Rectification Of Accounting Errors

Accountants prepare trial balance to check the correctness of accounts. If total of debit balances does not agree with the total of credit balances, it is a clear-cut indication that certain errors have been committed while recording the transactions in the books of original entry or subsidiary books. It is our utmost duty to locate these errors and rectify them, only then we should proceed for preparing final accounts. We also know that all types of errors are not revealed by trial balance as some of the errors do not effect the total of trial balance. So these cannot be located with the help of trial balance. An accountant should invest his energy to locate both types of errors and rectify them before preparing trading, profit and loss account and balance sheet. Because if these are prepared before rectification these will not give us the correct result and profit and loss disclosed by them, shall not be the actual profit or loss.

All errors of accounting procedure can be classified as follows:

1. Errors of Principle

When a transaction is recorded against the fundamental principles of accounting, it is an error of principle. For example, if revenue expenditure is treated as capital expenditure or vice versa.

2. Clerical Errors

These errors can again be sub-divided as follows:

(i) Errors of omission

When a transaction is either wholly or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of original entry or with regard to omission to post a transaction from the books of original entry to the account concerned in the ledger.

(ii) Errors of commission

When an entry is incorrectly recorded either wholly or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission effect the trial balance whereas others do not. Errors effecting the trial balance can be revealed by preparing a trial balance.

(iii) Compensating errors

Sometimes an error is counter-balanced by another error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.

From the point of view of rectification of the errors, these can be divided into two groups :

(a) Errors affecting one account only, and

(b) Errors affecting two or more accounts.

Errors affecting one account

Errors which affect can be :

(a) Casting errors;

(b) error of posting;

(c) carry forward;

(d) balancing; and

(e) omission from trial balance.

Such errors should, first of all, be located and rectified. These are rectified either with the help of journal entry or by giving an explanatory note in the account concerned.


Stages of correction of accounting errors

All types of errors in accounts can be rectified at two stages:

(i) before the preparation of the final accounts; and

(ii) after the preparation of final accounts.

Errors rectified within the accounting period

The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. But while errors are being rectified before the preparation of final accounts, in certain cases the correction can't be done with the help of journal entry because the errors have been such. Normally, the procedure of rectification, if being done, before the preparation of final accounts is as follows:

(a) Correction of errors affecting one side of one account Such errors do not let the trial balance agree as they effect only one side of one account so these can't be corrected with the help of journal entry, if correction is required before the preparation of final accounts. So required amount is put on debit or credit side of the concerned account, as the case maybe. For example:

(i) Sales book under cast by Rs. 500 in the month of January. The error is only in sales account, in order to correct the sales account, we should record on the credit side of sales account 'By under casting of. sales book for the month of January Rs. 500".I'Explanation:As sales book was under cast by Rs. 500, it means all accounts other than sales account are correct, only credit balance of sales account is less by Rs. 500. So Rs. 500 have been credited in sales account.

(ii) Discount allowed to Marshall Rs. 50, not posted to discount account. It means that the amount of Rs. 50 which should have been debited in discount account has not been debited, so the debit side of discount account has been reduced by the same amount. We should debit Rs. 50 in discount account now, which was omitted previously and the discount account shall be corrected.

(iil) Goods sold to X wrongly debited in sales account.

This error is effecting only sales account as the amount which should have been posted on the credit side has been wrongly placed on debit side of the same account.

For rectifying it, we should put double the amount of transaction on the credit side of sales account by writing "By sales to X wrongly debited previously."

(iv) Amount of Rs. 500 paid to Y, not debited to his personal account. This error of effecting the personal account of Y only and its debit side is less by Rs. 500 because of omission to post the amount paid. We shall now write on its debit side. "To cash (omitted to be posted) Rs. 500.

Correction of errors affecting two sides of two or more accounts

As these errors affect two or more accounts, rectification of such errors, if being done before the preparation of final accounts can often be done with the help of a journal entry. While correcting these errors the amount is debited in one account/accounts whereas similar amount is credited to some other account/ accounts.

