Accountants prepare the trial balance to verify the accuracy of the accounts. If the total of the debit balances does not agree with the total of the credit balances, it is a clear indication that certain errors have been made when recording the transactions in the original entry books or subsidiary books. It is our greatest duty to locate these errors and correct them, only then should we proceed to the preparation of the final accounts. We also know that the trial balance does not reveal all types of errors, as some of the errors do not affect the total trial balance. Therefore these cannot be located with the help of the trial balance. An accountant must invest his energy in locating both types of errors and rectifying them before preparing the profit and loss account and balance sheet. Because if these are prepared before rectification, they will not give us the correct result and the gains and losses disclosed by them will not be the actual gains or losses.
All accounting procedure errors 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 income expenses are treated as capital expenses or vice versa.
2. Administrative errors
These errors can be subdivided again as follows:
(i) Errors of omission
When a transaction is not fully or partially recorded in the books, it is an error of omission. It may be in respect of the failure to enter a transaction in the original journal entries or in respect of the failure to record a transaction in the original journal entries in the account in question in the general ledger.
(ii) Commission errors
When an entry is incorrectly posted, either fully or partially incorrect posting, calculation, conversion, or balancing. Some of the commission errors affect the trial balance, while others do not. Errors affecting the trial balance can be revealed by preparing a trial balance.
(iii) Compensation for errors
Sometimes an error is offset by another error in such a way that the trial balance does not reveal it. These errors are called offset errors.
From the point of view of correcting errors, these can be divided into two groups:
(a) Errors that affect only one account, and
(b) Errors that affect two or more accounts.
Errors affecting an account
The errors that affect can be:
(a) Launch errors;
(b) publication error;
(c) carryover;
(d) balance; and
(e) omission of trial balance.
Such errors must first be located and rectified. These are rectified with the help of a journal entry or by giving an explanatory note in the corresponding account.
Correction
Stages of correction of accounting errors.
All kinds of errors in the accounts can be rectified in two stages:
(i) before the final accounts are prepared; and
(ii) after the preparation of the final accounts.
Errors rectified within the accounting period
The proper method of correcting an error is to pass the journal entry in such a way that it corrects the error that was made and also gives effect to the entry that should have been passed. But while the errors are rectified before the preparation of the final accounts, in certain cases the correction cannot be made with the help of journal entries because the errors have been such. Normally, the rectification procedure, if carried out, before the final accounts are prepared is as follows:
(a) Correction of errors that affect one side of an account These errors do not allow the trial balance to agree, since they affect only one side of an account, so they cannot be corrected with the help of an entry in the journal, if correction is required before the preparation of final accounts. Therefore, the required amount is placed on the debit or credit side of the account in question, as the case may be. For instance:
(i) Book of sales below the distribution for Rs 500 in the month of January. The error is only in the sales account, to correct the sales account, we must record on the credit side of the sales account ‘By under casting of. sales book for the month of January Rs. 500. “Explanation: As the sales book was below Rs. 500, it means that all accounts except the sales account are correct, only the credit balance of the sales account is less than Rs. 500 So they have been credited 500 rupees to the sales account.
(ii) Discount allowed to Marshall Rs.50, not posted to the discount account. It means that the amount of Rs 50 that should have been debited from the discount account has not been debited, so the debit side of the discount account has been reduced by the same amount. We should debit Rs 50 from the discount account now, which was skipped above and the discount account will be corrected.
(iil) Goods sold to X unduly charged to the sales account. This error affects only the sales account, as the amount that should have been posted on the credit side has been incorrectly placed on the debit side of the same account. To rectify this, we should put double the transaction amount on the credit side of the sales account by writing “For sales to X incorrectly charged previously”.
(iv) Rs 500 amount paid to Y, not debited from his personal account. This error of making the personal account of Y alone and its debit side is less by Rs.500 due to the failure to account for the amount paid. We will now write on your debit side. “To collect (omitted to be accounted for) Rs. 500.
Correction of errors that affect two sides of two or more accounts.
As these errors affect two or more accounts, rectification of these errors, if done before the final accounts are prepared, can often be done with the help of a journal entry. While these errors are being corrected, the amount is debited to one account / accounts, while a similar amount is credited to other accounts / accounts.
Correction of errors in the next accounting period
As indicated above, it is advisable to locate and correct errors before preparing the final accounts for the year. But in certain cases, when after considerable searching, the accountant fails to locate errors and is in a rush to prepare the firm’s final accounts for filing for sales tax or income tax purposes, he transfers the Trial balance difference amount to a newly opened ‘Suspended Account’. In the next accounting period, as errors are found, they are corrected with reference to the suspense account. When all errors are discovered and rectified, the suspense account will be automatically closed. We must not forget here that only those errors that affect the trial balance totals can be corrected with the help of the suspense account. Those errors that do not affect the trial balance cannot be corrected with the help of the suspense account. For example, if the total debit of the trial balance is found to be less than Rs. 500 for the reason that Rs. 500 was not debited from Wilson’s account, the next rectification entry is required to be passed.
Difference in trial balance
The trial balance is affected only by errors that are rectified with the help of the suspense account. Therefore, to calculate the difference in transitory account, a table will be prepared. If the suspense account is debited on the rectification entry, the amount will be placed on the debit side of the table. On the other hand, if the temporary account is credited, the amount will be placed on the credit side of the table. In the end, the balance is calculated and reversed in the suspense account. If the credit side exceeds, the difference will be placed on the debit side of the suspense account. Effect of errors in the final accounts
1. Errors affecting the profit and loss account
It is important to consider the effect that an in-or will have on the net profit of the company. One point to remember here is that only those accounts that are transferred to the profit and loss account at the time of final accounts preparation affect the net profit. It means that only the errors in the nominal accounts and in the property account will affect the net profit. The error in these accounts will increase or decrease the net profit.
How errors or their rectification affect the profit tracking rules is helpful to understand:
(i) If due to an error a nominal account has been debited, the profit will decrease or the losses will increase, and when it is rectified the profits will increase and the losses will decrease. For example, the machinery is reconditioned for 10,000 rupees, but the amount owed to the machinery repair account, this error will reduce the profit. In the rectification of the entry, the amount will be transferred to the machinery account of the machinery repair account and profits will be increased.
(il) If due to an error, the amount is omitted from the record on the debit side of a nominal account, there is an increase in profit or a decrease in loss. Rectification of this error will have an inverse effect, which means that profit will be reduced and losses will increase. For example, rent paid to the landlord but the amount was debited from the landlord’s personal account; profit will increase as rental costs are reduced. When the error is rectified, we will post the required amount to the rental account, which will increase the rental expense and therefore reduce the profit.
(iil) Profit will increase or losses will decrease if a nominal account is incorrectly credited. With the rectification of this error, the profits will decrease and the losses will increase. For example, the investments were sold and the amount was credited to the sales account. This error will increase profits (or reduce losses) when the same error is rectified, the amount will be transferred from the sales account to the investment account, so the sales will be reduced resulting in a decrease in profits ( or increased losses).
(iv) Profits will decrease or losses will increase if the posting of an account on the credit side of a nominal or property account is omitted. When the same is rectified, it will increase profit or reduce losses. For example, the commission received is skipped and posted to the commission account credit. This error will decrease profits (or increase losses) as the income is not credited to the profit and loss account. When the error is corrected, it will have a reverse effect on profit and loss, as additional income will be credited to the profit and loss account, thus the profit will increase (or the losses will decrease). If by some mistake the losses or gains are made, it will have its effect on the capital account also because the gains are credited and the losses are charged to the capital account and thus the capital will also increase or decrease. Since principal is shown on the liability side of the balance sheet, any errors in the nominal account will affect the balance sheet as well. Therefore, we can say that an error in the nominal account or in the property account affects both the loss account and the balance sheet.
2. Errors that only affect the balance sheet
If a mistake is made in a real or personal account, it will affect the assets, liabilities, debtors or creditors of the company and as a result it will have its impact only on the balance sheet. because these items are shown only on the balance sheet and the balance sheet is prepared after the profit and loss account has been prepared. So if there is any error in the cash account, bank account, asset or liability account, it will only affect the balance sheet.