Chapter 02 Correction of Error. (2a)

Chapter 2
Correction of Errors
Contents
Errors
Correcting Errors
Impact of correcting errors on financial statements
Practice Question
ICAP Past Papers
Objective Based Questions
Objective based answers
ERRORS
Introduction
Accounting errors can occur in double entry bookkeeping for a number of reasons including, but
not limited to, human factor. These errors can occur at any stage of accounting process, for
example, recording, posting, totaling, balancing, etc.
Note:
Transposition errors are quite common where the wrong
sequence of individual characters within a number is entered, for
example, Rs. 142 entered instead of Rs. 124.
An accounting error can cause the trial balance not to balance, which is easier to spot, or the error
can be such that the trial balance will still balance, usually making it more difficult to identify the
error.
Errors where trial balance does not balance

One way of finding some errors in the accounting records is to extract a trial balance from the
general ledger. If the total of the debit balances does not equal the total of the credit balances on
the general ledger accounts, then an error or several errors have been made.
The following six types of errors will cause a trial balance not to tally i.e. total debits shall not agree
with total credits.
Casting error
Incorrect addition in any individual account, i.e., under-casting or over-casting.
Example 01.
In the sales day book, the column for total sales has been added up incorrectly. The total
should be Rs. 26,420, but the total was undercast by Rs. 1,000. (The total was added up
as Rs. 25,420). The correct total amount receivable was entered in the receivables account
in the general ledger.
This type of error is called casting error.
Balancing error
Opening balance not brought down or brought down on wrong side or with wrong amount.
Example 02.
Prepaid insurance amounting to Rs. 740,000 pertaining to the last year was not brought
forward from the previous year. This type of error is called balancing error.
Extraction error
The ledger balance omitted or placed in trial balance at wrong side or with incorrect amount.
Example 03.
Fixture and fittings account balance (debit) of Rs. 460,000 has been included in the trial
balance at credit side. This type of error is called extraction error because it is caused at
the time trial balance is being extracted from ledger accounts.
Posting error
Part of the transaction not posted or transaction posted with incorrect amount or posting to wrong
side of an account.
Example 04.
Salaries paid of Rs. 909,000 were correctly recorded in cash book but posted to credit side
of Salaries account in general ledger. This type of error is called posting error.
CAPS College 24 M. Imran Gasura

Financial Accounting and Reporting-I
Error of part omission

A debit entry has been made but no corresponding credit entry or vice versa i.e., single sided entry.
Example 05.
Cash sales of Rs. 6,000 was correctly recorded in cash book but not recorded anywhere
else in the general ledger. This type of error is called error of part omission.
Different amounts
Debit and credit entries have been made but at different amounts.
Example 06.
Sales return of Rs. 4,600 was recorded correctly in Sales Return Account in general ledger
but included on credit side of relevant receivable account at Rs. 6,400.
This type of errors is called error of different amounts.
Errors where trial balance still balances

A trial balance is only useful in helping to identify errors where the debit and credit entries in the
general ledger accounts do not match. It does not help with the identification of errors where there
has not been a mismatch between debit and credit entries.
The following six types of errors result in situation where errors are not highlighted by extraction of
trial balance.
Error of omission
Entry missed from the accounting records completely.
Example 07.
Journal entry that should have been recorded
Date Particulars LF Debit Rs. Credit Rs.
17 Aug Purchases 450,000
ABC & Co (Payables) 450,000
Actually, the journal entry was omitted (causing the error)

This type of error is called error of omission.

Error of commission
Correct amount and type of account but wrong individual account.
Example 08.
Journal entry that was recorded actually (causing the error)
ATC & Co (Payables) 450,000
Error of principle
Correct amount but wrong type of account.

Example 09.

17 Aug Plant & machinery 450,000
ATC & Co (Payables) 450,000
Compensating errors
Two or more errors balance each other out.
Example 10.
Journal entries that should have been recorded
31 Aug Salaries expense 999,000
Bank 999,000
Journal entries that were recorded actually (causing the error)

31 Aug Salaries expense 909,000
Bank 999,000
This type of errors are called compensating errors.
Error of original entry
Correct accounts but wrong amounts on both side of an entry.
Example 11.
This type of error is called error of original entry.

