Correcting accounting errors

Auditors prepare the trial balance to check the accuracy of accounts. If the total debit balances do not match the total credit amount, it is a clear indication that some errors were made while recording the transactions in the books in original bookkeeping or subsidiaries. It is our greatest duty to locate and correct these errors, only then must we continue to prepare the final accounts. We also know that all types of errors are not revealed by trial balance, as some of the errors do not affect the overall trial balance. So these cannot be found using trial balance. An accountant should invest his energy in locating both types of errors and correcting them before preparing for trading, income statement and balance sheet. For if these are prepared before correction, these will not give us the right result and the profits and losses revealed by them should not be the actual profits or losses.

All errors in the accounting procedure can be classified as follows:

1. Error of principle

When a transaction is recorded according to the basic accounting principles, it is a principle error. For example, if income expenditure is treated as capital expenditure or vice versa.

2. Performance errors

These errors can again be broken down as follows:

(i) Failure to fail

When a transaction is either completely or partially not recorded in the books, it is a failure. This may be for failure to enter a transaction in the books with original entry or for failure to post a transaction from the books with the original entry to the account in question in the general ledger.

(ii) Commission errors

When an entry is incorrectly recorded either in whole or in part incorrect accounting, calculation, casting or balance sheet. Some of the commission errors affect the sample balance, while others do not. Errors affecting the sample balance can be revealed by preparing a sample balance.

(iii) Compensation failure

Sometimes, one error is offset by another error in such a way that it is not revealed by the trial balance. Such errors are called compensatory errors.

From the point of view of remedying the errors, these can be divided into two groups:

(a) Errors affecting only one account; and

(b) Errors affecting two or more accounts.

Errors affecting an account

Impacting errors can be:

(a) Molding failure;

(b) posting errors;

(c) carry on

(d) balance and

(e) failure of the trial balance.

Such faults must first of all be located and corrected. These are rectified either by journal entry or by providing an explanatory note on the account in question.

correction

Phases for correcting accounting errors

All types of account errors can be remedied in two stages:

(i) prior to the preparation of the final accounts and

(ii) after preparation of the final accounts.

Errors corrected within the accounting period

The correct method for correcting an error is to pass the journal entry in such a way that it corrects the error that has been committed and also gives effect to the record that should have been passed. However, while errors are corrected prior to the preparation of the final accounts, in some cases the correction cannot be performed by journal entry because the errors have been so. Typically, the correction procedure, if performed, before the preparation of the final accounts, is as follows:

(a) Correction of errors affecting one side of an account. Such errors do not allow the trial balance to be agreed as they affect only one side of an account, so these cannot be corrected by means of journal entry whose correction is required before preparation of the final accounts. So the required amount is placed on the debit or credit page of that account, as may be the case. E.g:

(i) Sales book under cast of Rs. 500 in January. The error is only in sales account, to correct the sales account we need to register on the credit side of the sales account ‘By during casting of. sales book for the month of January Rs. 500 “. I explain: Since the sales book was taught by Rs. 500, it means that all accounts other than sales account are correct, only the credit balance of the sales account is less than Rs. 500. So 500 500 is credited in sales account.

(ii) Discount allowed for Marshall Rs. 50, not posted to discount account. This means that the amount of Rs. 50, which should have been debited on a discount, has not been charged, so the debit page on the discount is reduced by the same amount. We should charge Rs. 50 on the discount account now, which was previously omitted and the discount account needs to be corrected.

(iil) Items sold to X are incorrectly debited in the sales account. This error only affects the sales account, as the amount that should have been posted to the credit page is incorrectly placed on the debit page of the same account. To rectify that, we should put twice the transaction amount on the credit side of the sales account by typing “In sales to X previously charged incorrectly.”

(iv) Amount of Rs. 500 paid to Y, not charged to his personal account. This error of conducting only the personal account of Y and its debit page is less of Rs. 500 due to failure to post the amount paid. We must now write on its debit page. “For cash (omitted to be posted) Rs. 500.

