Accountancy · Ch 6 — Trial Balance and Rectification of Errors
Rectification of Errors in the Next Accounting Year
Rectification of Errors in the Next Accounting Year
Rectification of Errors in the Next Accounting Year
When errors committed during an accounting year are not located and corrected before the final accounts are prepared, the suspense account cannot be closed. Its balance is carried forward to the next accounting period.
The key problem is this: if you simply correct an error in the next year by debiting or crediting an expense or income account, you would distort the profit or loss of the new year. The expense or income really belongs to the previous year, not the current one.
To avoid this, a Profit and Loss Adjustment Account is used. This account is debited or credited in place of the expense/loss or income/gain account that should have been affected in the earlier year. This keeps the current year's income statement clean. You will study this treatment in detail at a more advanced stage.
Guiding Principles of Rectification of Errors
The textbook provides a set of assumptions that must be followed when rectifying errors. These rules tell you what to assume about the wrong entry that was actually made, so you can figure out the correct rectification entry.
- Error in the book of original entry: Assume all postings were done correctly based on that wrong entry.
- Error at the posting stage: Assume the recording in the subsidiary book was correct.
- Error in posting to a wrong account (side and amount not mentioned): Assume the posting was on the correct side and with the correct amount.
- Error in posting with a wrong amount (side not mentioned): Assume the posting was on the correct side.
- Error in posting to a wrong account on the wrong side (amount not mentioned): Assume the posting was with the correct amount as per the original recording.
- Error in posting to a wrong account with a wrong amount (side not mentioned): Assume the posting was on the right side.
- Error in posting to a correct account on the wrong side (amount not mentioned): Assume the posting was with the correct amount as per the original recording.
- Error in posting individual transactions from subsidiary books: The error relates only to the individual personal account. The sales, purchases, sales return, or purchases return accounts are not involved.
- Error in a transaction recorded in the cash book: The error in posting relates to the other account affected, not to the cash or bank account. …