Complete reversal of entries
Correct accounts and amounts but sides (debit & credit) reversed.
Example 12.


17 Aug ABC & Co (Payables) 450,000
Purchases 450,000
This type of error is called complete reversal of entries.
CORRECTING ERRORS
Suspense account
A suspense account is temporary account that is required until the sufficient information is
received and errors are identified and corrected. Suspense accounts are temporarily classified as
a statement of financial position account, usually under the heading of current assets or current
liabilities depending on the balance (debit or credit).
There are two main reasons for creation of suspense account:
Trial balance does not agree

Irrespective of the reasons why a trial balance may not balance, as a temporary measure the
difference in the trial balance is allocated to a suspense account and a suspense account
reconciliation is carried out at a later stage.
Example 13.
For example, a trial balance showed total debits of Rs. 97,000 but total credits of Rs.
94,000 leaving a difference of Rs. 3,000.
Trial balance as at 30 June 2021 (extracts only)
Account code Particulars Debit Rs. Credit Rs.
Total 97,000 94,000

TMP-05 Suspense account 3,000
Total 97,000 97,000
This way a suspense account has been created to tally the trial balance temporarily until
the error is identified and corrected.
Unknown entry
In some instances, a suspense account will be opened deliberately by the book-keeper, if the
bookkeeper is uncertain of where to post one side of the double entry. This is later transferred to
proper account when relevant information is received.
Example 14.
A bookkeeper has noticed the credit transfer by a customer of Rs. 25,000 in bank statement
but which of the customers exactly made that payment. He may temporarily record it in
suspense account.
17 Aug Bank 450,000
Suspense 450,000
Later, it was discovered that the credit transfer was from O&J Traders, the suspense
account can be eliminated now by transferring the amount to correct account.


19 Oct Suspense 450,000
O&J Traders 450,000
Approach to correction of errors

The correction of errors would require the consideration of following three steps:
• What double entry should have been recorded?
• What double entry was recorded, in actual, including suspense account where the error
caused it?
• What correction is required?
Note: Assume that if one side of double entry is not mentioned, it has been correctly recorded.
The correction process would require:
• to reverse what had been recorded incorrectly; and
• to record what had been omitted.
IMPACT OF CORRECTING ERRORS ON FINANCIAL

STATEMENTS
Impact of errors on financial statements
The impact of errors on financial statements may be material or immaterial, therefore, it is important
to quantify this impact. This can be calculated as difference of ‘the amount if error is not
corrected’ and ‘the corrected amount’. The same impact may also be quantified by looking at
debit and credit items of correcting journal entry.
Often the most common analysis in this respect is the effect of correcting entries on profit and
non-current assets.
Effect of correcting entries on profit

The following points are relevant in this regard:
• All accounts of income and expenses are called nominal accounts.
• The net profit shall increase due to all nominal accounts credited in correcting entries.
• The net profit shall decrease due to all nominal accounts debited in correcting entries.
• The gross profit shall increase due to nominal accounts, related to revenue and cost of
sales only, credited in correcting entries.
• The gross profit shall decrease due to nominal accounts, related to revenue and cost of
sales only, debited in correcting entries.
Effect of correcting entries on other line items of financial statements

Similarly, impact on other line items in the financial statements may be calculated, for example,
assets would increase when related account is debited in correcting entry and decrease when
related account is credited in correcting entry

