Principles of Accounting: The effects of errors on profit

////Principles of Accounting: The effects of errors on profit

Principles of Accounting: The effects of errors on profit

ZIMSEC O Level Principles of Accounting Notes: An example of how to correct errors in a suspense account

  • We have looked at several types of errors that may occur in accounting
  • There are some of errors that do not affect the subsequent profit figure
  • There are however some errors that will result in a wrong profit figure being obtained

Errors which do not affect the profit figure

  • Errors that occur in items that do not appear in the Income Statement/Statement of Comprehensive Income do not affect the profit figure Examples include:
    1. Errors involving the Purchase of Fixed Assets
    2. Miscalculating the Cash and Bank Balance
    3. Wrong Long term loan figure
    4. Wrong Drawings calculation
  • You should be careful to note however that some of these errors might have a tentive effect on items that appear in the Income Statement
  • For example: We have a wrong Long term loan figure because interest payments were recorded in the Long-term loan account
  • Here is an example of an error which does not affect profit:
  • A cash payment of $100 to J Mukono a creditor was only entered in the Cash Book but nowhere else. This should not affect the original profit figure at all since this only affects creditors

Errors which affect the profit figure

  • The profit figure has to be adjusted if there is an error which affects items that affect items used in the calculation of profit
  • This includes all the items that appear in the Income statement including but not limited to:
    1. Sales
    2. Sales and Purchases Returns
    3. Carriage Inwards and Outwards
    4. Import duty
    5. Opening and Closing Stock
    6. Purchases
    7. Revenue items
    8. Expense items such as wages
    9. Disposal of an asset
    10. Depriciation
    11. Selling and Distribution Expenses
    12. Advertising
    13. Rent etc
  • An example is when one of the pages is omitted in the Sales Day Book when calculating the sales total for the month
  • This will not affect the creditors figure because credit sales are posted regulary to their respective accounts in the Debtor’s ledger but only periodic totals are posted to the Sales Account. This will mean Sales for the period were understated

NB

  • For an example of the suspense and profit calculations click here

To access more topics go to the Principles of Accounts Notes.

By |2017-08-09T10:42:42+00:00August 9th, 2017|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: The effects of errors on profit

About the Author:

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
%d bloggers like this: