Rectification of Error

Rectification of Error

Rectification of Error

Every monetary event that occurs is recorded in financial accounting. Sometimes occurrences are not recorded, or they are documented in the wrong head of account, or the wrong amount is recorded in the correct head of account.

Whatever the cause, there is always the possibility of an error in the books of accounts. These accounting mistakes must be corrected. The technique used to correct inaccuracies in financial accounting is known as “rectification of error.”

How to Rectify these Errors?

One method of correction is to simply erase or overwrite the incorrect entry and replace it with the right one. However, this technique is not permitted in the accounting profession. We must Rectify / fix the error by recording another entry.

Types of Errors

Before we begin the correction procedure, let us first examine the many types of mistakes that might emerge in our books of accounts:

Error of Omission

One of the most prevalent mistakes is that an event is not recorded. This indicates that an event occurred but was not recorded. For example, we spoke about bank charges being taken without our knowledge, or payments made by banks on our standing orders, and so on. There might be other reasons as well. These are known as Errors of Omission.

Error of Principle

Then there are errors, such as when an entry is recorded in the incorrect class of account. A purchase of a fixed asset, such as a vehicle, is recorded in an expense account. These are known as Errors of Principle.

Error of Original Entry

Errors of Original Entry are errors in which the recording is correct but the figure is incorrect. A receipt of Rs. 50,000 from a debtor, for example, is recorded in his account as Rs. 5,000.

Reversal of Entry

There are errors in which the entry is accidentally reversed. This means that the account that should have been debited is instead credited, and vice versa. These are known as Reversal of Entry Errors.

Rectifying the Errors

We will now correct all of these types of entries:

Error of Omission

This is the simplest error to correct. You must record the entry that was accidentally omitted. It is crucial to remember that the correcting entry will be published on the day the error was detected. However, we shall include a notation in the voucher’s narrative that the event occurred on such a date.

Example:

On january 15, a purchase of $5,000 from ABC was mistakenly omitted.

Correction on the date of discovery:

Debit:          Purchase Account           15,000

Credit:                    XYZ Account                  15,000

Narration: Rectification of omission of recording purchase to XYZ on january 15.

Errors of Commission / Error of Principle

In each of these situations, the effect that was applied to the incorrect account is reversed, and the effect is applied to the proper account.

Example:

A $80,000 asset purchase is recorded in the expense account.

Rectification:

Debit:                 Asset Account                            80,000

Credit:                       Relevant Expense Account            80,000

Narration: Rectification of purchase of asset incorrectly reported as an expense.

Error of Original Entry

If the recorded entry is less than the necessary amount, an entry of the balance amount is passed. If, on the other hand, the recorded entry is more than the required amount, a reverse entry of the balance amount is passed, which reverses the impact of the error.

Example:

1) A cash receipt of $6,000 from B is recorded as $600.

2) A cash payment of $6,000 from B is recorded as $60,000.

Rectification:

In the first case, the recorded number is $5,400 lower. As a result, the rectification entry will be:

Debit:               Cash Account             5,400

Credit:                        B Account                 5,400

In the second case, the reported value is $54,000 more than the required sum.  So, the correction will be a reverse entry of $54,000:

Debit:               B Account                 54,000

Credit:                        Cash Account           54,000

Reversal of Entry

If a reverse entry is accidentally recorded, two entries are required to correct it, one to reverse the impact of the error and the second to record the right entry, alternatively we can pass one entry with double the amount that fulfills the purpose of both entries.

For Example:

A payment of $20,000 made to Mr. A is entered on the cash book’s receipt side, and credit is provided to A’s account.

Rectification:

We can correct this mistake by two entries:

Debit:              Mr. A Account          20,000

Credit:                   Cash Account               20,000

This will reverse the effect of mistakes:

Debit:               Mr. A Account         20,000

Credit:                       Cash Account           20,000

And this will appropriately record the transaction or we may record it in a single entry:

Debit:              Mr. A Account          40,000

Credit:                      Cash Account           40,000

Based on our previous explanation, we can develop a generic technique for mistake correction.

Assume we got $60,000 in cash from a debtor and instead of debiting the Cash Book / Cash Account, we debited the Bank Book, whereas credit was issued to the correct account.

Step 1: Note down the correct entry

Debit:                 Cash                     60,000

Credit:                    Creditors                       60,000

Step: 2 Note down the incorrect entry

Debit:              Bank                        60,000

Credit:               Creditors                          60,000

Step:3 Check to ensure that the Credit impact is correct. In the case of a debit, the effect has been given to the bank rather than the cash. As a result, we will debit Cash to give it the proper impact and credit the bank to remove the incorrect effect.

Debit:              Cash                        60,000

Credit:                Bank                                 60,000

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