PRACTICE QUESTIONS
Question 01.
The accountant of Grant Company has prepared a trial balance, but has found that the total of
debit balances is Rs.864,600 and the total of credit balances is Rs.862,150.
On investigation, he discovers the following errors in the book-keeping:
• Total purchases in the period were recorded at Rs.100 below their correct value, although
the total value of trade payables was correctly recorded.
• Total telephone expenses were recorded at Rs.1,000 above their correct amount, although
the total value of the amount’s payable was correctly recorded.
• Purchase returns of Rs.550 were recorded as a debit entry in the sales returns account,
but the correct entry had been made in the trade payables control account.
• Equipment costing Rs.2,000 had been recorded as a debit entry in the repairs and
maintenance account.
• Rental expenses of Rs.5,490 were entered incorrectly as Rs.5,940 in the expense account
but were entered correctly in bank account in the ledger.
• Bank charges of Rs.200 have been omitted entirely from the ledger.
(Note: Individual debtors and creditors accounts are maintained in the general ledger)
Required
(a) Prepare journal entries for the correction of the errors.
(b) Open a suspense account. Record the appropriate corrections in the suspense account,
so that the balance on this account is eliminated.
Question 02.
The trial balance of Eastern Products showed a short credit of Rs. 6,264 as at June 30, 2013. A
suspense account was opened for the difference and the profit for the year was then calculated at
Rs. 956,180.
The following errors and adjustments were discovered subsequently:
(i) An invoice of Rs. 3,700 was debited to purchases but the goods were received after
year-end and were not included in the closing inventory.
(ii) Store equipment costing Rs. 8,100 and having a book value of Rs. 3,600 was sold for
Rs. 2,500. Cash was debited and store equipment was credited. No other entries were
made.
(iii) A cheque of Rs. 1,850 received from a customer was dishonored on June 25, 2013 but
no entry was made in the books. Cash there against was received after year-end.
(iv) Purchase of office equipment costing Rs. 15,200 was entered in the purchases account.
Depreciation on office equipment is provided at the rate of 10%.
(v) A purchase invoice of Rs. 197 was debited to the supplier account as Rs. 917.
(vi) Purchase returns book was under-casted by Rs. 650.
(vii) The opening balance of furniture account was brought forward as Rs. 18,300 instead
of Rs.13,800. Depreciation on furniture is provided at the rate of 10%.
(viii) A balance of Rs.730 in the sales ledger is to be offset against a balance of Rs. 880 in
the purchase ledger.
(Note: Individual debtors and creditors accounts are maintained in the general ledger)
Required:
(a) Prepare journal entries to adjust the above items.
(b) Recalculate the net profit for the year.

Question 03.
1. A sum of Rs. 2,000 spent on extension of business premises was wrong debited to repair
of building account
2. A sum of Rs 60 paid to clerk as salary was by mistake debited to his personal account
3. Rupees 800 received from Mr. Naveed one of the customers of the firm were credited to
miscellaneous Revenue account
4. Repair charges of the building amounting to Rs 1230 were debited to building account
5. Drawing of the proprietor amounting to Rs 700 were debited to salaries account
6. A sale of Rs 1000 had been passed through purchase journal The customer account has
however been correctly debited
7. Credit sale of Rs 700 debited to Mr. Rahim instead of Mr. Aslam
8. Cash sale of Rs 50 returned back by the customer. The amount was credit to the personal
account
9. Recovery of Rs 500 credited to J.Y. The amount has been written off as bad debt
10. Repairs to plant and machinery to Rs 300 debited to machinery account
11. A portion of furniture was sold of Rs 500. The amount was treated as regular sale of the
firm
12. Total purchases in the period were recorded at Rs.100 below their correct value, although
the total value of trade payables was correctly recorded.
13. Total telephone expenses were recorded at Rs.1,000 above their correct amount, although
the total value of the amounts payable was correctly recorded.
14. Purchase returns of Rs.550 were recorded as a debit entry in the sales returns account,
but the correct entry had been made in the trade payables control account.
15. Equipment costing Rs.2,000 had been recorded as a debit entry in the repairs and
maintenance account.
16. Rental expenses of Rs.5,490 were entered incorrectly as Rs.5,940 in the expense account
but were entered correctly in bank account in the ledger.
17. Bank charges of Rs.200 have been omitted entirely from the ledger
18. The total of purchase return day book amounting to Rs. 16,160 had not been posted to the
ledger.
19. Discount received amounting to Rs. 11,320 had been debited to discount allowed account.
20. The sales account had been added short by Rs. 10,000.
21. An asset bought four years ago for Rs. 7,000 and depreciated to Rs. 1,200 had been sold
for Rs. 1,500 at the beginning of the year. The receipt of cash has been posted in the bank
book but corresponding entries have not been recorded.
22. A credit sale of Rs. 1,470 had been credited to the customer’s account as Rs. 1,740. A
doubtful debt of Rs. 1,560 has to be written off. Allowance for doubtful debts is to be
maintained at 10% of receivables. Receivables appearing in the trial balance are Rs.
23,390 and the allowance for bad debts account shows a credit balance of Rs. 2,320.
23. A cheque of Rs. 10,800 was paid to a creditor who allowed 10% cash discount. The
payment was correctly entered in the bank book but was posted to purchase account as
Rs. 1,080 only. No other entry was made.
24. Sundry receivables include an amount of Rs. 15,000 which had proved irrecoverable but
was not written off. According to a consistent policy, a reserve for bad debt was created @
5% on closing receivables
25. Commission of Rs. 3,500 was paid but was debited twice, once in the party’s account and
again in the commission account
26. Purchases of Rs. 4,500 were entered as sales in the Sales Day Book

27. Rs. 600 collected from a party in respect of dues which had been written off as bad two
years ago, was credited to the receivables control account
28. Goods invoiced at Rs. 4,600 were returned by a debtor. These were entered in the
purchase book and posted from there to debtor’s account as Rs. 6,400
29. The discount column in the sales day book was short casted by Rs. 1,500
30. A cash sale of Rs. 7,300 to Mr. Anwar was correctly entered in the cash book but was
posted to the credit of Mr. Anwar’s account
31. An amount of Rs. 17,400 was received in full and final settlement from a customer after he
was allowed a discount of Rs. 2,600. However, while writing the books, the amount received
was entered in the discount allowed column of the bank book and the discount allowed was
entered in the bank column
32. Receivables include Rs. 15,000 which are irrecoverable and need to be written off
33. Goods invoiced at Rs. 4,600 were returned by a customer. It was entered in the purchase
book and posted from there to a creditor’s account as Rs. 6,400
34. A cheque of Rs. 8,000 received from a customer was not posted to his ledger account.
Moreover, the corresponding sales invoice for Rs. 12,000 was incorrectly passed through
the sales day book as Rs. 2,000.
35. Sales include goods sold for cash amounting to Rs. 25,000 on behalf of Mr Yasir. Ayub
Brothers were entitled to a commission of 10% on the sales plus selling expenses, for which
no adjustment was made. The related selling expenses amounted to Rs. 1,500
36. An amount of Rs. 3,800 owed by Zahid & Company for goods supplied was to be adjusted
against an amount of Rs. 8,500 owed to Zahid & Company. No entry has been made in this
regard
37. A purchase of Rs. 15,100 was entered in the purchase day book as Rs. 1,500 and posted
to the supplier’s account as Rs. 5,100
38. Goods invoiced at Rs. 23,000 and returned by Hamid Khan, a debtor, were entered in the
purchase day book and posted there from to Hammad Khan, a creditor, as Rs. 32,000
39. A supplier’s invoice for Rs. 12,300 had been entered in the purchase day book on 28
December 2013. However, the goods were received on 2 January 2014
40. Computers costing Rs. 240,000 purchased on 1 September 2017 for office use were
debited to purchases account. SE depreciates computers at 20% per annum using straight
line method
41. Furniture costing Rs. 1,200,000 and having a book value of Rs. 670,000 as on 31
December 2017 had already been sold on 1 November 2017. The proceeds of Rs. 700,000
were credited to sales. SE depreciates furniture at 10% per annum using straight line
method
42. On 1 April 2017, SE rented-out one of its premises at an annual rent of Rs. 900,000
payables in advance. The rent received was credited to income
43. Trade receivables include a balance of Rs. 180,000 which is irrecoverable but has not been
written-off. Further, a recovery of Rs. 96,000 against receivables written off in prior years
was credited to trade receivables. As per SE's policy, provision for doubtful receivables has
already been made at 5% on year-end balance
44. A cheque of Rs. 192,000 was received after a discount of 4% from a customer. However,
in the cash book, the amount received was entered in the discount allowed column and the
amount of discount was entered in the bank column.
Question 04.
The bookkeeper has prepared a preliminary trial balance of CND for the year ended 31 December
as follows.

