Accounting for Rectification of Errors – Classification, Suspense

Accounting for Rectification of Errors , To err is human! So, it is obvious that while we are doing the accounting of an entity, we can make mistakes. But more important is to analyze & correct the mistakes. So here, we are providing the basics of Accounting for Rectification of Errors. Here, we will have a look on how to rectify the errors if those are found in the same financial year or later on.

Accounting for Rectification of Errors

Basic features of correct accounting:

• All transactions & events must be recorded/ entered.
• Transactions & events must be recorded by Double entry system & by following proper accounting Principles.
• All entries must be fully & correctly posted to ledger accounts.
• There must be arithmetical accuracy:
  • in Recording i.e. passing entry,
  • in Posting figures in accounts,
  • in totaling & balancing of books of Entry &
  • in totaling & balancing of ledger accounts.

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ERROR

Meaning of an Error

If in books of account any one or more of the above mentioned basic elements/features of correct accounting is not followed, then we will say an error/mistake has been committed.

Classification of Errors:

1. Errors of Principle:

• That means there is error in applying some accounting Principle,
• Such errors will not affect the agreement of trial balance i.e. these are double sided error.

Ex. Treating a revenue expense as capital expenditure or vice versa or the recording of sale of a fixed asset as ordinary sale.

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2. Clerical Errors:

• These are the errors committed in applying the accounting procedure.
• Such errors may or may not affect the agreement of trial balance.

Rectification in the same year can be:

• Before preparation of Trial Balance i.e. without opening a Suspense a/c or
• After preparation of Trial Balance i.e. after opening a Suspense a/c.

Suspense Account:

• When trial balance does not tally, the difference is put to an account named as Suspense a/c. Difference is:
  • debited to suspense a/c (if debit side of trial balance is short) or
  • credited to suspense a/c (if credit side of trial balance is short)
• Thus with the help of suspense a/c trial balance is artificially tallied.

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Rectification In Subsequent Years Books

Rectification in the next year:

• If errors are located after finalizing the accounts then it should be rectified in the next years accounts.
• The difference of Trial balance will also get transferred to next years books under the name Suspense a/c.
• This will involve preparation of Profit & Loss Adjustment account.

Profit & Loss Adjustment account:

• The rectification entry will be same as passed in case of rectification in same year except that wherever any Income or Expenses a/c. is involved, the Debit/Credit will be made in P&L adjustment a/c. and not in the Income or Expenses a/c.
• Otherwise this years profit will be affected by the errors of last year.
• The balance in P&L adjustment a/c. will be transferred to capital a/c in the case of proprietorship or partnership concern or to Profit and Loss Appropriation account in the case of a company.

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Forming Rectification Entry:

Steps to be followed for solving a rectification problem are as follows:

• An account is not debited or less debited ¬ debit it
• An account is not credited or less credited ¬ credit it
• An account is wrongly debited or more debited ¬ credit it
• An account is wrongly credited or more credited ¬ debit it
• After making above if double entry is not yet completed, then make it double entry by debiting or crediting the difference to suspense a/c.
• If rectification is being done in subsequent year then in place of income & expenses account, P & L adjustment account will be debited or credited, as the case may be.

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