ERROR MANAGEMENT There are three steps in error management: Prevention of errors; Detection of errors; and Rectification of errors.
TYPES OF ERRORS Errors of Omission Errors of Commission Errors of Principle Compensating Errors
PREVENTION OF ERRORS Two principal reasons unintentional errors: (i) Ignorance (ii) Carelessness Development of internal control system
DETECTION OF ERRORS… Classification of errors (a) Two-sided errors: Errors which do not affect the agreement of Trial Balance (b) One-sided errors: Errors which affect the agreement of Trial Balance
DETECTION OF ERRORS… Types of Trial Balance: (i) Trial Balance (ii) Adjusted Trial Balance (iii) Post Trial Balance Locate errors
Rectification on the basis of types of errors: Rectification of two-sided errors. Rectification of one-sided errors.
Rectification of two-sided errorsThese errors do not affect the agreement of Trial Balance and are rectified by passing journal entries which are known as Rectification Entries. Thus, Rectification entries are entries passed to correct the errors committed and set right the accounting records.
Rectification of one-sided errors These errors which affect the agreement of Trial Balance, e.g. undercasting/overcasting, non- inclusion of an account, wrong posting, etc. These errors can be corrected by entering the correct amount in the affected account/place.
Stages of Rectification viz a viz Location of errorsStage Journal Ledger Trial Final A/ Balance Cs & B/ S I II III
Steps in the identification of rectification entry• Identify what has been done – WRONG ENTRY• Identify what had to be done – CORRECT ENTRY• Combine REVERSAL OF WRONG ENTRY with correct entry• RESIDUAL will help to determine the rectification entry
Stage I: Before preparation of Trial Balance In case both the sides of the residual agree, i.e. total debits = total credits – It is in the form of a journal entry – The RECTIFICATION ENTRY In case both the sides do not agree – DIRECT LEDGER POSTING be made (rectification of one-sided errors)
Stage II: After preparation of Trial Balance but before preparation of Final Accounts and Balance Sheet If both the sides agree, the Rectification entry for the Stage I will be the rectification entry for the Stage II. If both the sides do not agree, Rectification entry has to be passed by taking SUSPENSE ACCOUNT as the balancing figure.
Stage III: After preparation of FinalAccounts and Balance Sheet, i.e.rectification in the next or a future accounting period First of all, it should be noted that all accounts related to expenses, losses, incomes and gains, i.e. all NOMINAL ACCOUNTS have been closed at the end of the accounting period.
Stage III: After preparation of Final Accounts and Balance Sheet, i.e. rectification in the next or a future accounting period If any nominal account appears in the residual, then it should be replaced by PROFIT & LOSS ADJUSTMENT ACCOUNT. Thereafter, if both the sides agree, it will be the rectification entry for the Stage III. If both the sides do not agree, Rectification entry has to be passed by taking SUSPENSE ACCOUNT as the balancing figure.
RECTIFICATION SEQUENCE RECTIFICATION FOR STAGE I: Agrees: Journal Disagrees: Ledger posting RECTIFICATION FOR STAGE II: Consider Stage I entry and in case it Disagrees: Suspense A/C as bal.fig. RECTIFICATION FOR STAGE III: Consider Stage II entry and Replace all Nominal A/Cs with P/L Adjustment A/C
ACCOUNTS RELATED TO RECTIFICATION SUSPENSE ACCOUNT: Difference in Books Accounts PROFIT & LOSS ADJUSTMENT ACCOUNT: It is a prior-period item transferred to Profit & Loss Account in the year when the error is rectified during stage III. It discloses the error(s) effect on profit or loss. Profit & Loss Adjustment Account (Dr.) will indicate under- statement of loss or over-statement of profit and vice versa.