Lesson
Learn how accounting mistakes are found and corrected in a simple way.
Understand common accounting errors, why they happen, and how rectification entries correct them.
Concept explanation
Rectification of Errors means finding accounting mistakes and correcting them.
Sometimes while recording, posting, or totaling accounts, mistakes can happen.
These mistakes must be corrected so that the accounts show the correct picture.
Example: Rent paid Rs.5,000 is wrongly recorded as Salary.
This mistake should be corrected.
Simple line: Rectification means correction of accounting mistakes.
A transaction may be forgotten.
A wrong account may be used.
Amount may be written wrongly.
Debit may be posted as credit.
Totaling may be wrong.
Transaction may be recorded in the wrong book.
Asset may be treated as expense.
Expense may be treated as asset.
Riya runs a small stationery shop.
During the month, she pays shop rent Rs.5,000, buys furniture Rs.10,000, sells goods to Amit Rs.8,000, and pays salary Rs.6,000.
At the end, while checking accounts, she finds that rent was recorded as salary.
Furniture was recorded as purchases.
Amit's account was posted with Rs.800 instead of Rs.8,000.
One cash sale was not recorded at all.
Can Riya prepare correct accounts without fixing these mistakes?
No. She must rectify the errors first.
Some errors make debit total and credit total unequal.
Examples are posting an amount only on one side, posting debit amount wrongly, posting credit amount wrongly, wrong totaling of a ledger account, writing debit balance in credit column of Trial Balance, or writing wrong amount in Trial Balance.
Simple example: Purchases A/c Dr Rs.10,000 / To Cash A/c Rs.10,000.
If Purchases is posted as Rs.10,000 but Cash is not posted, Trial Balance may not agree.
Memory line: If only one side is wrong, Trial Balance may disagree.
Some errors do not disturb debit-credit equality, so Trial Balance may still agree.
Examples are complete omission of a transaction, wrong account but correct side and amount, error of principle, compensating errors, and recording wrong amount on both debit and credit sides.
Simple example: Rent paid Rs.5,000 is recorded as Salary paid Rs.5,000.
Debit is still Rs.5,000 and credit is still Rs.5,000.
Trial Balance may agree, but the account is wrong.
Memory line: Trial Balance agreement does not mean there is no mistake.
Error of Omission means a transaction is not recorded. Example: cash sale Rs.2,000 is completely forgotten.
Error of Commission means wrong account or person is used. Example: amount received from Amit is posted to Raju.
Error of Principle means a basic accounting rule is broken. Example: furniture bought is recorded as Purchases even though furniture is an asset.
Compensating Error means one mistake is balanced by another mistake.
Error of Original Entry means wrong amount is recorded from the beginning. Example: goods purchased Rs.8,000 is recorded as Rs.800.
Posting Error means journal entry is correct, but ledger posting is wrong.
Casting or Totaling Error means total of an account or book is wrongly added.
When Trial Balance does not agree and the error is not found immediately, the difference is temporarily placed in Suspense Account.
Suspense Account is like a temporary waiting room for the difference.
Example: Trial Balance debit total is Rs.50,000 and credit total is Rs.48,000.
Difference is Rs.2,000.
Until the error is found, Rs.2,000 may be put in Suspense Account.
When the error is found, Suspense Account is closed by passing rectification entry.
Simple line: Suspense Account is temporary, not permanent.
Step 1: find what was wrongly recorded.
Step 2: find what should have been recorded.
Step 3: compare wrong and correct treatment.
Step 4: pass rectification entry.
Step 5: if Suspense Account was used, close it when correcting the error.
Very simple formula: Wrong entry -> Correct entry -> Difference = Rectification entry.
Visual flow
Transaction recorded
Error found
Identify wrong account/amount/side
Find correct treatment
Pass rectification entry
Correct accounts
Reliable Trial Balance and Final Accounts
Solved examples
Example 1
Wrong: Salary A/c Dr Rs.5,000 / To Cash A/c Rs.5,000 Correct: Rent A/c Dr Rs.5,000 / To Cash A/c Rs.5,000 Rectification: Rent A/c Dr Rs.5,000 To Salary A/c Rs.5,000
Salary was wrongly debited.
Rent should be debited.
Example 2
Wrong: Purchases A/c Dr Rs.10,000 / To Cash A/c Rs.10,000 Correct: Furniture A/c Dr Rs.10,000 / To Cash A/c Rs.10,000 Rectification: Furniture A/c Dr Rs.10,000 To Purchases A/c Rs.10,000
Furniture is an asset.
It is not goods purchased for resale.
Example 3
Rectification: Amit A/c Dr Rs.8,000 To Raju A/c Rs.8,000
Amit should be debtor.
Raju was wrongly debited.
Example 4
Meaning: Sales total is short by Rs.2,000. Rectification: Suspense A/c Dr Rs.2,000 To Sales A/c Rs.2,000
Sales should increase, so Sales is credited.
Suspense Account is used because Trial Balance difference is being corrected.
Example 5
Meaning: Purchases total is more by Rs.1,000. Rectification: Suspense A/c Dr Rs.1,000 To Purchases A/c Rs.1,000
Purchases was too high.
It must be reduced by crediting Purchases.
Avoid these
Practice prompts
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After learning how mistakes are corrected, learn how written promises to pay later are recorded.
Continue to Bills of Exchange