FUN PACK 6 Flashcards
Revise corrections of errors
Identify the errors below:
a) Sales revenue was overstated by $400 while rent income was understated by $400.
b) Invoice issued to Dave, $620 was not recorded in the books.
c) Repairs of owner’s private residence $1 500 was debited as business repairs expense.
d) Returns by debtor Wee $520 was debited to Wee’s account and credited to Sales returns account.
a) compensating errors
b) error of omission
c) error of principle
d) error of complete reversal entries
Sally recorded insurance paid, $450 as $540 in the books.
a) name the error
b) state how the error will affect profit for the year.
a) error of original entries
b) profit will be understated by $90
(since expense overstated by $90)
Jerry took goods valued at $600 for own use. This was not recorded in the books.
a) give the double entries to correct the error.
b) explain how the error will affect balance sheet items.
a) Dr Drawings $600; Cr Inventory $600
b) Effect on balance sheet:
Equity will be overstated by $600 since drawings is understated.
Inventory (current asset) will be overstated by $600
Larry returned inventory $64 to his credit supplier, Wong. This was recorded as Dr Sales Returns and Cr Trade Payable Wong.
Explain the effect of this error on income statement and balance sheet.
Income Statement:
Sales returns will be overstated causing gross profit to be understated by $64. This in turn causes profit to be understated by $64.
Balance Sheet:
Equity is understated by $64 since profit is understated by $64.
Current asset (inventory) is overstated by $64 since there is no record of inventory return.
Current liabilities (trade payable) is overstated by $128 since the trade payable should be debited by $64 but it is credited by $64.
Riley paid for inventory $300 by cheque. The bookkeeper debited Inventory a/c and credited trade payable a/c.
Explain if working capital is affected by the error made.
No effect.
Working capital is CA less CL. In this case, the wrong entry causes CL to increase but did not decrease CA.
Sales of goods to Eric $120 was debited to Edison’s a/c.
Name the error and state if the error affects profit.
Error of commission.
Profit not affected.
Rent paid $300 was wrongly recorded as $380. State the effect of corrections on income statement and balance sheet.
Income statement:
Rent expense will be reduced by $80. This causes profit to increase by $80.
Balance Sheet:
Equity increases by $80 since profit increases by $80.
Cash at bank (current asset) will be increased by $80.
Impairment loss on inventory $580 was not recorded by the bookkeeper.
State the effect of the error on gross profit and profit.
Gross profit no effect.
Profit overstated by $580.
Purchase of motor vehicle, $30000 on credit was wrongly debited to inventory account.
Name the error and state how corrections will affect the balance sheet equation.
Error of Principle.
Upon correction, NCA will increase in the form of increase in motor vehicles, $30 000.
CA in the form of inventory will reduce by $30 000.
It was discovered that impairment loss on inventory, $400, in 2018 was not recorded.
a) Explain how this omission will affect the gross profit and profit for 2018 and 2019
b) State if the inventory on 31 Dec 2019 will be affected.
a) 2018 gross profit will not be affected since no error was made in the trading items - sales, sales revenue and cost of sales.
2018 profit will be overstated by $400 because the impairment loss on inventory, an expense, was not recorded.
2019 gross profit will be understated by $400 because the cost of sales would be overstated by $400 (assuming the goods from 2018 are sold).
2019 profit will be understated by $400 since gross profit is understated.
b) Inventory on 31 Dec 2019 will not be affected assuming the inventory in 2018 is sold.
