Note on Accounting Errors

  • Note
  • Things to remember

Concept and Meaning of Accounting Errors

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.

Source:Tweak Your Biz
Source:Tweak Your Biz

Types of Accounting Errors

Accounting errors can be classified into two types according to their common characteristics. These are as follows:

1. Accounting Errors Based On Their Nature

Errors of omission

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.

  • Errors of partial omission
    Errors of partial omission occurs when a transaction is entered in the subsidiary book but not entered to the ledger. For example, cash paid to the supplier has been posted to the payment side of the cash book but has not been posted in the debit side account.

  • Errors of complete omission
    Errors of complete omission occurs when the transaction is completely omitted from the books of accounts. For example, an accountant fails to enter a specific invoice from the sales day book.

Errors of commission

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:

  • Errors of principle
    This kind of errors occurs when the entries are made against the principle of accounting. These errors are made because of the following reasons:-
    1. Due to the inability to make a distinction between the capital and revenue items.
    2. Due to the inability to make a difference between the personal and business expenses.
    3. Due to the inability to make a distinction between the productive and non-productive expenses.

  • Compensating error
    Compensating errors are those errors which compensates themselves in the net results of the business. A compensating error occurs when two or more errors cancel each other out. For example, if there are over debit in one account then it will be compensated by the over credit in some account in the same extent of the business.

  • Errors of posting
    An error of posting occurs when an incorrect amount is posted to the correct accounts. For example, if cash paid to a supplier of 2196 was posted as 2169 to a cash account.

  • Errors of recording
    Errors of recording occur when the correct amount is recorded to the correct accounts but the debits and credits have been reversed. For example, if a cash sale is made for 400 and posted incorrectly as follows:

    Accounting errors – Incorrect posting
    Account Debit Credit
    Sales 400
    Cash 400


  • Error in carrying forward
    Total or balances are carried forward to the next page. These may be carried forward incorrectly which arises errors in accounting. For example, the total of one page of the Purchases Book of Rs.35,600 is carried to next page as Rs.36500.

2. Accounting Errors Based On Disclosure By Trial Balance

  • Errors are shown by trial balance
  • Errors not shown by trial balance

Rectification of Accounting Errors and Its Methods

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:

  1. Rectification of errors located before preparation of trial balance
  2. Rectification of errors after preparation of trial balance

1. Rectification of Errors Before the Preparation of Trial Balance

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 Before Preparation of Trial Balance

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.

  • Two-sided Errors Before Preparation of Trial Balance

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.

2. Rectification of Errors After the Preparation of Trial Balance

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'.

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.

Utility of Suspense Account

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:

  • Helps to carry one-sided errors amounts to suspense account
  • Helps to show the total amount of errors which are to be rectified
  • Helps to show the different accounts wherein rectifications are to be made
  • Helps to draft final account along with checking of errors simultaneously.

Preparation of Suspense Account

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.


References:

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

  1. Error of omission
  2. Error of commission
  3. Errors of principles
  4. Compensating errors
  5. Errors of posting
  6. Errors of recording
  7. Errors of carrying forward
.

Very Short Questions

0%

DISCUSSIONS ABOUT THIS NOTE

You must login to reply

Forum Time Replies Report


You must login to reply

gautam

why we make acconting error


You must login to reply