Rs. Rs.
Capital account 110,000
Accumulated profit at 1 January 50,000
Bank loan 30,458
Trade receivables and payables 77,240 60,260
Cash in hand and bank overdraft 1,000 5,036
Inventories at 1 January 108,000
Non-current assets at cost and accumulated 161,879 60,943
depreciation at 31 December
Depreciation for the year 15,000
Purchases and revenues 300,297 402,000
Returns 4,370 4,630
Discounts allowed and received 9,760 6,740
Wages and salaries 22,000
Rent, rates and insurance 18,036
Postage, telephone and stationery 3,009
Repairs and maintenance 2,124
Advertising 4,876
Packing materials 924
Motor expenses 2,000
Sundry expenses 1,000
Loan interest 4,000
Accrued expenses 6,478
Suspense account 1,030
736,545 736,545
When the bookkeeper discovered that the preliminary trial balance did not balance, he made it
do so by opening a suspense account and entering the required amount on the appropriate side.
A subsequent investigation shows the following mistakes have been made.
1. A loan to the business of Rs.10,000 from the owner’s brother, X, has been added to capital.
2. Accrued interest on the bank loan of Rs.458 has been credited to the bank loan account
instead of being treated as a current liability.
3. Bank charges of Rs.1,000 have been completely omitted from the books.
4. In addition to allowing discount of Rs.240 and receiving discount of Rs.260, various
customers’ and suppliers’ accounts amounting to Rs.10,000 were set off by contra. No
entries whatever have been made in respect of these items.
5. Trade receivables amounting to Rs.2,000 are bad and need to be written off.
6. A debt of Rs.1,000 written off as bad in a previous year has been recovered in full. The
amount has been credited to the personal account and deducted from the trade receivables
ledger control account.
7. Goods returned from a customer of Rs.630 have been correctly entered into the personal
account, but by mistake were entered in the returns outwards journal.
8. A payment for stationery of Rs.234 was correctly entered in the cash book but debited in
the ledger as Rs.243.
9. A payment of Rs.76 for packing materials has been correctly entered in the cash book, but
no other entry has been made.
10. A payment of Rs.124 for advertising has been debited to repairs and maintenance.
11. A cheque payment of Rs.26 for insurance has been recorded in all accounts as Rs.62.
12. A page in the purchase account correctly totaled Rs.125,124 was carried forward to the top
of the next page as Rs.125,421.

All entries other than those given above are to be assumed to have been made correctly.
Required:
(a) Show the correcting entries in journal form (i.e., showing accounts and amounts debited
and credited but no supporting narrative is required) in respect of each of the mistakes
mentioned above.
(b) Show the trial balance of the company at 31 December after these corrections have been
made. A working showing how the suspense account is cleared should be included.
Note Control accounts are not maintained.
Question 05.
Mr. Fawwad owns a factory and closes his books on June 30. The trial balance prepared by him,
contained a difference which he kept in a suspense account. On scrutinizing the records, the
following errors were detected:
(i) A cheque of Rs. 10,800 was paid to a creditor who allowed 10% cash discount. The
payment was correctly entered in the bank book but was posted to purchase account
as Rs. 1,080 only. No other entry was made.
(ii) Sundry receivables include an amount of Rs. 15,000 which had proved irrecoverable
but was not written off. According to a consistent policy, a reserve for bad debt was
created @ 5% on closing receivables;
(iii) Commission of Rs. 3,500 was paid but was debited twice, once in the party’s account
and again in the commission account;
(iv) Purchases of Rs. 4,500 were entered as sales in the Sales Day Book.
(v) Rs. 600 collected from a party in respect of dues which had been written off as bad two
years ago, was credited to the receivables control account.
(vi) Goods invoiced at Rs. 4,600 were returned by a debtor. These were entered in the
purchase book and posted from there to debtor’s account as Rs. 6,400.
(vii) The discount column in the sales day book was short casted by Rs. 1,500.
(viii) A cash sale of Rs. 7,300 to Mr. Anwar was correctly entered in the cash book but was
posted to the credit of Mr. Anwar’s account
(ix) An amount of Rs. 17,400 was received in full and final settlement from a customer after
he was allowed a discount of Rs. 2,600. However, while writing the books, the amount
received was entered in the discount allowed column of the bank book and the discount
allowed was entered in the bank column.
Required:
Pass rectification entries (without narration) to correct the above errors.
Question 06.
The trial balance prepared by A.A. Enterprise showed a difference of Rs. 47,090 which was put on
the credit side of a suspense account. An investigation disclosed that:
(i) The total of purchase return day book amounting to Rs. 16,160 had not been posted to
the ledger.
(ii) Discount received amounting to Rs. 11,320 had been debited to discount allowed
account.
(iii) The sales account had been added short by Rs. 10,000.
(iv) An asset bought four years ago for Rs. 7,000 and depreciated to Rs. 1,200 had been
sold for Rs. 1,500 at the beginning of the year. The receipt of cash has been posted in
the bank book but corresponding entries have not been recorded.
(v) A credit sale of Rs. 1,470 had been credited to the customer’s account as Rs. 1,740. A
bad debt of Rs. 1,560 has to be written off. Allowance for doubtful debts is to be
maintained at 10% of receivables. Receivables appearing in the trial balance are Rs.

