RECTIFICATION OF ERROR

SOME IMPORTANT TERMS-

Expenditure

Expenditure means the spending of money or incurring a liability for some benefit/ service received by the business entity.

Purchase of machinery, purchase of furniture, payment of salaries, rent, etc., are some examples of expenditure.

Revenue Expenditure –

 If the benefit of an expenditure is limited to one year, it is treated as an expense (also called revenue expenditure) such as payment of salaries and rent.

Capital expenditure-

On the other hand, if the benefit of an expenditure is available for more than one accounting year, it is treated as an asset (also called capital expenditure) such as purchase of furniture and machinery.

Deferred Revenue Expenditure –

The term deferred means “postponement”.

Deferred revenue expenditure is the expenditure that is written off( charged) in more than one accounting period because the benefit of such expenditure will accrue in more than one accounting year.

ERRORS

When the Trial Balance does not tally, it means there are errors in the books of account. These errors must be detected and rectified before preparing the final accounts, otherwise they will not reflect a true and fair view of the state of affairs of the business.

Errors are of two types-

1. Errors of Principle
2. Clerical Errors

                 (i) errors of omission,

                 (ii) errors of commission

                 (iii) compensating errors

Errors of principle

When a transaction has not been recorded as per the rules of debit and credit, or it violates some other principle, the errors so arising are called 'errors of principle'.

Example-

1. Assets recorded as expenses
2. Expenses recorded as assets
3. Expenses taken to personal account .

1. Errors of omission

?When a transaction is completely or partially omitted to be recorded in books of account, it is called  'error of omission.

 If the transaction is not recorded in the subsidiary books or its posting is completely omitted, it is called an 'error complete omission'.

If, however, the posting is done in one account but omitted from the other, it is called an 'errors of partial omission'.

The errors of complete omission do not affect the Trial Balance. But the errors of partial omission would certainly cause disagreement of the Trial Balance because they would lead to either short debit or short credit.

ii. Errors of Commission-

When an error is committed in recording a transaction with wrong amount, or posting it to a wrong account or the wrong side of an account, it is called an 'error of commission'.

Errors like double posting, wrong totaling, wrong carry forward, wrong balancing etc. are also regarded as errors of commission. Such errors usually cause disagreement in the Trial Balance.

But, the errors committed while recording the transaction in subsidiary books or posting it to a wrong amount (but with correct amount and on the correct side) do not affect the Trial Balance.

Compensatory Errors –

Those errors which nullify the effect of each other are called 'compensating errors'. In other words, compensating errors refer to such a group of errors wherein the effect of one error is compensated by the effect of other error or errors. They cancel out of the effect of each other. Such errors do not affect the Trial Balance.

Locating the Errors –

• The errors such as errors of principle, errors of complete omission and errors of compensating nature which do not affect the Trial Balance are difficult to locate.
• They are usually found out during the course of audit or when the statement of accounts is received by the business or sent to customers for confirmation.
• However, the location of errors of omission and commission which affect the Trial Balance is not so difficult.

The rectification should not be made by overwriting or by striking off the wrong entry. This would destroy the authenticity of the books of account.

For purposes of rectification the errors are divided into two categories:

1. one-sided errors
2. two-sided errors.

One-sided Errors:

Certain errors affect only one side bf an account, either the debit side or the credit side. Such errors are called 'one-sided errors'.

Two-sided Errors:

 Certain errors may affect two or more accounts. Such errors are called 'two-sided errors'.

1. Error of recording
2. Error of posting to wrong amount
3. Error of principle
4. Error of complete Omission

Suspense Account –

This method is used for rectifying the errors located before preparing the final accounts.

If the trial balance does not tally, it means there are still some errors which have not been detected.

Hence, in such a situation the usual practice is to place the difference to Suspense Account and tally the Trial Balance for the time being.

Effect of Rectifying entries on profits-

The profit is affected only if the errors involve accounts which usually appear in the Trading and Profit and Loss Account (nominal accounts) and not those which appear in the Balance Sheet (real and personal accounts).