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Rectification of Errors

"Finding an error is half the battle; rectifying it completes the victory."

After identifying errors (from previous lesson), we must rectify (correct) them. The method depends on when the error is discovered.

Two Scenarios for Rectification

Before Trial Balance
↓
After Trial Balance

Rectification BEFORE Trial Balance

Method: Pass a journal entry to cancel the wrong effect and record the correct effect.

Steps:

  1. Identify the wrong entry made
  2. Identify the correct entry that should have been made
  3. Pass a rectification entry

Example 1: Wrong Account (Same Class)

Error: Paid ₹5,000 to creditor Ram, but posted to creditor Shyam's account.

Wrong Entry (made earlier):

Shyam A/c                Dr.    ₹5,000
    To Cash A/c                     ₹5,000

Correct Entry (should have been):

Ram A/c                  Dr.    ₹5,000
    To Cash A/c                     ₹5,000

Rectification Entry:

Ram A/c                  Dr.    ₹5,000
    To Shyam A/c                    ₹5,000
(Being error rectified - payment wrongly posted to Shyam now corrected)

Logic: Remove from Shyam (credit him back), add to Ram (debit him).

Example 2: Error of Principle

Error: Purchase of furniture ₹10,000 debited to Purchases A/c.

Wrong Entry:

Purchases A/c            Dr.    ₹10,000
    To Cash A/c                     ₹10,000

Correct Entry:

Furniture A/c            Dr.    ₹10,000
    To Cash A/c                     ₹10,000

Rectification Entry:

Furniture A/c            Dr.    ₹10,000
    To Purchases A/c                ₹10,000
(Being purchase of furniture wrongly debited to Purchases now corrected)

Example 3: Excess/Short Posting

Error: Sales of ₹12,000 posted as ₹1,200 (short by ₹10,800).

Rectification Entry:

Debtors A/c              Dr.    ₹10,800
    To Sales A/c                    ₹10,800
(Being sales understated, now corrected)

Rectification AFTER Trial Balance

Problem: If error is discovered after TB is prepared, the difference has already been placed in Suspense Account.

Method: Rectification entry must include Suspense A/c to clear it.

What is Suspense Account?

Definition: A temporary account created to make Trial Balance agree when it doesn't tally.

Example:

  • Debit side total: ₹5,00,000
  • Credit side total: ₹4,95,000
  • Difference: ₹5,000 (shortfall on credit side)

Entry to create Suspense A/c:

Suspense A/c             Dr.    ₹5,000
    To Difference in Books          ₹5,000

Now TB agrees. Later, when error is found, Suspense A/c is cleared through rectification.

Rectification WITH Suspense Account

Rule: If error affects Trial Balance agreement, Suspense A/c will be involved in rectification.

Example 4: Partial Omission

Error: Purchases of ₹8,000 from Mohan were debited to Purchases A/c but NOT credited to Mohan A/c.

Effect: Debit > Credit by ₹8,000.

Suspense Entry (when TB didn't tally):

Suspense A/c             Dr.    ₹8,000
    To Difference in Books          ₹8,000

Rectification Entry:

Suspense A/c             Dr.    ₹8,000
    To Mohan A/c                    ₹8,000
(Being credit to Mohan omitted, now rectified)

Result: Suspense A/c is cleared (Dr. ₹8,000, Cr. ₹8,000 = Zero balance).

Example 5: Wrong Side Posting

Error: Discount allowed ₹500 was credited instead of debited.

Effect: Credit > Debit by ₹1,000 (₹500 not debited + ₹500 wrongly credited = ₹1,000 difference).

Suspense Entry:

Difference in Books       Dr.    ₹1,000
    To Suspense A/c                 ₹1,000

Rectification Entry:

Discount Allowed A/c      Dr.    ₹1,000
    To Suspense A/c                 ₹1,000
(Being discount allowed wrongly credited, now debited with double the amount)

Why ₹1,000? We need to remove ₹500 from credit AND add ₹500 to debit = Total ₹1,000 debit.

Decision Tree: Which Account to Use?

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Practical Example: Multiple Errors

Situation: The following errors are discovered after preparing Trial Balance (which showed Suspense A/c with a debit balance of ₹7,500):

  1. Sales of ₹5,000 were not posted to Sales A/c (partial omission).
  2. Purchase of machinery ₹10,000 was debited to Purchases A/c (principle error).
  3. Discount received ₹2,500 was debited instead of credited (wrong side).

Rectification Entries:

Error 1:

Suspense A/c             Dr.    ₹5,000
    To Sales A/c                    ₹5,000

Error 2:

Machinery A/c            Dr.    ₹10,000
    To Purchases A/c                ₹10,000
(No Suspense - doesn't affect TB)

Error 3:

Suspense A/c             Dr.    ₹5,000
    To Discount Received A/c        ₹5,000
(₹2,500 × 2 = ₹5,000, to reverse wrong debit and record correct credit)

Suspense A/c Ledger:

Dr.                  Suspense A/c                  Cr.
------------------------------------------------------------
Balance b/d      7,500 | Error 1 rectified     5,000
Error 3 rectified 5,000| Balance c/d           7,500
------------------------------------------------------------
Total           12,500 | Total                12,500

Issue: Suspense still has ₹7,500 Dr. balance—there are more errors yet to be found!

Real-World Scenario

Infosys - Year-End Audit

During annual audit, auditors found:

  • Multiple posting errors
  • Wrong classification of expenses

Process:

  1. All errors documented
  2. Rectification entries passed
  3. Revised Trial Balance prepared
  4. Suspense Account cleared
  5. Correct financial statements prepared

Even large companies with ERP systems need manual rectification when errors slip through!

Quiz: Rectification of Errors

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