Accountancy · Ch 6 — Trial Balance and Rectification of Errors
Rectification of Errors
Rectification of Errors
Rectification of Errors
Errors in accounting are not always discovered immediately. When they are found, they must be corrected, or rectified. The method of rectification depends entirely on whether the error has caused the trial balance to disagree or not.
Two Categories of Errors
From the viewpoint of rectification, errors are divided into two broad types:
- Errors that do not affect the trial balance.
- Errors that affect the trial balance.
This distinction is crucial because it determines the procedure for correction.
Errors That Do Not Affect the Trial Balance
These errors are typically two-sided errors. They occur in such a way that the total of the debit balances still equals the total of the credit balances in the trial balance. Because the trial balance still agrees, the error is hidden.
Since two accounts are involved (one is debited too much or too little, and another is credited too much or too little), the correction is straightforward. You can simply pass a journal entry to rectify the mistake. The journal entry will debit the account that needs to be increased (or credited too little) and credit the account that needs to be decreased (or debited too little).
The key point: a journal entry is possible because both the debit and credit aspects of the error are known.
Errors That Affect the Trial Balance
These are one-sided errors. They affect only one account. For example, posting the correct amount to the wrong side of an account, or omitting an amount from one side of an account. Because only one account is wrong, the trial balance totals will not match.
The problem is that you cannot pass a complete journal entry for a one-sided error. A journal entry always has a debit and a credit. If you know only one account is wrong, you don't know what the other side of the correcting entry should be.
To solve this, a Suspense Account is used. The difference in the trial balance is temporarily placed in the Suspense Account. Later, when the one-sided error is located, it is rectified by passing a journal entry that involves the Suspense Account. The Suspense Account acts as the missing debit or credit.
For a one-sided error, a journal entry is not possible unless a Suspense Account has already been opened to balance the trial balance.
How One-Sided Errors Are Rectified
When a one-sided error is discovered, it is corrected by passing a nullifying entry in the respective account. This means you pass an entry that cancels the wrong effect and puts the correct effect in its place. The other side of this entry is the Suspense Account. …