Rectification Of Error in Financial Accounting

Error is a mistake done in book keeping. The mistake may be done while entering the transactions in the subsidiary books or while posting in the ledger accounts. It becomes of utmost important for the book-keeper and the accountant to locate such errors and rectify them. So that correct profit and financial position of the concern may be ascertained.

Types of errors

1. Errors of principle

An error of principle is an error committed disregarding the fundamentals of book-keeping. An error of principle take place in the following cases.
Treating and expense as an asset – Amount paid for repairing the machinery may be debited to Machinery A/c instead of Repairs A/c
Treating as asset as an expense: Purchase of furniture for office use may be debited to office expenses A/c instead of Furniture A/c
Treating an income as liability: For instance, commission Rs. 10000 received from ABC & Co. may be credited to ABC & Co. A/c instead of commission A/c.

Clerical Errors

Error of omission

Error of omission may be either complete omission or partial omission. A partial omission is making entry in the subsidiary book but not posting in the ledger. When a transaction is completely omitted from the books, it is called complete omission.

Error of commission

It is another type of clerical error. This type of error take place in the following ways;

Errors relating to subsidiary books, they are

Entering wrong amount in the subsidiary books
Entering the transaction in a wrong subsidiary book
Wrong totaling of subsidiary books (Tally won’t do this mistake!)

Errors relating to postings they are

Posting wrong amount on the correct side of an account
Posting the same amount twice to an account
Posting the correct amount tot the wrong side of the correct account
Posting the wrong amount to the wrong side of the correct account
Posting the correct amount to the wrong account but on the correct side.
Posting correct amount to the wrong account and on wrong side.
Posting wrong amount to the wrong account and on the wrong side.
Error in Balancing.

Note: Most of these errors are avoided when using Tally software.

Compensating Errors

These are errors which make up for one another. This means one error canceling the other. For example, a wrong debit may get canceled by wrong credit.

Rectifying the Errors

Errors are always corrected in the books of accounts by means of suitable journal entries. If the correction involves transfer of an amount from one account to another, a journal entry is given. If it is not so, the concerned account may be corrected by debiting or crediting the amount to be corrected.

Suspense Account

There are errors which affect the agreement of the debit balances and credit balances. When such errors are committed, the trial balance does not agree. In such cases, the suspense account is opened. If the debit balances are short, then suspense account will have debit balance and vice versa.

No comments: