What is a Accounting error and their rectification?
Concepts and meaning
An error is a mistake committed either innocently or internationally error is also a kind of mistake committed in this books of account in other, the mistake which are committed in the journal ledger and in and In any other accounting statement are called accounting error. Thus, accounting error may be defined as the mistakes generally committed technically or committed due to the lack of basis accounting principle. Generally, errors are committed innocently due to the lack of basic accounting principle. Generally, errors are committed innocently. However, some error may be committed intentio
nally in order to take some under benefit. These errors must be located and rectified so as to ascertain the true operating result and financial position of the business.
Causes
Accounting errors can take place either intentionally or innocently. The main causes of accounting errors are as follows:
a. Lack of accounting knowledge: The books of accounts are maintained following certain accounting principles, due to lack of accounting principles and rules, accounting error may occur.
b. Carelessness of accountant: accounting errors may also result from carelessness on the part of accounting maintaining books of accounts.
c. Lack of sound internal check system: due to the lack of effective internal check, an accounting error occurs; internal check is a system where the work of one employee is automatically checked by another.
d. Computer flows: nowadays, modern business organizations keep accounts (records) in computers. The transactions recorded in computer are supposed to be safer as compare to other forms of record keeping. However, Ineffective computer program which are accessible to the unauthorized may cause an accounting error.
Types of errors in the books of accounts
It the debit side and credit side of trial balance is equal. It is assumed that entries made in journal and ledgers are arithmetically correct. However, even if the sides of trial balance agrees, it does not necessarily meant at the accounting records are free from errors, because there might be some error which are not disclosed by trial balance. Therefore, trial balance should not be regarded as a conclusive proof of the accuracy of the ledger. Thus there are two types of errors which may have occurred in the books of accounts:
a. Errors disclosed by trial balances
b. Errors not disclosed by trial balances
Errors disclosed by trial balances
If the debit and credit side of trial balance does not agree, it is a evidence of the arithmetical inaccuracy of the entries made in the book of account. The following errors are disclosed by trial balance:
a. Wrong totaling or wrong balancing of ledger account: if the account in ledger is wrongly totaled or balanced, then the trial balance does not agree. For example, if sales accounts is wrongly totaled or balanced, it causes the disagreement of trial balance.
b. Posting of wrong amount in ledger accounts: the trial balance will not agree if wrong figure is posted in the accounts. For example, gods sold to KC for Rs.990 but KC account was debited with Rs. 9,900, it increases the debit side of trial balance. Thus, the trial does not tally.
c. Posting on wrong side of ledger account: when an item sis posted on the ledger account, it causes disagreement of trial balance. For example: goods sold to Hari for rs. 5,000 and while posting into Hari a/c, the amount was credited instead of being debited.
d. Double posting side of ledger account: sometimes an error occurs if an entry is posted twice in one account. For example, if cash received from shyam Rs. 8,000 were correctly posted into cash account, but posted twice in shyam's account, then the trial balance will not agree.
e. Omission of posting an amount in ledger accounts: the trial balance will not agree it one aspect of a transactions, if omitted to post in ledger account. For example, salary paid Rs. 23,000 was correctly posted into cash a/c but omitted to post in salary a/c and then, it will cause an disagreement of the trial balance.
Errors not disclosed by Trial balance
The primary objective of preparing a trial balance is to check the accuracy of financial transactions recorded in the books of accounts. When the debit and credit side of trial balance are equal. It is assumed that there are no be taken as conclusive proof of the accuracy of transaction. However, if should not be taken as conclusive proof of the accuracy of transaction recorded in journal and ledger, because there are certain errors which remain undetected in spite of the agreement of trial balance. These errors are explained as follows:
Errors of omission
If a transaction is not recorded in the books of original entry (journal) then both debit and credit effects of the transactions will be omitted (in ledger or trial balance) and the trial balance still agree. For example, if goods purchases from sirjana thapa Rs. 9,000 are not recorded in the books at all, it means neither purchase a/c is debited nor sirjana thapa a/c is credited. As both debit and credit sides have been affected by equal amount, so the trial balance shall will agree.
Generally one sided errors occurred in the following cases:
• When a subsidiary book over case (totaled more) or under case (totalized less)
• When posting is omitted in one account of the transaction.
• When position is made with wrong amount.
• When position is made at the wrong side of an account.
Rectification of one sides error
Rectification of one side’s errors can be done in the following ways:
Rectification of one error located before preparation of trial balance
If one sided errors are located before preparing the trial balance. There is no need to pass rectifying entries. Rather the ones sides’ error is rectified by posting an additional amount on the affected side of the ledger accounts.
