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MGT101 - Financial Accounting - I - Lecture Handout 28

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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

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.

Rectifying 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. 50,000 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.

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
1) A receipt of cash Rs. 5,000 from B is recorded as Rs. 500
2) 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:

Or

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

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
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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