ERROR MANAGEMENTERROR MANAGEMENT

There are three steps in error There are three steps in error management:management:

Prevention of errors;Prevention of errors; Detection of errors; andDetection of errors; and Rectification of errors.Rectification of errors.

TYPES OF ERRORS TYPES OF ERRORS

Errors of OmissionErrors of Omission Errors of CommissionErrors of Commission Errors of PrincipleErrors of Principle Compensating Errors Compensating Errors

PREVENTION OF ERRORSPREVENTION OF ERRORS

Two principal reasons Two principal reasons unintentional errors:unintentional errors:

(i) Ignorance(i) Ignorance

(ii) Carelessness(ii) Carelessness Development of internal control Development of internal control

systemsystem

DETECTION OF ERRORS… DETECTION OF ERRORS… Classification of errorsClassification of errors (a) Two-sided errors: (a) Two-sided errors: Errors which do not affect the Errors which do not affect the agreement of Trial Balanceagreement of Trial Balance (b) One-sided errors: Errors which (b) One-sided errors: Errors which affect the agreement of Trial affect the agreement of Trial Balance Balance

Types of Trial Balance:Types of Trial Balance:

(i) Trial Balance(i) Trial Balance

(ii) Adjusted Trial Balance(ii) Adjusted Trial Balance

(iii) Post Trial Balance(iii) Post Trial Balance Locate errorsLocate errors

DETECTION OF ERRORS… DETECTION OF ERRORS…

Rectification Rectification on the basis of on the basis of types of errors:types of errors:

Rectification of two-sided errors.Rectification of two-sided errors.

Rectification of one-sided errors. Rectification of one-sided errors.

Rectification of two-sided errorsRectification of two-sided errors

These errors do not affect the These errors do not affect the agreement of Trial Balance and are agreement of Trial Balance and are rectified by passing journal entries rectified by passing journal entries which are known as Rectification which are known as Rectification Entries. Thus, Rectification entries are Entries. Thus, Rectification entries are entries passed to correct the errors entries passed to correct the errors committed and set right the committed and set right the accounting records.accounting records.

Rectification of one-sided errorsRectification of one-sided errors

These errors which affect the These errors which affect the agreement of Trial Balance, e.g. agreement of Trial Balance, e.g. undercasting/overcasting, non-undercasting/overcasting, non-inclusion of an account, wrong inclusion of an account, wrong posting, etc. These errors can be posting, etc. These errors can be corrected by entering the correct corrected by entering the correct amount in the affected amount in the affected account/place.account/place.

Stages of Rectification Stages of Rectification viz a viz Location of errorsviz a viz Location of errors

StageStage JournalJournal LedgerLedger Trial Trial BalanceBalance

Final Final A/Cs & A/Cs &

B/SB/S

II

IIII

IIIIII

Steps in the identification of Steps in the identification of rectification entry rectification entry

• Identify what has been done – Identify what has been done – WRONG ENTRYWRONG ENTRY

• Identify what had to be done – Identify what had to be done – CORRECT ENTRYCORRECT ENTRY

• Combine REVERSAL OF WRONG Combine REVERSAL OF WRONG ENTRY with correct entryENTRY with correct entry

• RESIDUAL will help to determine RESIDUAL will help to determine the rectification entrythe rectification entry

Stage I: Before preparation of Stage I: Before preparation of Trial Balance Trial Balance

In case both the sides of the residual In case both the sides of the residual agree, i.e. total debits = total credits agree, i.e. total debits = total credits – It is in the form of a journal entry – – It is in the form of a journal entry – The RECTIFICATION ENTRYThe RECTIFICATION ENTRY

In case both the sides do not agree – In case both the sides do not agree – DIRECT LEDGER POSTING be made DIRECT LEDGER POSTING be made (rectification of one-sided errors)(rectification of one-sided errors)

Stage II: After preparation of Trial Stage II: After preparation of Trial Balance but before preparation of Balance but before preparation of Final Accounts and Balance SheetFinal Accounts and Balance Sheet

If both the sides agree, the If both the sides agree, the Rectification entry for the Stage I will Rectification entry for the Stage I will be the rectification entry for the be the rectification entry for the Stage II.Stage II.