Rectification of one sided error located after the preparation of trial balance
When one sided error are located before preparing trial balance, the error are rectified by passing journal entries. In the sided error, one account is either debited or credited for the rectify and suspense account is also debited of credited to complete the double entry.
Meaning of suspense account
When the trial balance does not agree, an effort is made to located error and rectified for the rectification and suspense account is also debited or credited to complete the double entry.them. But if the errors cannot be located easily and quickly and the same time. If the final accounts are to be prepared urgently, the difference in trial balance is rectified by writing suspense's account to the smaller side of trial balance. Thus, suspense's account is a dummy ledger created with a view to make the debit and credit of trial balance equal.
Rectification of one sided errors through suspense account
The following points should be considered while rectifying the one sided errors with the help of suspense account.
• Suspense account is used to those errors which affect trial balance.
• If the rectified account is debited in rectifying entry, suspense account is credited and if rectified account is credited in rectifying entry, suspense account will be debited.
Two sided errors
Errors which affect two or more account are called two sided errors. Such errors are corrected by passing rectifying entries. The two sided errors include the following types of errors.
1. Omission to pass on entry in the books of account: when a transaction is omitted to record in journal, it affected two accounts. For example, if goods purchase from shiva is unrecorded in the books of account. It affects i. purchase a/c and it. Shiva a/c. thus it is a two sides error.
2. Posting form journal to wrong ledger accounts: it a transaction is correctly recorded in journal but posted to wrong account in ledger, it also affected. For example, if goods purchase from Mahesh is posted t Mohan's account it affects two accounts because it should been posted to Mahesh account but it was wrongly posted to mohan's account.
3. Errors of principle: if a transaction is recorded without following the principle of accounting, it also affects. For example, if furniture purchase is recorded through purchase book it affected i. purchase a/c it. Furniture a/c.
Rectification of two sided error before and after preparation of trial balance
Since the two sided errors affects two or more accounts, correction of these errors needs to make rectified journal entry. While rectifying such errors, one account is debited and other account is debited and other account is credited.
1. Find correct entry: what should have been the correct journal entry?
2. Find wrong entry: what mistakes were actually done. i.e. what was the wrong journal entry?
3. Find rectifying entry: for this the wrong entry should be reversed & adjusted with correct entry,
Accounting errors can take place either intentionally or innocently. The main causes of accounting errors are as follows:
a. Lack of accounting knowledge: The books of accounts are maintained following certain accounting principles, due to lack of accounting principles and rules, accounting error may occur.
b. Carelessness of accountant: accounting errors may also result from carelessness on the part of accounting maintaining books of accounts.
c. Lack of sound internal check system: due to the lack of effective internal check, an accounting error occurs; internal check is a system where the work of one employee is automatically checked by another.
d. Computer flows: nowadays, modern business organizations keep accounts (records) in computers. The transactions recorded in computer are supposed to be safer as compare to other forms of record keeping. However, Ineffective computer program which are accessible to the unauthorized may cause an accounting error.
Types of errors in the books of accounts
It the debit side and credit side of trial balance is equal. It is assumed that entries made in journal and ledgers are arithmetically correct. However, even if the sides of trial balance agrees, it does not necessarily meant at the accounting records are free from errors, because there might be some error which are not disclosed by trial balance. Therefore, trial balance should not be regarded as a conclusive proof of the accuracy of the ledger. Thus there are two types of errors which may have occurred in the books of accounts:
a. Errors disclosed by trial balances
b. Errors not disclosed by trial balances
Errors disclosed by trial balances
If the debit and credit side of trial balance does not agree, it is a evidence of the arithmetical inaccuracy of the entries made in the book of account. The following errors are disclosed by trial balance:
a. Wrong totaling or wrong balancing of ledger account: if the account in ledger is wrongly totaled or balanced, then the trial balance does not agree. For example, if sales accounts is wrongly totaled or balanced, it causes the disagreement of trial balance.
b. Posting of wrong amount in ledger accounts: the trial balance will not agree if wrong figure is posted in the accounts. For example, gods sold to KC for Rs.990 but KC account was debited with Rs. 9,900, it increases the debit side of trial balance. Thus, the trial does not tally.
c. Posting on wrong side of ledger account: when an item sis posted on the ledger account, it causes disagreement of trial balance. For example: goods sold to Hari for rs. 5,000 and while posting into Hari a/c, the amount was credited instead of being debited.
d. Double posting side of ledger account: sometimes an error occurs if an entry is posted twice in one account. For example, if cash received from shyam Rs. 8,000 were correctly posted into cash account, but posted twice in shyam's account, then the trial balance will not agree.
e. Omission of posting an amount in ledger accounts: the trial balance will not agree it one aspect of a transactions, if omitted to post in ledger account. For example, salary paid Rs. 23,000 was correctly posted into cash a/c but omitted to post in salary a/c and then, it will cause an disagreement of the trial balance.
