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 errors

These 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
vis a vis Location of errors
Stage Journal Ledger Trial Final
Balance A/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 Final
Accounts 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.
THANK YOU