Rectification of errors in trial balance

Whenever an error occurs, it should be rectified through proper rectification. Otherwise the books of accounts cannot exhibit the true and correct view of the state of affairs of a business and its financial results.

So it is very important that we identify and rectify all material errors in the books of accounts.

POINTS OF TIME AT WHICH ERRORS CAN BE DETECTED

1. Before preparation of the trial balance;
2. After preparation of the trial balance but before preparation of final accounts; and
3. After preparation of final accounts.

The rectification of the errors will be guided by

• the nature and effect of the errors and
• the point of time at which the errors have been detected.

TYPES OF ERRORS

A. ON THE BASIS OF NATURE

1. ERROR OF OMISSION:

It results from a complete or partial omission of recording a transaction.

For example, a transaction may be recorded in the subsidiary book but omitted to be posted to any of the ledger accounts.  This is a case of partial omission.

However, if a transaction is totally omitted to be entered in the books then it is a case of complete omission.

A complete omission will not affect the agreement of the trial balance but a partial omission will affect the agreement of a trial balance.

2. ERROR OF COMMISSION:

It results from an act of commission i.e. entries wrongly made in the journal or ledger.  It may be an

• error of posting,
• error of casting,
• entering wrong amounts,
• entering a transaction in a wrong subsidiary book etc.  

Unless the effects of errors of commission counterbalance each other, the agreement of the trial balance becomes affected.

3. ERROR OF PRINCIPLE:

It Is an error occurring due to wrong application of basic Accounting Principles.  The main reason behind such an error is incorrect classification of capital and revenue items.

For example, purchase of an Asset may be recorded through the Purchase day book instead of debiting the Asset account.  Or wages paid for the installation of an asset may be debited to the wages account instead of debiting the asset account with the amount of wages.

An error of principle will not affect the agreement of a trial balance. However, it will result in misrepresentation of the state of affairs and operational results of a business.

4. COMPENSATING ERRORS:

If the effect of an error is counterbalanced or cancelled out by the effect of another error or errors then such errors are known as compensating errors.  Since the compensating errors as a whole cancel out the effect of each other, the agreement of trial balance is not affected. Thus, it becomes difficult to detect such errors.

B. ON THE BASIS OF EFFECTS:

1. ONE SIDED ERRORS:

One sided error is an error whose effect falls on only one account.  It may arise due to

• Wrong casting of any day book;
• Posting made to the Wrong side of the relevant account;
• Duplicate posting of the same amount in an account.

One Sided errors cause a disagreement of the trial balance and hence are easy to detect.

2. TWO SIDED ERRORS:

A Two-sided error maybe

• Affecting two accounts at the same direction and not affecting the agreement of the trial balance.  For example Mr A’s account credited instead of Mr B account for an amount received from Mr B.
• Affecting two accounts at opposite direction and affecting the agreement of the trial balance.  For example, Mr A’s account debited instead of Mr B account being credited for an amount received from Mr B.

3. MORE THAN TWO SIDED ERRORS:

An error which affects more than two accounts simultaneously falls in this category.  This may or may not affect the agreement of a trial balance depending on the situation in each case.

EFFECTS OF ERRORS ON TRIAL BALANCE

Depending on its effect on the trial balance, the errors may be divided into two categories-

1. Errors affecting the agreement of trial balance; and
2. Errors not affecting the agreement of trial balance.