1. ERROR MANAGEMENT
There are three steps in error
management:
 Prevention of errors;
 Detection of errors; and
 Rectification of errors.

2. TYPES OF ERRORS
 Errors of Omission
 Errors of Commission
 Errors of Principle
 Compensating Errors

3. PREVENTION OF ERRORS
 Two principal reasons
unintentional errors:
(i) Ignorance
(ii) Carelessness
 Development of internal control
system

4. 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

5. DETECTION OF ERRORS…
 Types of Trial Balance:
(i) Trial Balance
(ii) Adjusted Trial Balance
(iii) Post Trial Balance
 Locate errors

6. Rectification
on the basis of
types of errors:
 Rectification of two-sided
errors.
 Rectification of one-sided
errors.

7. 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.

8. 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.

9. Stages of Rectification
viz a viz Location of errors
Stage Journal Ledger Trial Final A/
Balance Cs & B/
S
I
II
III

10. 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

11. 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)

12. 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.

13. 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.

14. 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.

15. 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

16. 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.

17. ATTENTION COMMERCE
STUDENTS
ACCOUNTING(FINANCIAL & COST) OF
ICMAP STAGE 1,2,3,4 (CRASH CLASSES)
CA..MODULE A,B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…..0322-3385752
KARACHI, PAKISTAN.
http://finance.groups.yahoo.com/group/cost-
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