Accounting is a field that needs more accuracy to ensure its operations run smoothly. Commonly, several errors can occur for various reasons. To rectify these errors, we have to take specific actions. Before that, we need to know the types of errors that can pop up. In this blog, we will discuss every error and how to rectify them in detail.
What is Rectification Of Errors in Accounting?
Rectifying errors is a very important process because financial records are updated time to time; as a result, there is an increased chance of omissions, miscalculations, and misinterpretations that can lead to various errors. These errors may be classified into errors of omission, commission, principle, or compensating errors. The rectification process includes analyzing trial balances, ledgers, and journals, followed by passing journal entries. This process will ensure stakeholder trust and thereby sustain the organization’s integrity.
Possible Errors in Accounting
Errors in Accounting can be classified into 2 types. They are listed below:
Errors That Do Not Affect The Trial Balance
These types of errors will not affect the trial balance, but we still have to correct them to make accurate financial records.
- Errors of Commission: If you enter your transaction incorrectly, the wrong transaction will be recorded, leading to more confusion.
- Errors of Principle: If you record a transaction that is against the accounting principles, such as making a capital expense a revenue expense.
- Errors of Omission: If a transaction is omitted from the books or not entered on time, this error will occur.
- Compensating Errors: These are errors that naturally compensate each other.
Errors that affect the trial balance
These are the errors that affect the trial balance directly and need rectification at the earliest.
- Omission of Transactions: If a required transaction is omitted from the financial records, it will affect the credibility of the economic data.
- Incorrect Balances: Discrepancies in financial statements may occur when errors are made in carrying forward balances from one period to another.
- Wrong Posting: If you record a transaction in the wrong ledger account, it will cause imbalances in the financial records.
Several Methods of Rectification of Errors in Accounting
There are several methods for rectifying errors. They are shown below:
Rectifying Errors Before the Preparation of the Trial Balance
If any errors have occurred before the trial balance is prepared, they can be corrected directly in the book of accounts. Since these errors are caught early, they will not affect the trial balance.
We can directly correct the ledger if any errors arise.
- If it is a single-sided error, then the error affects only one account; you can correct it by adding an entry or striking out the incorrect entry and posting the correct one.
- Example: You have purchased something for 400Rs, but you just recorded 40 Rs instead of 400Rs in the purchase account. You can correct it by adding the remaining 360 Rs to the purchase account.
Purchase A/c – Dr Rs 360
To Cash / Bank A/c – Cr Rs 360
- If it is a double-sided error, it affects both the credit and debit sides.
- Example: You owe Ravi 200 Rs, and you paid Ravi 200 Rs one day. But you made a mistake: you debited the sales account instead of Ravi’s creditor account in the records. (At present, you have already paid Ravi, but the mistake happened in the records only.) So the sales account was 200 Rs. less in the records, and Ravi was not credited as per the accounting entry. (even though you have paid Ravi). So both errors have to be corrected. For that, you have to undo the debit in the sales account and put it into Ravi’s account.
Creditors A/c – Dr Rs 200
To Sales A/c – Cr Rs 200
Rectifying Error After The Preparation Of the Trial Balance
The errors that are popping up after preparing the trial balance may or may not affect it.
- Those errors that will not affect the trial balance because both the debit and credit are affected at the same time. One example is an Error of Omission.
- Example: If a particular sale of goods worth 1000 Rs occurred and you were told they would pay you later, but this action was forgotten to add to the books, an error of omission occurred.
- To correct that, add the money debited from debtors; your sales account is credited by 1000 Rs.
Cash / Debtors A/c – Dr Rs 1000
To Sales A/c – Cr Rs 1000
- Errors that affect the trial balance, such as one-sided transactions with only debit or credit entries, are rectified using a suspense account.
Rectifying Errors With The Help Of Adjusting Entries
When preparing final accounts, some errors can be corrected by making adjusting entries at the end of the accounting period. Errors in revenue or expenses can affect the profit and loss account/balance sheet.
- If you forgot to add the depreciation of 600, adjust by.
Depreciation Expense Account – Dr 600
Accumulated depreciation Account – Cr 600
So you can adjust the account’s profit and losses accordingly. To know more about this, join the best accounting courses available in the industry.
Rectification of Errors Through Subsequent Accounting Periods
There will be some errors shown in the next accounting period. These errors can be corrected through the profit and loss adjustment account or directly in the affected accounts.
Example: If sales of Rs 2,000 were overstated in the previous year, correct by:
Sales A/c – Dr Rs 2000
To Profit & Loss A/c – Cr Rs 2000
Suppose your actual sales last year were ₹8,000,
But you accidentally recorded ₹10,000.
Now, your books show an extra ₹2,000 in income.
To fix that:
Debit Sales ₹2,000 → reduces sales to ₹8,000
Credit Profit & Loss ₹2,000 → reduces profit to the true figure.
Rectifying Errors Through Reversal & Restatement
In the case of prior-period financial statement errors, rectification can be achieved by reversing the incorrect entries and restating the financial statements.
If an asset was overstated by Rs 5000 due to an error, reverse it:
Asset A/c – Dr Rs 5,000
To Retained Earnings A/c – Cr Rs 5000
Suppose you bought a computer for 50000 Rs, but in your records, you put it as Rs 55000. So we can correct this by reversing the extra 5000 to the asset account, and thereby changing the retained earnings account. As your previously recorded profit was very high, you reduced it in retained earnings.
Merits Of Rectification Of Errors In Accounting
There are several merits of the rectification process of errors. They are:
- We can accurately report financial data.
- Stakeholders can take well-informed decisions about business strategies.
- Rectification ensures compliance with accounting standards and regulations.
- The credibility of financial statements will increase.
- Removes the chance for future errors.
- This process will keep consistency in accounting records.
Conclusion
To ensure the accuracy and reliability of financial information, it is essential to identify errors in the records. We can implement each of the methods discussed above to correct those errors. We have also learnt how each error affects trial balances. It is the responsibility of a citizen to rectify mistakes in financial statements and provide credibility to each financial statement. So that businesses can provide reliable financial information to stakeholders to support effective financial decisions. To learn more about these errors, join finprov- a trusted accounting training institute in Kerala.
FAQs
1. What is Rectification meant in Accounting?
Rectification is the process of correcting the mistakes in accounting records to ensure financial accuracy.
2. What are the advantages of rectifying errors in accounting?
Rectifying errors will ensure accurate financial data and eliminate the possibility of future errors.
3. What are the errors of Omission?
Transactions that are entirely or partially unrecorded are called errors of omission.
4. What are the causes of accounting errors?
Accounting errors result from accidental mistakes while recording journal entries, matching them, or preparing financial reports.
5. Why is Rectification of Errors important?
Rectifying accounting errors is important because it enhances financial credibility, enabling businesses to make critical financial decisions wisely.
