Accountants put together trial steadiness to test the correctness of accounts. If whole of debit balances doesn’t agree with the entire of credit score balances, it’s a clear-cut indication that sure errors have been dedicated whereas recording the transactions within the books of unique entry or subsidiary books. It’s our utmost responsibility to find these errors and rectify them, solely then we should always proceed for making ready remaining accounts. We additionally know that each one forms of errors usually are not revealed by trial steadiness as among the errors don’t impact the entire of trial steadiness. So these can’t be situated with the assistance of trial steadiness. An accountant ought to make investments his vitality to find each forms of errors and rectify them earlier than making ready buying and selling, revenue and loss account and steadiness sheet. As a result of if these are ready earlier than rectification these won’t give us the proper end result and revenue and loss disclosed by them, shall not be the precise revenue or loss.
1. Errors of Precept
When a transaction is recorded towards the basic ideas of accounting, it’s an error of precept. For instance, if income expenditure is handled as capital expenditure or vice versa.
2. Clerical Errors
These errors can once more be sub-divided as follows:
(i) Errors of omission
When a transaction is both wholly or partially not recorded within the books, it’s an error of omission. It might be with regard to omission to enter a transaction within the books of unique entry or with regard to omission to publish a transaction from the books of unique entry to the account involved within the ledger.
(ii) Errors of fee
When an entry is incorrectly recorded both wholly or partially-incorrect posting, calculation, casting or balancing. Among the errors of fee impact the trial steadiness whereas others don’t. Errors effecting the trial steadiness will be revealed by making ready a trial steadiness.
(iii) Compensating errors
Generally an error is counter-balanced by one other error in such a approach that it’s not disclosed by the trial steadiness. Such errors are known as compensating errors.
From the standpoint of rectification of the errors, these will be divided into two teams :
(a) Errors affecting one account solely, and
(b) Errors affecting two or extra accounts.
Errors affecting one account
Errors which have an effect on will be :
(a) Casting errors;
(b) error of posting;
(c) carry ahead;
(d) balancing; and
(e) omission from trial steadiness.
Such errors ought to, initially, be situated and rectified. These are rectified both with the assistance of journal entry or by giving an explanatory word within the account involved.
Levels of correction of accounting errors
All forms of errors in accounts will be rectified at two levels:
(i) earlier than the preparation of the ultimate accounts; and
(ii) after the preparation of ultimate accounts.
Errors rectified inside the accounting interval
The correct technique of correction of an error is to go journal entry in such a approach that it corrects the error that has been dedicated and in addition offers impact to the entry that ought to have been handed. However whereas errors are being rectified earlier than the preparation of ultimate accounts, in sure circumstances the correction cannot be performed with the assistance of journal entry as a result of the errors have been such. Usually, the process of rectification, if being performed, earlier than the preparation of ultimate accounts is as follows:
(a) Correction of errors affecting one aspect of 1 account Such errors don’t let the trial steadiness agree as they impact just one aspect of 1 account so these cannot be corrected with the assistance of journal entry, if correction is required earlier than the preparation of ultimate accounts. So required quantity is placed on debit or credit score aspect of the involved account, because the case possibly. For instance:
(i) Gross sales ebook underneath solid by Rs. 500 within the month of January. The error is barely in gross sales account, as a way to appropriate the gross sales account, we should always document on the credit score aspect of gross sales account ‘By underneath casting of. gross sales ebook for the month of January Rs. 500″.I’Clarification:As gross sales ebook was underneath solid by Rs. 500, it means all accounts apart from gross sales account are appropriate, solely credit score steadiness of gross sales account is much less by Rs. 500. So Rs. 500 have been credited in gross sales account.
(ii) Low cost allowed to Marshall Rs. 50, not posted to low cost account. It implies that the quantity of Rs. 50 which ought to have been debited in low cost account has not been debited, so the debit aspect of low cost account has been diminished by the identical quantity. We should always debit Rs. 50 in low cost account now, which was omitted beforehand and the low cost account shall be corrected.
(iil) Items offered to X wrongly debited in gross sales account. This error is effecting solely gross sales account as the quantity which ought to have been posted on the credit score aspect has been wrongly positioned on debit aspect of the identical account. For rectifying it, we should always put double the quantity of transaction on the credit score aspect of gross sales account by writing “By gross sales to X wrongly debited beforehand.”
(iv) Quantity of Rs. 500 paid to Y, not debited to his private account. This error of effecting the private account of Y solely and its debit aspect is much less by Rs. 500 due to omission to publish the quantity paid. We will now write on its debit aspect. “To money (omitted to be posted) Rs. 500.
