Rectification of errors with accounting terms
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This document discusses various types of accounting errors and how to rectify them. It outlines two main types of errors: two-sided errors, which do not affect the trial balance, and one-sided errors, which do affect the trial balance. Two-sided errors include errors of omission, commission, original entry, principle, and compensating errors. One-sided errors require using a suspense account to rectify. The document provides examples for each type of error and explains how to make the correcting journal entries to rectify the errors.
Rectification of errors with accounting terms
- 2. What to Learn? Meaning of Rectification of error Types of Errors: One Sided Errors Two Sided Errors Suspense Account Problems of Rectification of errors
- 3. What is Rectification of Error? Once an error is error is located. It should be properly corrected. The correction of accounting error in a systematic manner is called rectification of errors. For verifying: C = W + R
- 4. Types of Errors: Two Sided Errors (Not effecting Trial balance agreement) Error of Omission Error Of Commission Error of Original Entry Compensating Error Error of Principal One Sided Errors (Effecting Trial balance agreement) Suspense Account
- 5. Trial Balance: Trial balance is a list of closing balances of Ledger account on a certain date and is the first step towards the preparation of financial statements
- 6. Two Sided Error Error of Omission: It means that a transaction has been completely omitted from the original books of accounts. It will neither appear on the debit side nor on Credit side of the Trial balance.
- 7. Example: Purchase of goods from Arshad & Co Rs. 4000 was omitted to be recorded in the books. Correct Entry Wrong Entry Rectify Entry Purchases 4000 Nil Purchases 4000 Arshad & Co 4000 Nil Arshad & Co 4000
- 8. Two Sided Error: Error of Commission: It means that a transaction instead of being recorded in the right account, has been recorded in the wrong account of the same class.
- 9. Example: A sale of Rs. 3000 to A was wrongly debited to the account of B. Correct Entry Wrong Entry Rectify Entry A 3000 B 3000 A 3000 Sales 3000 Sales 3000 B 3000
- 10. Two Sided Error: Error of Original Entry: It means that the amount of a transaction has been wrongly recorded in the journal and the same wrong amount was also posted in the Ledger.
- 11. Example: Goods sold to Mr. Naeem for Rs. 5000 was wrongly recorded in the sales journal at Rs. 500 and the same amount of Rs. 500 is posted both in the Mr. Naeem A/c and in sales A/c. Correct Entry Wrong Entry Rectify Entry Mr. Naeem 5000 Mr. Naeem 500 Mr. Naeem 4500 Sales 5000 Sales 500 Sales 4500
- 12. Two Sided Error: Error of Principal: Error of principle mean errors caused due to violation of generally accepted accounting principles e.g., incorrect allocation between capital and revenue items. Treating capital expenditure as a revenue expenditure. Treating revenue expenditure as a capital expenditure.
- 13. Errors of principle: Revenue Expenditure o Short term benefits o Routine Expenses ( occurrence again and again to continue business operation) Capital Expenditure o Long term benefits o Not in routine
- 14. Example: Paid wages on installation of new Machinery on Rs. 10,000 but recorded as a wages expenses. Correct Entry Wrong Entry Rectify Entry Machinery 10,000 Wages Exp. 10,000 Machinery 10,000 Cash 10,000 Cash 10,000 Wages Exp. 10,000
- 15. Two Sided Errors: Compensating Errors: It means that some errors in amount have occurred on the opposite side of two or more accounts and have cancelled themselves in the net result. Compensate
- 16. Examples: Purchase A/c has been wrongly debited with Rs.5000 instead of Rs.4000. On the other hand Asif A/c has been wrongly credited with Rs.1500 instead of Rs.1000 and Sales A/c has been wrongly credited with Rs.6000 instead of Rs.5500. Correct Entry Wrong Entry Rectify Entry Purchase 4000 Purchase 5000 Purchase 1000 Asif 1000 Asif 1500 Asif 500 Sales 5500 Sales 6000 Sales 500
- 17. One Sided Errors: When these words like wrongly debited, wrongly credited and posted are used in any statements then there is error in one account. This is called One Sided Error.