23,390 and the allowance for bad debts account shows a credit balance of Rs. 2,320.
(vi) A sub-total of Rs. 29,830 on the list of closing inventory had been carried over as Rs.
29,380 and another sheet had been overcast by Rs. 1,000.
Required:
Pass rectification/adjustment entries to correct the above errors. (Narrations are not required)
Question 07.
The bookkeeper has produced the following statement of financial position at 31 December for
Smetena’s Newsagents.
Rs. Rs.
Non-current assets 72,208
Current assets
Inventory 18,826
Trade receivables 26,216
Drawings 8,260
Suspense account 3,830
Cash 700
57,832
130,040
Capital account 50,224
Loan – L Franks 12% 20,000
Trade payables 26,782
Bank overdraft 14,634
Profit for year 18,400
130,040
Jan Smetena, the proprietor, is unhappy with the statement of financial position and asks you to
revise it. You discover the following.
1. The suspense account balance represents the difference on the trial balance.
2. The purchases day book total for October of Rs.4,130 was posted to the purchases
account as Rs.4,310 although the correct entry was made to the payables ledger control
account.
3. Inventory sheets were overcast by Rs.2,000.
4. Cash should be Rs.110.
5. Fixtures and fittings account balance of Rs.4,600 has been omitted from the trial balance.
6. Interest for a half year on the loan account has not been paid and no provision has been
made for it.
Required:
(a) Show the journal entries to correct the above errors.
(b) Write up the suspense account.
(c) Draw up a revised statement of financial position at 31 December. Clearly show the adjustments
to profit.

ICAP PAST PAPERS

Question 01.
During the review of accounting records and financial statements for the year ended 30 June 2022
of Tally Traders, following errors were highlighted:
(i) Sales included an outstanding balance of Rs. 500,000 for which a customer would need to
pay Rs. 485,000 only if payment is made within 30 days. The customer is expected to pay
within 30 days.
(ii) An item was included in closing inventory at its net realizable value of Rs. 490,000. However,
the item had a cost of Rs. 450,000.
Periodic inventory method is used to record the inventory transactions.
(iii) A sub-total of Rs. 234,000 was carried forward in the purchase day book as Rs. 432,000.
Control accounts are not maintained for Debtors and Creditors.
(iv) A credit note issued to a customer of Rs. 128,000 was recorded as credit note received from
supplier.
(v) An office machine costing Rs. 3,540,000 with a carrying value of Rs. 2,040,000 as on 1 July
2021 was disposed of on 28 February 2022 for Rs. 1,860,000. The sale proceeds were
credited to accumulated depreciation account and full year’s depreciation was provided on
the machine.
Office machines are depreciated at 10% per annum using reducing balance method.
Required:
Prepare journal entries to correct the above errors. (Narrations are not required)
(Autumn 2022 Q4)
Question 02.
The trial balance of Moon Mart (MM) did not agree as at 31 December 2021 and the shortage of
Rs. 215,000 on the debit side was carried to suspense account. The financial statements prepared
from the trial balance showed net profit of Rs. 1,431,000.
During review, following matters were noted:

i. A return outward of Rs. 18,000 was posted to the debit of return inward account in general
ledger.
ii. A sales invoice of Rs. 42,000 was posted twice in sales ledger.
iii. Balance of accumulated depreciation of equipment was brought forward as Rs. 641,000
instead of Rs. 461,000 on 1 January 2021.
iv. Following entries in cash book were not posted to general ledger:
a. Receipt of annual rent for the period ending 31 March 2022 amounting to Rs. 336,000.
b. Payment of Rs. 220,000 for equipment purchased on 1 May 2021.
c. Cash purchases of Rs. 50,000.
Additional information:
i. After passing all the adjustments, the remaining amount of suspense account is to be
considered as loss from embezzlement.
ii. MM uses periodic inventory method. Control accounts are not maintained for trade
receivables and payables. Equipment is depreciated at 15% using reducing balance
method.
Required:
(a) Prepare suspense account. (04)
(b) Compute the corrected net profit. (04)