Correction of errors affecting two sides of two or extra accounts
As these errors have an effect on two or extra accounts, rectification of such errors, if being performed earlier than the preparation of ultimate accounts can typically be performed with the assistance of a journal entry. Whereas correcting these errors the quantity is debited in a single account/accounts whereas related quantity is credited to another account/ accounts.
Correction of errors in subsequent accounting interval
As said earlier, that it’s advisable to find and rectify the errors earlier than making ready the ultimate accounts for the yr. However in sure circumstances when after appreciable search, the accountant fails to find the errors and he’s in a rush to arrange the ultimate accounts, of the enterprise for submitting the return for gross sales tax or revenue tax functions, he transfers the quantity of distinction of trial steadiness to a newly opened ‘Suspense Account’. Within the subsequent accounting interval, as and when the errors are situated these are corrected close to suspense account. When all of the errors are found and rectified the suspense account shall be closed routinely. We should always not neglect right here that solely these errors which impact the totals of trial steadiness will be corrected with the assistance of suspense account. These errors which don’t impact the trial steadiness cannot be corrected with the assistance of suspense account. For instance, whether it is discovered that debit whole of trial steadiness was much less by Rs. 500 given that Wilson’s account was not debited with Rs. 500, the next rectifying entry is required to be handed.
Distinction in trial steadiness
Trial steadiness is affected by solely errors that are rectified with the assistance of the suspense account. Due to this fact, as a way to calculate the distinction in suspense account a desk might be ready. If the suspense account is debited in’ the rectification entry the quantity might be placed on the debit aspect of the desk. Then again, if the suspense account is credited, the quantity might be placed on the credit score aspect of the desk. In the long run, the steadiness is calculated and is reversed within the suspense account. If the credit score aspect exceeds, the distinction could be placed on the debit aspect of the suspense account. Impact of Errors of Remaining Accounts
1. Errors effecting revenue and loss account
You will need to word the impact that an en-or shall have on web revenue of the agency. One level to recollect right here is that solely these accounts that are transferred to buying and selling and revenue and loss account on the time of preparation of ultimate accounts impact the web revenue. It implies that solely errors in nominal accounts and items account will impact the web revenue. Error within the these accounts will both improve or lower the web revenue.
How the errors or their rectification impact the profit-following guidelines are useful in understanding it :
(i) If due to an error a nominal account has been given some debit the revenue will lower or losses will improve, and when it’s rectified the earnings will improve and the losses will lower. For instance, equipment is overhauled for Rs. 10,000 however the quantity debited to equipment repairs account -this error will cut back the revenue. In rectifying entry the quantity shall be transferred to equipment account from equipment repairs account, and it’ll improve the earnings.
(il) If due to an error the quantity is omitted from recording on the debit aspect of a nominal account-it ends in improve of earnings or lower in losses. The rectification of this error shall have reverse impact, which implies the revenue might be diminished and losses might be elevated. For instance, hire paid to landlord however the quantity has been debited to private account of landlord-it will improve the revenue because the expense on hire is diminished. When the error is rectified, we are going to publish the required quantity in hire account which is able to improve the expenditure on hire and so earnings might be diminished.
(iil) Revenue will improve or losses will lower if a nominal account is wrongly credited. With the rectification of this error, the earnings will lower and losses will improve. For instance, investments had been offered and the quantity was credited to gross sales account. This error will improve earnings (or cut back losses) when the identical error is rectified the quantity shall be transferred from gross sales account to investments account as a result of which gross sales might be diminished which is able to end in lower in earnings (or improve in losses).
(iv) Revenue will lower or losses will improve if an account is omitted from posting within the credit score aspect of a nominal or items account. When the identical might be rectified it’s going to improve the revenue or cut back the losses. For instance, fee obtained is omitted to be posted to the credit score of fee account. This error will lower earnings ( or improve losses) as an revenue shouldn’t be credited to revenue and loss account. When the error might be rectified, it’s going to have reverse impact on revenue and loss as an extra revenue might be credited to revenue and loss account so the revenue will improve ( or the losses will lower). If as a result of any error the revenue or losses are effected, it’s going to have its impact on capital account additionally as a result of earnings are credited and losses are debited within the capital account and so the capital shall additionally improve or lower. As capital is proven on the liabilities aspect of steadiness sheet so any error in nominal account will impact steadiness sheet as properly. So we are able to say that an error in nominal account or items account results revenue and loss account in addition to steadiness sheet.
2. Errors effecting steadiness sheet solely
If an error is dedicated in an actual or private account, it’s going to impact property, liabilities, debtors or collectors of the agency and consequently it’s going to have its affect on steadiness sheet alone. as a result of this stuff are proven in steadiness sheet solely and steadiness sheet is ready after the revenue and loss account has been ready. So if there may be any error in money account, checking account, asset or legal responsibility account it’s going to impact solely steadiness sheet.