Correction of errors in next accounting period

As stated earlier, that it is advisable to locate and rectify the errors before preparing the final accounts for the year. But in certain cases when after considerable search, the accountant fails to locate the errors and he is in a hurry to prepare the final accounts, of the business for filing the return for sales tax or income tax purposes, he transfers the amount of difference of trial balance to a newly opened 'Suspense Account'. In the next accounting period, as and when the errors are located these are corrected with reference to suspense account. When all the errors are discovered and rectified the suspense account shall be closed automatically. We should not forget here that only those errors which effect the totals of trial balance can be corrected with the help of suspense account. Those errors which do not effect the trial balance can't be corrected with the help of suspense account. For example, if it is found that debit total of trial balance was less by Rs. 500 for the reason that Wilson's account was not debited with Rs. 500, the following rectifying entry is required to be passed.

Difference in trial balance

Trial balance is affected by only errors which are rectified with the help of the suspense account. Therefore, in order to calculate the difference in suspense account a table will be prepared. If the suspense account is debited in' the rectification entry the amount will be put on the debit side of the table. On the other hand, if the suspense account is credited, the amount will be put on the credit side of the table. In the end, the balance is calculated and is reversed in the suspense account. If the credit side exceeds, the difference would be put on the debit side of the suspense account.

Effect of Errors of Final Accounts

1. Errors effecting profit and loss account

It is important to note the effect that an en-or shall have on net profit of the firm. One point to remember here is that only those accounts which are transferred to trading and profit and loss account at the time of preparation of final accounts effect the net profit. It means that only mistakes in nominal accounts and goods account will effect the net profit. Error in the these accounts will either increase or decrease the net profit.

How the errors or their rectification effect the profit-following rules are helpful in understanding it :

(i) If because of an error a nominal account has been given some debit the profit will decrease or losses will increase, and when it is rectified the profits will increase and the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but the amount debited to machinery repairs account -this error will reduce the profit. In rectifying entry the amount shall be transferred to machinery account from machinery repairs account, and it will increase the profits.

(il) If because of an error the amount is omitted from recording on the debit side of a nominal account-it results in increase of profits or decrease in losses. The rectification of this error shall have reverse effect, which means the profit will be reduced and losses will be increased. For example, rent paid to landlord but the amount has been debited to personal account of landlord-it will increase the profit as the expense on rent is reduced. When the error is rectified, we will post the necessary amount in rent account which will increase the expenditure on rent and so profits will be reduced.

(iil) Profit will increase or losses will decrease if a nominal account is wrongly credited. With the rectification of this error, the profits will decrease and losses will increase. For example, investments were sold and the amount was credited to sales account. This error will increase profits (or reduce losses) when the same error is rectified the amount shall be transferred from sales account to investments account due to which sales will be reduced which will result in decrease in profits (or increase in losses).

(iv) Profit will decrease or losses will increase if an account is omitted from posting in the credit side of a nominal or goods account. When the same will be rectified it will increase the profit or reduce the losses.

For example, commission received is omitted to be posted to the credit of commission account. This error will decrease profits ( or increase losses) as an income is not credited to profit and loss account. When the error will be rectified, it will have reverse effect on profit and loss as an additional income will be credited to profit and loss account so the profit will increase ( or the losses will decrease).

If due to any error the profit or losses are effected, it will have its effect on capital account also because profits are credited and losses are debited in the capital account and so the capital shall also increase or decrease. As capital is shown on the liabilities side of balance sheet so any error in nominal account will effect balance sheet as well. So we can say that an error in nominal account or goods account effects profit and loss account as well as balance sheet.

2. Errors effecting balance sheet only

If an error is committed in a real or personal account, it will effect assets, liabilities, debtors or creditors of the firm and as a result it will have its impact on balance sheet alone. because these items are shown in balance sheet only and balance sheet is prepared after the profit and loss account has been prepared. So if there is any error in cash account, bank account, asset or liability account it will effect only balance sheet.