(Spring 2022 Q4)
Question 03.
The trial balance of Mint Mart (MM) as at 30 June 2021 was not in agreement and consequently
the difference was carried to suspense account. The financial statements are prepared from the
trial balance showed a net profit of Rs. 2,520,000
During the review, following matters were identified:
i. Year-end physical inventory count sheets total of Rs. 4,325,000 was accounted for as Rs.
3,425,000.
ii. Cheques of Rs. 268,000 drawn and recorded on 30 June 2021 were handed over to the
suppliers on 10 July 2021.
iii. A sale invoice of Rs. 315,000 was posted to sales day book as 351,000 and to trade
receivable account as 135,000
iv. A purchase return amounting to Rs. 500,000 was mistakenly debited to trade receivable
account.
v. An unidentified credit of Rs. 209,000 appearing in the bank statement for the month of June
2021 was credited to the suspense account. It was discovered that the amount, net of
agreed payment discount of 5%, was an online transfer by a customer.
vi. A cheque of Rs. 450,000, issued by a customer as an advance, was dishonored and is
returned by the bank on 30 June 2021
vii. An office equipment costing Rs. 600,000 with a carrying value of Rs. 270,000 as on 1 July
2020 was disposed of on 1 April 2021 for Rs. 280.000. The sale proceeds were credited to
gain on disposal account and no depreciation was provided on the equipment.
viii. MM maintains a general provision for doubtful receivables at 5% of year-end balance.
ix. Staff bonus for the year ended 30 June 2021 was to be accrued at 10% of net profit after
bonus but it was mistakenly accrued at 10% of profit before bonus.
MM uses periodic inventory method. Control accounts are not maintained for trade receivables and
payables.
Office equipment are depreciated at 10% using straight line method.
Required:
(a) Prepare journal entries to correct the above errors. (Narrations are not required) (11)
(b) Compute the corrected net profit. (05)
(Autumn 2021 Q6)
Question 04.
Following information has been extracted from the draft financial statements of Lather
Establishment (LE) for the year ended 31 December 2020:
Statement of profit or loss

Rs. in
'000
Revenue 3,500
Cost of sales (2,000)
Gross profit 1,500
Administrative expenses (800)
Selling expenses (550)
Operating profit 150
Other expenses (60)
Other income 200
Net profit 290

Summarized financial position

Rs. in '000
Rs. in '000 Total assets (including balance of suspense Rs. 132,000) 8,000
Total liabilities (3,000)
Net assets / equity 5,000
During the review following matters were identified:

i. Inventory costing Rs. 440,000 received on 30 December 2020 were included in the closing
inventory. The invoice for the same was not received till year end.
ii. Selling expenses include freight-in of Rs. 200,000. 75% of the freight relates to goods sold
and remaining relates to inventories in hand.
iii. A selling expense amounting to Rs. 35,000 has been posted in the other expenses account
as Rs. 53,000.
iv. Sales include an amount of Rs. 145,000 received from a customer on 20 December 2020.
Goods were dispatched on 6 January 2021.
v. Payment of office rent expense amounting to Rs. 120,000 was recorded as a credit entry
in the cash book and also credited to rent income account.
vi. A purchase of Rs. 352,000 was entered in the purchase day book as Rs. 325,000 and
posted to the creditor’s account as Rs. 235,000.
vii. Rent payable for owner’s residence amounting to Rs. 250,000 was recorded as accrued
office rent.
viii. Laptop costing Rs. 120,000 purchased on 1 January 2019 was sold on 1 October 2020 for
Rs. 65,000 to a supplier with agreement that supplier’s outstanding balance will be adjusted
against the sale proceed. No entry was posted for disposal. Depreciation expense was
recorded on the laptop for full year and included in administrative expenses. LE has a policy
of depreciating laptop at straight line method over a useful life of 3 years.
LE uses periodic inventory method to record the inventory. Control accounts are not maintained
for debtors and creditors.
Required:
Prepare corrected statement of profit or loss for the year ended 31 December 2020. Also determine
the correct amounts of total assets and total liabilities as at that date
(Spring 2021 Q8)
Question 05.
Following draft statement of financial position as on 31 December 2019 of Naltar Establishment
(NE) is under review:
Assets Rs. in ‘000 Equity & liabilities Rs. in ‘000
Fixed assets – net 22,590 Opening capital 32,240
Current assets: Net profit for the year 9,360
Stock 15,320 41,600
Trade receivables 19,730 Current liabilities:
Drawings 1,400
Cash & bank 3,850 Trade payables 17,332
40,300 Other payables 2,680
Suspense account 798
Discount received 480
21,290
62,890 62,890

