RECTIFICATION OF ERROR

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Financial Accounting (Mgt-101)

Lesson-28

RECTIFICATION OF ERROR

In financial accounting, every single event occurring in monetary terms is recorded. Sometimes, it just so

happens that some events are either not recorded or it is recorded in the wrong head of account or wrong

figure is recorded in the correct head of account.

Whatever the reason may be, there is always a chance of error in the books of accounts. These errors in

accounting require rectification. The procedure adopted to rectify errors in financial accounting is called

"Rectification of error".

HOW TO RECTIFY THESE ERRORS

One way of rectification is that we can simply erase or overwrite the incorrect entry and replace it with the

correct one. But this practice is not allowed in accounting. We have to Rectify / correct the mistake by

recording another entry.

TYPES OF ERRORS

Before going to the rectification process, let's first see the different kinds of errors that can appear in our

books of accounts:

ERROR OF OMISSION

One of the most common errors is that an event escapes recording. This means that an event occurred but

we did not record it. For example, we discussed about bank charges being deducted by banks without our

knowledge or our payments made by banks on our standing orders etc. There can be other reasons as well.

Such errors are called ERRORS OF OMISSION.

ERROR OF COMMISSION

Then, there is a chance that the event is classified and recorded correctly but within wrong classification of

account. For example, a payment to Mr. A, who is a debtor, is recorded in the account of Mr. B, who is also

a debtor. Now the classification is correct but entry is posted in the wrong account. Such errors are called

ERRORS OF COMMISSION.

ERROR OF PRINCIPLE

Then there are errors in which an entry is recorded in the wrong class of account. For example a purchase of

fixed asset, say, a vehicle is recorded in an expense account. These errors are called ERRORS OF

PRINCIPLE.

ERROR OF ORIGINAL ENTRY

The errors in which recording is in correct account but the figure is incorrect are called ERRORS OF

ORIGINAL ENTRY. For example, a receipt of Rs. 50,000 from a debtor is recorded as Rs. 5,000 in his

account.

REVERSAL OF ENTRY

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Financial Accounting (Mgt-101)

Then, there are errors in which the entry is reversed by mistake. This means that the account that should

have been debited is credited and vice versa. These errors are called REVERSAL OF ENTRY.

RECTIFYING THE ERRORS

Now, we will rectify all these types of entries:

ERROR OF OMISSION

This is the easiest error to rectify. You have to record the entry that was omitted by mistake. It is important

to note here that the rectifying entry will be posted on the date on which the error was discovered. But we

will give a note in the narration of the voucher that the event took place on such date.

Example

A purchase of Rs. 5,000 from ABC on April 15, was omitted by mistake

Rectification Entry on the date of discovery:

Debit:

Purchase Account

15,000

Credit:

ABC Account

15,000

Narration:

Rectification of omission of recording purchase to ABC on April 15.

ERRORS OF COMMISSION / ERROR OF PRINCIPLE

In both these cases, the effect given to incorrect account is reversed and effect is given to the correct

account.

Example

Purchase of an asset for Rs. 20,000 is recorded in the expense account.

Rectification:

Debit:

Asset Account

50,000

Credit:

Relevant Expense Account

50,000

Narration: Rectification of purchase of asset incorrectly recorded as expense.

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Financial Accounting (Mgt-101)

ERROR OF ORIGINAL ENTRY

If the entry recorded is of lesser amount than the required amount, then an entry of the balance amount is

passed. On the other hand, if the entry recorded is of a greater amount than the required amount, a reverse

entry is passed of the balance amount that cancels the effect of the error.

