It is very important to record and keep a track of every single monetary action that is performed in some particular business organization. this problem may arise in case some events might not be recorded or may be recorded under the wrong head etc. therefore, to correct them, a rectification process needs to be followed. This process of correcting the errors in the financial statements is known as the Rectification of Errors.
The stages at which the errors can be detected
The errors in the financial statements may be located:
- Before preparing a trial balance
- After the trial balance is prepared and before the final accounts
- After preparing the final accounts
Types of Errors
There are various types of errors. These are categorized on the basis of nature and effects.
On the basis of nature
Under this head, there are further 4 types of errors.
Error of Omission
This type of error occurs when a complete or partial transaction or record has been omitted. If some record is maintained in the subsidiary book and is mistakenly missed in the ledger accounts, then it is a case of partial omission. But, it some transaction happened and has totally not added up in the books, then it can be said as the complete omission case.
Error of Commission
There are some acts of commission that means the entries have been made in a journal or the ledger. These can be - posting the error, casting error, wrong amounts or transaction in the wrong subsidiary book.
Error of Principle
Because the accounting principles have not been used correctly, therefore, there are high chances for this to occur. Since the capital and revenue items are not explained properly. Hence, it is the biggest reasons for the errors to occur. The agreement of the trial balance will not be affected by the error of the principle.
If one error cancels the effect of the other error, they are known as compensating errors. Since the whole effect of the two errors is canceled out, therefore, the trial balance doesn’t get affected. Hence, it becomes difficult to search for errors.
On the basis of effects
In this type of error, the effect occurs only on one account. This may be because of:
- Wrong recording in the books
- Posted the entry on the wrong side of the account
- Double posting of the same amount
These errors if occurred cause issues in the disagreement of the trial balance. Therefore, they are easy to search and work.
The two-sided error may be:
Affecting the two accounts in the same direction or that in the opposite direction.
More than two-sided errors
An error that affects more than two accounts simultaneously is more than two-sided errors. This sometimes may or may not affect the trial balance.
Methods to rectify the errors
The errors that are located at the time of closing the accounting books for that particular cycle and before the preparation of the trial balance. These errors may be either one-sided or two-sided errors. Once, you are aware of the errors it is important to rectify them.
The one-sided errors can be rectified by passing another additional entry on the affected side of the ledger.
In order to rectify the two-sided errors, following are the steps:
- Identify correct entry
- Rewrite wrong entry
- Find rectifying entry by making an adjustment of correct entry and wrong entry
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