Trial balance is prepared to check the arithmetical accuracy of transactions in a journal. In case of agreement in a trial balance, it can be assumed that the recording, posting and balancing are performed correctly. However, in case the trial balance does not agree, we need to locate the errors committed.
The errors in a trial balance may occur at the time of recording, classifying, or summarising a financial transaction.
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It should be noted that even when the trial balance is correct, some errors may remain in the accounting records. For example, if the credit purchases are not recorded in the purchase book, it would not affect the agreement of the trial balance because the entry is not made in either sides of the book.
Therefore, clearly two types of errors are committed: errors that affect the trial balance and the errors that do not affect the trial balance. However, we need to identify and rectify both types of errors. The process of rectifying the errors and correcting the accounting records is termed as rectification of errors.
Types of Accounting Errors
Let us discuss the major types of accounting errors in the following section.
Errors of Principle
It is imperative to follow the Generally Accepted Accounting Principles (GAAP) to record accounting transactions. However, when financial transactions are recorded in violation of the accounting principles, the error is referred to as the error of principle.
It should be noted that the errors of principles do not affect the trial balance. In any situation when there is wrong categorisation of receipts or expenditure between capital and revenue, then it will lead to rise of the error of principle.
These errors may occur; when the entry of a transaction is made on the wrong side of the related account or in the wrong account. However, the value of entry or the amount of the transaction is correct. The rectification of such errors is very important as they directly affect financial statements.
Such errors may occur due to the following reasons:
- In case, there is lack of understanding, classification and hence the distinction between the revenue and capital items. The revenue receipt may be taken as capital receipt or vice versa.
- In case, there is lack of distinction between the business expenses and personal expenses.
- In case, there is lack of distinction between the productive and non-productive expenses.
Let us comprehend the process of rectification of errors of principle with the help of an example.
Rectify the following errors:
- Paid wages for the construction of office debited to wages account ₹2,000.
- Paid cartage for newly purchased furniture ₹500, is posted to cartage account.
- Paid ₹5,000 for the installation of machinery debited to wages account.
Solution: The rectification of entries is shown as follows:
To Wages A/c
(Being wages paid for construction of office wrongly debited to wages A/c, now rectified) Dr.
To Cartage A/c
(Being cartage paid for newly purchased furniture wrongly posted to cartage A/c, now rectified) Dr.
To Wages A/c
(Being amount paid for installation of machinery wrongly debited to wages A/c, now rectified. Dr.
Errors of Omission
An error of omission occurs when any transaction is completely or partially omitted to be recorded in the books of accounts. There is a difference between the error of partial recording of transactions and error of completely omitting transactions.
These errors may occur when the entry of a transaction is omitted from being recorded or it is recorded only on one side (either debit or credit side) of the account. When the transaction is completely omitted to be recorded in the books of account, then it is called as error of complete omission.
These types of errors do not affect the trial balance. For instance, credit purchase from vendor is not recorded in the purchase book. On the other hand, when the transaction is recorded only on one side of account (either debit or credit), then it is the case of partial omission. These types of errors affect the trial balance. For example, discount allowed to a customer not recorded in the discount account of ledger.
Let us understand the error of omission with the help of an example. Suppose the recording of goods worth ₹1000 purchased on credit from Arun Lal is omitted from the purchase book. In such a case, it would be omitted from being posted in the ledger as well. Consequently, the transaction is not found in the trial balance.
Besides this, now suppose a particular transaction is recorded in relevant subsidiary book but it was omitted to be recorded in ledger. This is the case of partial omission. In this scenario, the agreement of trial balance also gets affected and hence accuracy of accounts is also diminished.
Errors of Commission
An error of commission occurs when the transaction is recorded with incorrect amount in the various books of account. Errors of commission are also known as posting errors.
Generally, error of commission occurs in two cases:
- Wrong amount: The transaction is recorded with wrong amount. For example, goods purchased worth ₹5000 are recorded as ₹5500.
- Wrong account: The transaction is recorded in the wrong account. For example, purchases made for the personal use of owner are recorded in the purchase account (i.e. which must be considered as drawings).
For example, the recording of goods worth ₹1000 purchased on credit from Arun Lal is recorded as ₹10000 in purchase book or credit purchase worth ₹1000 from Arun Lal is recorded in the sales account.
This is called error of commission and majority of these types of errors are reflected in the trial balance. This type of error affects the trial balance and as a result, balances do not match due to an incorrect amount recorded and accuracy of accounts also gets affected.
Let us understand the rectification process of errors of omission with the help of an illustration.
Pass the journal entries to rectify the following errors:
- A credit sale of ₹50,000 to Krish omitted to be recorded in the books.
- Goods (cost ₹20,000 and sales price ₹24,000) taken by the proprietor were not recorded anywhere.
- Goods worth ₹3,500 sold to Ravi on credit were omitted from the accounts. Although, cash received subsequently from him stands posted to his credit.
- A credit sale of old furniture to Rajesh for ₹5,000 omitted to be recorded.
- On 31st March, 2007, the goods worth ₹30,000 were returned by Ram and were taken into stock on the same date, but no entry was passed in the books.
The journal entries after rectification of errors are shown as follows:
To Sales A/c
(Being a credit sale omitted to be recorded, now recorded) Dr.
To Purchase A/c
(Being goods taken away by the proprietor omitted to be recorded, now recorded) Dr.
To Sales A/c (
Being the rectification of goods sold to Ravi not recorded in the books) Dr.
To old furniture A/c
(Being old furniture sold to Rajesh on credit omitted to be recorded, now recorded) Dr.
|Sales return A/c
(Sales return received from Ram omitted to be recorded, now recorded) Dr.
Errors of Compensation
In case of errors of compensation, an error is nullified with errors of equal proportion. In other words, it means one type of error is balanced by another error. This is why these are called errors of compensation. It may happen that when an error occurs in an account, the same type of error may take place in another account.
In such a case, it is not easy to detect the error. For example, Amit’s A/c was debited with ₹1000 instead of ₹10000 while Sandip’s A/c was debited with ₹10000 instead of ₹1000. Therefore, Amit’s A/c, which was debited by ₹9000, was compensated by another error in Sandip’s A/c, whose account was debited excess of ₹9000. Errors of compensation do not affect the trial balance.