Errors not disclosed by Trial balance
The primary objective of preparing a trial balance is to check the accuracy of financial transactions recorded in the books of accounts. When the debit and credit side of trial balance are equal. It is assumed that there are no be taken as conclusive proof of the accuracy of transaction. However, if should not be taken as conclusive proof of the accuracy of transaction recorded in journal and ledger, because there are certain errors which remain undetected in spite of the agreement of trial balance. These errors are explained as follows:
Errors of omission
If a transaction is not recorded in the books of original entry (journal) then both debit and credit effects of the transactions will be omitted (in ledger or trial balance) and the trial balance still agree. For example, if goods purchases from sirjana thapa Rs. 9,000 are not recorded in the books at all, it means neither purchase a/c is debited nor sirjana thapa a/c is credited. As both debit and credit sides have been affected by equal amount, so the trial balance shall will agree.
Generally one sided errors occurred in the following cases:
• When a subsidiary book over case (totaled more) or under case (totalized less)
• When posting is omitted in one account of the transaction.
• When position is made with wrong amount.
• When position is made at the wrong side of an account.
Rectification of one sides error
Rectification of one side’s errors can be done in the following ways:
Rectification of one error located before preparation of trial balance
If one sided errors are located before preparing the trial balance. There is no need to pass rectifying entries. Rather the ones sides’ error is rectified by posting an additional amount on the affected side of the ledger accounts.
Rectification of one sided error located after the preparation of trial balance
When one sided error are located before preparing trial balance, the error are rectified by passing journal entries. In the sided error, one account is either debited or credited for the rectify and suspense account is also debited of credited to complete the double entry.
Meaning of suspense account
When the trial balance does not agree, an effort is made to located error and rectified for the rectification and suspense account is also debited or credited to complete the double entry.them. But if the errors cannot be located easily and quickly and the same time. If the final accounts are to be prepared urgently, the difference in trial balance is rectified by writing suspense's account to the smaller side of trial balance. Thus, suspense's account is a dummy ledger created with a view to make the debit and credit of trial balance equal.
Rectification of one sided errors through suspense account
The following points should be considered while rectifying the one sided errors with the help of suspense account.
• Suspense account is used to those errors which affect trial balance.
• If the rectified account is debited in rectifying entry, suspense account is credited and if rectified account is credited in rectifying entry, suspense account will be debited.
Two sided errors
Errors which affect two or more account are called two sided errors. Such errors are corrected by passing rectifying entries. The two sided errors include the following types of errors.
1. Omission to pass on entry in the books of account: when a transaction is omitted to record in journal, it affected two accounts. For example, if goods purchase from shiva is unrecorded in the books of account. It affects i. purchase a/c and it. Shiva a/c. thus it is a two sides error.
2. Posting form journal to wrong ledger accounts: it a transaction is correctly recorded in journal but posted to wrong account in ledger, it also affected. For example, if goods purchase from Mahesh is posted t Mohan's account it affects two accounts because it should been posted to Mahesh account but it was wrongly posted to mohan's account.
3. Errors of principle: if a transaction is recorded without following the principle of accounting, it also affects. For example, if furniture purchase is recorded through purchase book it affected i. purchase a/c it. Furniture a/c.
Rectification of two sided error before and after preparation of trial balance
Since the two sided errors affects two or more accounts, correction of these errors needs to make rectified journal entry. While rectifying such errors, one account is debited and other account is debited and other account is credited.
1. Find correct entry: what should have been the correct journal entry?
2. Find wrong entry: what mistakes were actually done. i.e. what was the wrong journal entry?
3. Find rectifying entry: for this the wrong entry should be reversed & adjusted with correct entry,
A book- keeper finds that the trial balahce is out by excess debit of Rs. 250. He puts the
ReplyDeletedifference to a newly opened suspense account. Latter on him detects the following errors.
l) Goods worth Rs 7500 purchased from Raj entered in the sales book. 2) Received a promissory note for Rs. 12500 from Airman but entered in the bills payable book. 3) An item of Rs 1750 relating to prepaid rent account was omitted to be bought forward. 4) An item of Rs 1000 in respect of purchase returns to Rohan had been ,*ongty entered in the
purchase book.
5) Rs. 2500 paid to Harish against acceptance was debited to Harendra. 6) A bill was received for repairs of furniture for Rs. 1250. The amount was debited to fumiture
account.
Passjournal entries to rectify the about errors and prepare the suspense account
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