Example

A receipt of cash Rs. 5,000 from B is recorded as Rs. 500

A receipt of cash Rs. 5,000 from B is recorded as Rs. 50,000

Rectification

In the first instance, the recorded figure is less by Rs. 4,500. The rectification entry will, therefore, be:

Debit:

Cash Account

4,500

Credit:

B Account

4,500

In the second instance, the recorded figure exceeds by Rs. 45,000 from the desired figure. The rectification

will, therefore, be a reverse entry of Rs. 45,000:

Debit:

B Account

45,000

Credit:

Cash Account

45,000

REVERSAL OF ENTRY

If a reverse entry is recorded by mistake, then two entries are required to rectify it, one to reverse the effect

of mistake and the other to record correct entry or we can pass one entry with double amount that serves the

purpose of both the entries.

Example

A payment of Rs. 10,000 made to Mr. D is recorded on the receipt side of the cash book and credit is given

to D's account.

Rectification

We can correct this mistake by two entries:

Debit:

Mr. D Account

10,000

Credit:

Cash Account

10,000

This will reverse the effect of mistake:

Debit:

Mr. D Account

10,000

Credit:

Cash Account

10,000

And this will record the transaction correctly:

We can record it through one entry:

Debit:

Mr. D Account

20,000

Credit:

Cash Account

20,000

Based on our above discussion, we can devise a general procedure for rectification of errors.

Take another example, assume that we received cash Rs. of 50,000 from a debtor and instead of Debiting the

Cash Book / Cash Account, we debited the Bank Book whereas the credit was given to the correct account.

Step 1: Note down the correct entry

Debit

Cash

50,000

Credit

Creditors

50,000

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Financial Accounting (Mgt-101)

Step 2: Note down the incorrect entry

Debit

Bank

50,000

Credit

Creditors

50,000

Step 3: See that Credit affect is correct. In case of Debit, affect has been given to Bank instead of cash.

Therefore we will give the due affect to Cash by debiting it and Remove the incorrect affect from bank by

crediting it.

Debit

Cash Account

50,000

Credit

Bank Account

50,000

ILLUSTRATION

Rectify the following errors:

1. A cheque issued of Rs. 50,000 to Mr. A(Creditor), but the credit was given to cash account.

2. Purchase of goods from Mr. B worth of Rs. 5,500 was recorded at Rs. 4,500.

3. Cash sale to Mr. C worth of Rs. 10,000 was debited to sale account and credited to cash

account.

4. Repair of vehicle worth of Rs. 5,000 was charged to asset account.

5. A cheque of Rs. 15,000 received and deposited in bank from Mr. D, but no entry was passed.

SOLUTION

Entry # 1

Correct Entry

Debit:

Mr. A (Creditor) A/C

50,000

Credit:

Bank A/C

50,000

Incorrect Entry passed

Debit:

Mr. A (Creditor) A/C

50,000

Credit:

Cash A/C

50,000

Rectifying Entry

Debit:

Cash A/C

50,000

Credit:

Bank A/C

50,000

Entry # 2

Correct Entry

Debit:

Purchase A/C

5,500

Credit:

Mr. B's A/C

5,500

Incorrect Entry passed

Debit:

Purchase A/C

4,500

Credit:

Mr. B's A/C

4,500

Rectifying Entry

Debit:

Purchase A/C

1,000

Credit:

Mr. B's A/C

1,000

Entry # 3

Correct Entry

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Financial Accounting (Mgt-101)

Debit:

Cash

10,000

Credit:

Sale A/C

10,000

Incorrect Entry passed

Debit:

Sale A/C

10,000

Credit:

Cash

10,000

Rectifying Entry

Debit:

Cash

20,000

Credit:

Sale A/C

20,000

Entry # 4

Correct Entry

Debit:

Repair A/C

5,000

Credit:

Cash A/C

5,000

Incorrect Entry passed

Debit:

Asset (vehicle) A/C

5,000

Credit:

Cash A/C

5,000

Rectifying Entry

Debit:

Repair A/C

5,000

Credit:

Asset (vehicle) A/C

5,000

Entry # 5

Correct Entry

Debit:

Bank A/C

15,000

Credit:

Mr. D's A/C

15,000

Incorrect Entry passed

No entry was passed

Rectifying Entry

Debit:

Bank A/C

15,000

Credit:

Mr. D's A/C

15,000

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