Rectification of errors

Learning Objectives:

To understand type of error and effects of identified error on financial statements.

GDB Question:

Mr. Hamid is running his small retail business under the name of Hamid Store. He has recently
hired Mr. Imran as a junior accountant to maintain the books of accounts of his business. Mr.
Imran has little knowledge in accounting. Recently, it has been observed that Mr. Imran wrongly
treated installation charges of plant and machinery worth Rs. 500,000 as revenue expenditure
under the heading of administration expenses. As a result, financial statements failed to reflect
true and fair business affairs.

Required:

1. Identify the “type of error” committed by Mr. Imran.

Answer : Error of Principle.

2. What will be the effect of given error on asset side of a balance sheet? (Just mention whether
the assets would be overstated, understated or remains unaffected)

Answer : Assets understated

3. What will be correct amount of fixed assets, if current assets and fixed assets before correcting
this error were Rs. 160,000 and Rs. 940,000 respectively?

Answer : Correct amount of Fix assets is 1440000/-

4. What will be correct amount of operating profit, if operating loss before correcting this error
was Rs. 300,000?

Answer : Operating Profit = 500000 - (300000) = 200000