Rectification of errors and suspense account While recording the transactions in the journal, posting them to the ledger accounts, casting or at the time of balancing the accounts, there are chances for errors. Such errors are to be found out and corrected in the books of the business Correction of errors. After the errors are found out from the books, those should be corrected. The correction of errors is to be done by passing correction entries or rectification entries in the general journal. The preparation of trial balance is the test of arithmetical accuracy of the ledger accounts prepared under double entry system. It proves the equality of debit and credit. A trial balance, which agrees, indicates that for every debit there has been an equivalent credit entry or entries. It does prove that all the entries are for the correct amount or made to the correct account
Types of errors which do not affect the agreement of the trial balance 1. Errors of omission: Where a transaction is completely omitted from the books (Journal or ledger). E.g. a sales invoice $ 245 to Bolton was completely omitted from the accounts. 2. Errors of commission. Where a correct amount is entered in wrong person’s account, for E.g. Credit purchase from C. Clint has been recorded in the account of C. Clinton’s account. 3. Errors of principle: Where an item is entered in wrong class of accounts, E.g. Purchase of plant had been debited to purchase account instead of debiting to plant account. 4. Compensating errors: Where errors cancel out each other, for E.g. Sales account was overcast by $ 500 at the same time the purchase account was also overcast by $500, and then the effect of these errors would cancel out in the trial balance 5. Errors of original entry: Where the original figure is incorrect but recorded in the correct original entry. Eg. Credit sales of goods$ 400 was calculated in the invoice as $ 300 and recorded in the same journal. 6. Complete reversal of entries: This occurs where the entries for transactions are reversed- the account which should be credited is debited and the account which should be debited is credited. Eg. The purchase of stationery for $ 200 for cash debited to cash and credited to stationery. 7. Transposition errors: Where the wrong sequence of the individual characters within a number was entered. E.g. An amount of a transaction $ 172 was entered in the accounts as $127 One way to help remember the six errors is to memorize COPCORT Commission Omission Principle Compensating Original entry Reversal Transposition
Types of errors which do affect the agreement of the trial balance The following errors will stop the trial balance from agreeing because debit does not equal to credit. 1. Incorrect addition to any accounts 2. Making an entry only on one side of one account i.e. Entering debit but not credit or entering debit but not credit. 3. Entering a different amount on the debit side from the amount on the credit side 4. The double entry has been inaccurate. E.g. Cash sales $15 – cash account debited with $5 and sales account credited with $15. 5. Two debit or two credit entry has been made.
Casting: means adding figures. Overcastting: means incorrectly adding a column of figures to give an answer which is greater than it should be. Under casting: means incorrectly adding a column of figures to give an answer which is less than it should be. Suspense account: This is the account opened in the books of the business to show the difference in trial balance, when it disagrees. When the errors are found out, the correction is made to suspense account and it will be automatically cancelled.
Key points
Nature of balances of each class of accounts
Assets and expenses -- always debit Liabilities and incomes --- always credit
To increase the balance of an account with debit balance – debit the account.
To decrease the balance of an account with debit balance – credit the account.
To increase the balance of an account with credit balance – credit the account.
To decrease the balance of an account with credit balance – debit the account.
The journal entries passed in the general journal to correct the errors found in the books of the business are known as rectification entries.
The action to be taken for rectification of errors in the case of undercasting and overcasting of accounts