Fix errors that affect two pages of two or more accounts

As these errors affect two or more accounts, correction of such errors, if performed before the preparation of the final accounts, can often be done by means of a journal entry. In correcting these errors, the amount is debited to one account / accounts, while a similar amount is credited to another account / account.

Correction of errors in the next accounting period

As previously mentioned, it is advisable to locate and correct the errors before preparing the final accounts for the year. But in some cases, when the accounting officer does not locate the errors after considerable searching and he is busy preparing the final accounts of the business for filing the return on sales tax or income tax, he transfers the difference between trial balance to a newly opened ‘Suspense account’. In the next accounting period, when and when the errors are found, these are corrected with reference to the voltage account. When all errors are detected and corrected, the voltage account is automatically closed. We should not forget here that only the errors affecting the sum of the sample balance can be corrected by means of voltage account. The errors that do not affect the trial balance cannot be corrected using the suspense account. For example, if it is found that the debit amount on the trial balance was less by Rs. 500 for the reason that Wilson’s account was not debited with Rs. 500, the following corrective entry must be passed.

Difference in Trial Balance

Trial balance is affected only by errors remedied using the suspense account. Therefore, a table is prepared to calculate the difference in voltage account. If the voltage account is debited in the correction input, the amount is placed on the debit side of the table. On the other hand, if the voltage account is credited, the amount is placed on the credit side of the table. In the end, the balance is calculated and returned to the voltage account. If the credit side exceeds, the difference will be placed on the debit side of the voltage account. The effect of errors in the final accounts

1. Errors in the income statement

It is important to note the impact that one — or should — have on the company’s net profit. One point to remember here is that only the accounts that are transferred to the trade and profit and loss account at the time of preparation of the final accounts affect the net profit. This means that only nominal and commodity account errors affect net income. Errors in these accounts will either increase or decrease your net income.

How the errors or their remedies affect the following rules is helpful in understanding it:

(i) If due to an error, a nominal account has been allocated some debit, the profit will decrease or loss will increase and when it is rectified the profits will increase and the losses will decrease. For example, machines are being monitored for Rs. 10,000, but the amount charged to the machine repair account – this error reduces the profits. When repairing the record, the amount is transferred to the machine account from the machine repair account, which increases the profits.

(il) If, due to a mistake, the amount is omitted from registration on the debit side of a nominal account, it results in increase in profit or decrease in loss. The remedy for this error has the opposite effect, which means that the profits are reduced and the losses increased. For example, rent paid to the landlord, but the amount is debited to the landlord’s personal account – it will increase profits when the cost of rent is reduced. Once the error is corrected, we put the required amount into the rent account, which increases the cost of rent so that the profits are reduced.

(iil) Profits will increase or losses will decrease if a nominal account is wrongly credited. With the correction of this error, profits will fall and losses will increase. For example, investments were sold and the amount credited to the sales account. This error increases profits (or reduces losses) when the same error is corrected, the amount is transferred from sales account to investment account as sales are reduced which will result in decrease in profits (or increase in losses).

(iv) Profits will decrease or losses will increase if an account fails to post on the credit side of a nominal or commodity account. When the same is corrected, it increases profits or reduces losses. Eg. Omitted received commission to be posted to the commission account. This error reduces profits (or increases losses) as an income is not credited to the income statement. When the error is rectified, it will have the opposite effect on profit and loss, as an additional income is credited to the income statement, so profits will increase (or losses decrease). If the surplus or loss is due to an error, it will have an effect on the capital account as well, because the surplus is credited and losses are debited to the capital account and the capital increases or decreases as well. As capital appears on the liability side of the balance sheet, any error in the nominal account will also affect the balance sheet. So we can say that an error in the nominal or merchandise account affects the income statement and balance sheet.

2. Errors affecting balance only

If a mistake is made in a real or personal account, it will affect the assets, liabilities, debtors or creditors of the company and as a result will affect the balance sheet alone. because these items are only shown in the balance sheet and balance sheets are prepared after the income statement has been prepared. So if there are any errors in the cash account, bank account, asset or liability account, it only affects balance.