Accountants put together trial steadiness to verify 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 is our utmost responsibility to find these errors and rectify them, solely then we must always proceed for getting ready last accounts. We additionally know that each one varieties of errors aren't revealed by trial steadiness as a number of the errors don't impact the entire of trial steadiness. So these can't be positioned with the assistance of trial steadiness. An accountant ought to make investments his vitality to find each varieties of errors and rectify them earlier than getting ready buying and selling, revenue and loss account and steadiness sheet. Because if these are ready earlier than rectification these is not going to give us the proper end result and revenue and loss disclosed by them, shall not be the precise revenue or loss.
All errors of accounting process might be categorised as follows:
1. Errors of Principle
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 could also 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. Some of the errors of fee impact the trial steadiness whereas others don't. Errors effecting the trial steadiness might be revealed by getting ready a trial steadiness.
(iii) Compensating errors
Sometimes an error is counter-balanced by one other error in such a manner that it isn't disclosed by the trial steadiness. Such errors are known as compensating errors.
From the viewpoint of rectification of the errors, these might 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 might be :
(a) Casting errors;
(b) error of posting;
(c) carry ahead;
(d) balancing; and
(e) omission from trial steadiness.
Such errors ought to, to start with, be positioned and rectified. These are rectified both with the assistance of journal entry or by giving an explanatory observe within the account involved.
Stages of correction of accounting errors
All varieties of errors in accounts might 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 move journal entry in such a manner that it corrects the error that has been dedicated and in addition provides impact to the entry that ought to have been handed. But whereas errors are being rectified earlier than the preparation of ultimate accounts, in sure instances the correction cannot be accomplished with the assistance of journal entry as a result of the errors have been such. Normally, the process of rectification, if being accomplished, 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) Sales e-book below forged by Rs. 500 within the month of January. The error is barely in gross sales account, in an effort to right the gross sales account, we must always document on the credit score aspect of gross sales account ‘By below casting of. gross sales e-book for the month of January Rs. 500″.I'Explanation:As gross sales e-book was below forged by Rs. 500, it means all accounts aside from gross sales account are right, 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) Discount 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 ought to debit Rs. 50 in low cost account now, which was omitted beforehand and the low cost account shall be corrected.
(iil) Goods bought 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 must 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) Amount of Rs. 500 paid to Y, not debited to his private account. This error of effecting the non-public account of Y solely and its debit aspect is much less by Rs. 500 due to omission to publish the quantity paid. We shall 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 accomplished earlier than the preparation of ultimate accounts can typically be accomplished with the assistance of a journal entry. While 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 getting ready the ultimate accounts for the 12 months. But in sure instances 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 earnings tax functions, he transfers the quantity of distinction of trial steadiness to a newly opened ‘Suspense Account'. In the subsequent accounting interval, as and when the errors are positioned these are corrected on the subject of suspense account. When all of the errors are found and rectified the suspense account shall be closed mechanically. We shouldn't overlook right here that solely these errors which impact the totals of trial steadiness might be corrected with the assistance of suspense account. Those 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.
Difference in trial steadiness
Trial steadiness is affected by solely errors that are rectified with the assistance of the suspense account. Therefore, in an effort to calculate the distinction in suspense account a desk will probably be ready. If the suspense account is debited in' the rectification entry the quantity will probably be placed on the debit aspect of the desk. On the opposite hand, if the suspense account is credited, the quantity will probably be placed on the credit score aspect of the desk. In the top, the steadiness is calculated and is reversed within the suspense account. If the credit score aspect exceeds, the distinction can be placed on the debit aspect of the suspense account. Effect of Errors of Final Accounts
1. Errors effecting revenue and loss account
It is vital to notice the impact that an en-or shall have on internet 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 enhance 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 enhance, and when it's rectified the earnings will enhance 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 enhance the earnings.
(il) If due to an error the quantity is omitted from recording on the debit aspect of a nominal account-it leads to enhance of earnings or lower in losses. The rectification of this error shall have reverse impact, which suggests the revenue will probably be diminished and losses will probably be elevated. For instance, hire paid to landlord however the quantity has been debited to private account of landlord-it will enhance the revenue because the expense on hire is diminished. When the error is rectified, we'll publish the required quantity in hire account which can enhance the expenditure on hire and so earnings will probably be diminished.
(iil) Profit will enhance or losses will lower if a nominal account is wrongly credited. With the rectification of this error, the earnings will lower and losses will enhance. For instance, investments had been bought and the quantity was credited to gross sales account. This error will enhance earnings (or cut back losses) when the identical error is rectified the quantity shall be transferred from gross sales account to investments account because of which gross sales will probably be diminished which can end in lower in earnings (or enhance in losses).
(iv) Profit will lower or losses will enhance if an account is omitted from posting within the credit score aspect of a nominal or items account. When the identical will probably be rectified it'll enhance 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 enhance losses) as an earnings isn't credited to revenue and loss account. When the error will probably be rectified, it'll have reverse impact on revenue and loss as a further earnings will probably be credited to revenue and loss account so the revenue will enhance ( or the losses will lower). If because of any error the revenue or losses are effected, it'll 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 enhance or lower. As capital is proven on the liabilities aspect of steadiness sheet so any error in nominal account will impact steadiness sheet as nicely. 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'll impact belongings, liabilities, debtors or collectors of the agency and in consequence it'll have its impression on steadiness sheet alone. as a result of these things are proven in steadiness sheet solely and steadiness sheet is ready after the revenue and loss account has been ready. So if there's any error in money account, checking account, asset or legal responsibility account it'll impact solely steadiness sheet.