Rectification of Accounting Errors

Meaning and Concept of Accounting Errors

Accounting errors are the types of errors or mistakes committed while preparing the journal, ledger accounts, or any other financial statements. In other words, accounting errors may be defined as the mistakes generally committed while recording financial transactions in the books of account.

Causes of Accounting Errors

• Lack of accounting knowledge: accounting is based on certain principles, rules, and assumptions. Due to a lack of knowledge of these principles, rules, and assumptions, accounting errors may occur.
• Carelessness: if the person responsible for keeping the books of account is not careful in his/her job, such accounting errors tend to increase.
• Dishonesty: if the person responsible for keeping the books of account is dishonest, he/she may intentionally commit such errors in the books of account to take undue advantage.
• Computer flaws: a modern business keeps its accounts on computer. However, a defective computer programme, or easy access by an unauthorized person to the accounting programme, may also result in accounting errors.
• Ineffective internal check: an ineffective internal check system may also lead to accounting errors. That is, if the existing internal check system is not effective, it may encourage errors rather than prevent them.

Rectification of Accounting Errors

The correction of accounting errors in a systematic manner is called the rectification of errors. In other words, the process of systematically correcting accounting errors is known as rectification of errors.

(a) Rectification of One Sided Errors

An error where only one account, or one side of any account, is affected is called a one sided error.

(i) One sided error located before preparation of the trial balance

These errors can be rectified by directly correcting the affected account. The governing rule is:

• Undercast = correct on the same side (add the missing amount on the account's normal side).
• Overcast = correct on the opposite side (deduct the excess amount by posting on the opposite side).

(ii) One sided error located after preparation of the trial balance

Once the trial balance has already been prepared (and the difference temporarily parked in a Suspense Account so that the trial balance agrees), these errors are rectified by passing a journal entry with the help of the Suspense Account: the Suspense Account is debited or credited as needed, and the affected account is corrected on its proper side through the same entry.

(b) Rectification of Two Sided Errors

Errors that affect two or more accounts at the same time are called two sided errors. These are rectified in three steps:

• Step 1: Write the Correct Entry (CE), that is, the journal entry that should have been passed.
• Step 2: Write the Wrong Entry (WE), that is, the journal entry that was actually passed.
• Step 3: Find the Rectified Entry (RE) = Correct Entry minus Wrong Entry.

In practice, this means: reverse out whatever was wrongly debited/credited in the Wrong Entry, and bring in whatever should have been debited/credited per the Correct Entry, netting off any account (such as Cash) that appears identically in both.

Illustration: Salary of Rs 5,000 was paid but wrongly debited to the Wages Account.

• Correct Entry: Salary A/c Dr 5,000, To Cash A/c 5,000
• Wrong Entry: Wages A/c Dr 5,000, To Cash A/c 5,000
• Rectified Entry (Cash cancels out since it is credited identically in both): Salary A/c Dr 5,000, To Wages A/c 5,000 (being salary paid but wrongly debited to wages account, now rectified).