check whether the balances of the cash and bank accounts have been taken in the Trial Balance or not.
• The schedules of sundry debtors and sundry creditors should be checked to find qut whether all balances of debtors and creditors have been included in these schedules or not.
• The totals of the subsidiary books such as the Sales Book, Purchases Book should be checked and it should be seen whether posting has been done from these two books correctly to the Sales, Purchases or other accounts as the case might be.
• If the error is still not traceable, check thoroughly the books of original entry and their posting into the Ledger and finally the balancing of different accounts.

1. Its 540 received from M. Mehta was posted to the debit of his account. 

The amount of M. Mehta should have been credited by P.s 540. It has been debited. In order to set the matters right, it is necessary to credit his account by Ps 1,080 (i.e., to cancel unnecessary debit of P.s 540 and to give him credit of Ps 540).

2. Rs 100 being Purchases Returns was posted to the debit of Purchases Account.

The Purchases Returns Account should have been credited by a sum of P.s 100 on account of return of the goods. It has not been at all credited. It has, therefore, been credited by Es 100. The Purchases Account should not have been at all debited. It has, therefore, been credited by P.s 100. Suspense Account has been debited by Rs 200, since no other account is available and it must have been credited earlier on account of these errors.

3. Discount Rs 200 received, entered in the cash book was not posted to the Ledger. 

The amount of discount received is credited to the Discount Account. It has not been done, Discount Account, has therefore, been credited now, Suspense Account has been debited because it must have been credited earlier on account of this error.

4. Its 574 paid for repairs to motor-car was debited to the motor-car account as Rs 574.

Repairs to motorcar is a revenue expenditure. It should has been debited 10 the Repairs Account. 11 has not been done. The Repairs Account has, therefore, been debited by P.s 574. Motor Car Account has been unnecessarily debited by Rs 174. It should, therefore, be credited by this amount. The difference has been put to the Suspense Account. 

SUSPENSE ACCOUNT 

The accountant should take the above mentioned steps one after the other to locate the difference in the totals of the Trial Balance. In case, he is not in a position to locate the difference and he is in a hurry to close the books of accounts, he may transfer the difference to an accountknown as “Suspense Account”. Thus, Suspense Account is an account tjwhich the difference in the Thai Balance has been put temporarily. On locating the errors in the beginning or during the course of the next year, suitable accounting entries are passed (as explained later) and the Suspense Account is closed. However, it should be noted that Suspense Account should be opened by the accountant only when he has failed to locate the errors in spite of his best efforts. It should not be by way of a normal practice, because the very existence of the Suspense Account creates doubt about the authenticity of the books of accounts. The result shown by the books qf accounts may not be trusted by the proprietors, tax officials and other government authorities in such a case. This may create complications for the business.

RECTIFYING ACCOUNTING ENTRIES 

The errors committed in the books of accounts when located out, have to be corrected. However, corrections in the books of accounts should he done by passing proper rectifying entries and not by culling or erasing figures. Such entries, as explained earlier, are passed in the General Journal or Journal Proper. The passing of proper rectifying entries is being explained below with suitable examples.

Example 1, The Sales Book overcast by Ps 50.

Over-casting of Sales Book will result in over-credit to Sales Account by Ps 50 since the total of the Sales Book is posted to the credit of the Sales Account at the end of a period. There can be two situation in such a case:

(i) The error might have been located out by the accountant before transferring the difference to the Suspense Account In such a case, there is mistake only in one account, i.e., the Sales Account. It has been credited more by Ps 50. The error can be rectified if the Sales Account is debited by Ps 50. Thus, the following will be the rectifying entry in the Journal Propet

No account is to be credited since the error affects only one account.

(ii) The error might have been located out by the accountant after transferring the difference in the Trial Balance to a Suspense Account In such a case two accounts are involved: (a) Sales Account, and (b) Suspense Account. Since Sales Account had been credited more by Ps 50 the credit side of the Thai Balance must have been more than the debit side of the Trial Balance. The Suspense Account should, therefore, have been put on the debit side of the Thai Balance in order to balance the two sides

The Sales Account has been &edited more by Ps 50. In order to rectify the error, the Sales Account should therefore be debited by Ps 50. Suspense Account has been debited because of this mistake which has now been found out. It should therefore, be closed by giving credit to it.

1. Errors of omission. These errors are incurred in those cases when a transaction

is completely omitted from the books of accounts. It happen: when a transaction is not recorded in the books of the original entry (i.e., various journals). For example, if a purchase of goods on credit from Shri Ram Lal has not at all been recorded in the books of accounts, such an error will be teimed as an error of omission. Since, there has been neither a debit entry nor a credit entry, therefore, the two sides of the TYial Balance will not be at all affected on account of this error. Such errors, therefore, cannot be located out very easily. They come to the notice of the businessman when statement of accounts are received from or sent to creditors or debtors as the case might be.

2. Errors of commission. Such errors include errors on account of wrong balancing of an account, wrong posting, wrong carry forwards, wrong totalling, etc. For example, if a sum of Ps 50 received from Mukesh is credited to his account as Rs 500, this is an error of commission. Similarly, if the total of the debit side of an account is carded forward from one page to another and the mistake is committed in such carry forward (e.g. total of Rs 996 is carried forwards as Rs 699) such an error is an error of commission. Errors of commission affect the agreement of the Trial Balance and, therefore, their location is easier.

3. Errors of principle. Errors of principle arc committed in those cases where a proper distinction between revenue and capital items is not made. i.e., a capital expenditure is taken as a revenue expenditure or vice-versa. Similarly, a capital receipt may have been taken as 1 revenue receipt or vice- versa. For example, a sale of old furniture of Rs 500 should be credited to the furniture account, but if it is credited to the Sales Account, it will be termed as an error of principle. Sale of old furniture is a capital receipt. If it is credited to Sales Account, it has been taken as a revenue receipt. Such errors by themselves do not affect the agreement of the Trial Balance. Therefore, they also are difficult to be located.

4. Compensating errors. As the name indicates, compensating errors are those errors which compensate each other. For example, if a sale of Rs 500 to Ram is debited as only of Ps 50 to his account, while a sale of Rs 50 to Shyam is debited as of Rs 500 to his account, it is a compensating error. These errors also do not affect the agreement of the ThaI Balance and, therefore, their location is also difficult.