Proprietor of HiTech Computer Services, Anil Kumar Gupta, Bachelor of Engineering (Hons.) in Electrical and Electronics Engineering from Birla Institute of Technology and Science, Pilani, India, Year of passing : May, 1985, is born on January 7, 1964 , Age : 40+, and is Indian national. Services Offered by HiTech Computer Services : Standard software for various business segments, Customized Software Development, Websites and web based ASP applications development, Financial Accounting and...

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Have a question for Anil?

18th August 2014 5:56am

Alex Fleming Marak
27th October 2014 12:44pm
sir could you help me solve this rectifying problem..
1. Goods purchased from ram for Rs. 3000 were recorded in sales book by mistake.
2. goods for Rs. 4000 sold to anil were passed through purchase book.
3. a Customer returned goods worth Rs. 1500. It was recorded in 'purchase return book'.
4. a credit sale of Rs. 126 to mohan was entered in the books as Rs 162.
5. sale of old tables for Rs. 650 was treated ad sales of goods.
6. rent of proprietor's residence Rs. 1000 debited to rent A/c.

1st January 2015 2:35pm
suspence account in trail balance where do post in final accounts.. (a).trading account (b)p&l account (c).balance sheet (d).cash flow statement.

2nd January 2015 6:31am
dear sir,
investment not mentioned in balance sheet in the balance sheet
how to right the entry , if its time of revaluation time in partnership

sana shah
12th February 2015 11:10am
how to solve errors n rectification sums in tabular form????

gaurav kaushik
7th May 2015 8:34am
After trial balance ka errors's I don't understand his journal entries please suggest how to make journal entry

5th June 2015 9:37am
In which book do we record the final accounts

5th June 2015 9:44am
sold goods to S Frank $100, entered in S Franco's account. how do we correct this error in the journal

prince verma
11th June 2015 9:08am
Cash found short by Rs. 1000 at the time of cash counting.

Sreenivasulu g
2nd July 2015 12:06pm
How to find out rectification of errors

Muskan anand
8th August 2015 4:14am
Sir i have a questions pls solve this..
1 Discount allowed to customer Riya Rs 100 not posted to her account
2 Rent paid to landloard Ms. Vidhi Rs 10000 debited to her account
3 Goods return to tanya Rs 500 entered in sales return book
4 Goods taken by owner Rs 2000 Not recorded any where

12th August 2015 1:29pm
Why rectification of error is necessary?

Varun M
17th September 2015 2:44am
Sir, to which accounts will be the entries posted when errors are rectified after the preparation of trial balance and before balance sheet? We can't post it to their original accounts as they are already closed, isn't it? Please help me with this doubt, sir. Thank you.

vinod kumar
21st December 2015 9:55pm
I am an employee in a travel company whereby I keep taking money as advance for Visa Processing to deposit clients cases and when the job is done , the cash is collected by the office from the client by billing direct . They get a stamped voucher signed from me when I take the money but just write on the back of the bill that the amount adjusted given before. My question is that this way , legally , they are debiting me on books but writing it off from books when such payment is realized from ... Read More

11th April 2016 4:07pm
can u solve these entries for me,?
1. commision account debit balance RS. 2430 was not transferred to the trial balance
2. The total of the sales book RS. 3480 was not entered in the sales account.

15th April 2016 1:52am
What would be the accounting treatement for under casting of amount in the pass book when bank reconciliation statement is made as per cash book.

5th September 2016 1:10pm
Sri agarwal could not agree the trial balance he transferred oto suspense account of rs296 debit side
A. Sales day book over cast by 300 amout rs 55 received from sri y was posted his account rs 550
C.purchase return book total on folio carried forward rs 221 instead rs 112
D.a car sales rs 1235 duly entered in cash book but posted to sales account as 235 difference wrong total in salaries account
Rectifie and prepare suspense account

muungani esther b
25th September 2016 9:25am
a car held as a none current asset had been sold during the year for $4800.The proceeds from the sale were entered in the cashbook but had not been credited to the sale account in the general ledger .The original cost of the car $12 000,and the accumulated depreciationto date $80000 were included in the motor van acount and the accumulated depreciation .The company depreciates motor vehicles at 25% per annum on a straight line basis with proportionate depreciation in the year of purchase but ... Read More

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