If both the sides do not agree, If both the sides do not agree, Rectification entry has to be passed Rectification entry has to be passed by taking SUSPENSE ACCOUNT as the by taking SUSPENSE ACCOUNT as the balancing figure. balancing figure.

First of all, it should be noted that First of all, it should be noted that all accounts related to expenses, all accounts related to expenses, losses, incomes and gains, i.e. all losses, incomes and gains, i.e. all NOMINAL ACCOUNTS have been NOMINAL ACCOUNTS have been closed at the end of the closed at the end of the accounting period.accounting period.

Stage III: After preparation of Final Stage III: After preparation of Final Accounts and Balance Sheet, i.e. Accounts and Balance Sheet, i.e. rectification in the next or a future rectification in the next or a future

accounting period accounting period

Stage III: After preparation of Final Stage III: After preparation of Final Accounts and Balance Sheet, i.e. Accounts and Balance Sheet, i.e. rectification in the next or a future rectification in the next or a future

accounting period accounting period If any nominal account appears in the If any nominal account appears in the

residual, then it should be replaced by PROFIT residual, then it should be replaced by PROFIT & LOSS ADJUSTMENT ACCOUNT.& LOSS ADJUSTMENT ACCOUNT.

Thereafter, if both the sides agree, it will be Thereafter, if both the sides agree, it will be the rectification entry for the Stage III.the rectification entry for the Stage III.

If both the sides do not agree, Rectification If both the sides do not agree, Rectification entry has to be passed by taking SUSPENSE entry has to be passed by taking SUSPENSE ACCOUNT as the balancing figure. ACCOUNT as the balancing figure.

RECTIFICATION SEQUENCERECTIFICATION SEQUENCE

RECTIFICATION FOR STAGE I:Agrees: Journal

Disagrees: Ledger posting

RECTIFICATION FOR STAGE II:Consider Stage I entry and in case itDisagrees: 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 ACCOUNTS RELATED TO RECTIFICATIONRECTIFICATION

SUSPENSE ACCOUNT: Difference in Books SUSPENSE ACCOUNT: Difference in Books AccountsAccounts

PROFIT & LOSS ADJUSTMENT ACCOUNT: It is a PROFIT & LOSS ADJUSTMENT ACCOUNT: It is a prior-period item transferred to Profit & Loss prior-period item transferred to Profit & Loss Account in the year when the error is rectified Account in the year when the error is rectified during stage III. It discloses the error(s) effect during stage III. It discloses the error(s) effect on profit or loss. Profit & Loss Adjustment on profit or loss. Profit & Loss Adjustment Account (Dr.) will indicate under-statement of Account (Dr.) will indicate under-statement of loss or over-statement of profit and vice loss or over-statement of profit and vice versa. versa.

ATTENTION COMMERCE ATTENTION COMMERCE STUDENTSSTUDENTS

ACCOUNTING(FINANCIAL & COST) OFACCOUNTING(FINANCIAL & COST) OFICMAP STAGE 1,2,3,4 (CRASH CLASSES)ICMAP STAGE 1,2,3,4 (CRASH CLASSES)

CA..MODULE A,B,C,DCA..MODULE A,B,C,DPIPFA (FOUNDATION,INTERMEDIATE,FINAL)PIPFA (FOUNDATION,INTERMEDIATE,FINAL)

ACCA-F1,F2,F3ACCA-F1,F2,F3BBA,MBABBA,MBA

B.COM(FRESH),M.COMB.COM(FRESH),M.COMMA-ECONOMICS..O/A LEVELSMA-ECONOMICS..O/A LEVELSKHALID AZIZ…..0322-3385752KHALID AZIZ…..0322-3385752

KARACHI, PAKISTAN.KARACHI, PAKISTAN.http://finance.groups.yahoo.com/group/cost-http://finance.groups.yahoo.com/group/cost-

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