An accounting entry which is recorded in the incorrect account, violating the fundamental principles of accounting is simply
known as an accounting error. In another word, the errors or mistakes which are committed in the journal, ledger and any other financial statements are known as accounting errors. Accounting errors may be defined as those mistakes which are generally committed while recording the financial transactions in the book of accounts. Generally, accounting errors are not done on purpose.
Accounting error can also occur in double entry book keeping system for a different number of reasons. These errors are not the same as fraud, errors happen unintentionally. So, these errors occur without the knowing of the accountant. This error also affect trial balance not to balance the debit and credit amount.
Therefore, these errors must be properly located and rectified for ascertaining the true profit or loss and financial position of the business.
Accounting errors can be classified into two types according to their common characteristics. These are as follows:
The errors of omission occurs if a transaction has not been recorded in the books of accounts or omitted by mistake. The errors of omission can be partial or complete.
When a transaction is entered in the books of accounts partially or incorrectly then such kind of errors are known as errors of commission. Such errors occurs because of ignorance or negligence of the accountant. This may be of different types,some of them are explained below:
Rectification of errors means correction of accounting errors in a systematic manner. In other words, the process of correcting the accounting errors systematically is known as rectification of errors. The following method should be followed to rectify the accounting errors:
Errors are detected before preparing a trial balance. The errors detected in this process may be either one-sided errors or two-sided errors.
One-sided errors are those errors which affect only one side of an account. Wrong totalling of subsidiary books, posting a wrong amount, posting on the wrong side are some of the examples of one-sided errors. It is rectified by making an additional posting on the affected side of the ledger account.
The errors that affect two or more accounts are said to be two-sided errors. The rectification journal entries are to be prepared since such errors involve two or more accounts. Therefore, one account is debited and another is credited to rectify such errors. The rules of debit and credit are applied to rectify these errors.
Errors can sometimes be detected after an accounting year is over. Such errors are detected after preparation of trial balance. The errors detected after the completion of accounting year may be one-sided and two-sided errors. Rectification of the errors seen after preparation of trial balance can be made by preparing rectifying journal entries in the subsequent year only.
Double entry system is followed to rectify the errors detected after preparation of trial balance. Two accounts are affected by the two-sided errors. Therefore, one account is debited and another affecting account is credited for such errors. But one-sided errors are rectified by opening 'Suspense Account'.
The account opened to rectify the previous year's one-sided errors is called suspense account. Suspense account disappears automatically once it shows no balance after rectification of all errors . A suspense account is an account in the general ledger which stores any transactions for temporarily when there is uncertainty in the account in which they should be recorded.
Suspense account is opened with a purpose of correcting the previous year's one-sided errors. It is used for temporary period only.
A suspense account is opened when one-sided errors detected after preparation of trial balance. It is a temporary account opened to rectify one-sided errors. Some of the utilities of opening suspense account are as follow:
Suspense Account is a temporary account opened with the amount of difference in both sides of the trial balance. By putting the amount on the shorter side of the trial balance, trial balance is balanced. When the errors get detected, the amount is transferred to the respective account from Suspense Account.
In this process, after detecting an error, the balance of Suspense Account reduces gradually and when all errors are rectified, there will be nil balance in the Suspense Account. In other words, we can say that Suspense Account stands automatically closed when all one sided errors are rectified.
Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu
Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu
Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan Kathmandu
Types of Accounting Error