The following matters are identified:

(i) Goods costing Rs. 5,800,000 received on 31 December 2019 were included in the year-
end physical count. However, these goods were recorded in purchases day book on 5
January 2020 on receipt of the invoice.
(ii) Year-end physical count sheets include a third-party stock of Rs. 1,320,000.
(iii) Goods sold on credit at a trade discount of 10% were recorded at gross amount of Rs.
6,400,000.
(iv) An unidentified credit of Rs. 294,000 appearing in the bank statement was accounted
for in the suspense account. It was discovered that the credit was a settlement of an
old outstanding balance previously written off. The amount was net of 2% bank charges.
(v) A cheque of Rs. 500,000 issued by a customer as an advance was dishonored and
returned by the bank on 31 December 2019. No entry was made on return of cheque.
(vi) Operating expenses include insurance premium of Rs. 900,000 paid during the year,
out of which Rs. 200,000 pertain to owner's residential premises. The policy is valid up
to 30 June 2020.
(vii) An upgradation of a plant to improve quality and efficiency was completed on 1 July
2019 at a cost of Rs. 2,500,000. The cost was charged to repair and maintenance
expense.
(viii) Total sales of 26 December 2019 as per sales day book was Rs. 167,000. This was
posted in trade receivable control account as Rs. 671,000. Trial balance was balanced
by taking the difference to the suspense account.
Other information: NE uses periodic stock method. The plant is depreciated at 20% using
diminishing balance method.
Required: Prepare corrected statement of financial position as on 31 December 2019. (17)
(Spring 2020 Q8)
Question 06.
Financial statements of Zeta Traders (ZT) for the year ended 30 June 2019 is under preparation.
Following information has been gathered in this respect:
(i) Trade receivables as at 30 June 2019:
Rupees
Trade receivables 2,500,000
Provision for doubtful debts (400,000)
Net trade receivables 2,100,000
It was noted that:
• an old outstanding balance of Rs. 250,000 which was written off previously was settled
during the year at 20% discount. The amount received was credited to trade receivables.
• purchase return amounting to Rs. 500,000 was mistakenly debited to trade receivables.
• Rana and Sons having a balance of Rs. 80,000 due for more than one year was declared
bankrupt and its balance needs to be written off.
ZT maintains provision for doubtful debts:
• at 25% for balances outstanding for more than six months. As at 30 June 2019, such
balances are aggregated to Rs. 600,000 (excluding balance of Rana and Sons); and
• at 5% for the remaining balances
(ii) A cheque dated 25 June 2019 for Rs. 150,000 was received from an insurance company
and deposited by the owner in his personal bank account. The cheque was received in
settlement of an inventory loss claim. Actual inventory loss was determined at Rs. 180,000.
No entries have been made for loss of inventory and insurance claim.
(iii) The opening balance of accumulated depreciation was brought forward as Rs. 280,000

instead of Rs. 820,000. The error was tried to be corrected with the difference by crediting
accumulated depreciation and debiting depreciation expense.
(iv) Goods amounting to Rs. 350,000 received from a supplier on 30 June 2019 were
included in the year-end physical inventory count but recorded in purchases day book on
1 July 2019.
(iv) Third party stock of Rs. 500,000 lying on ZT premises has been included in ZT’s year-end
inventory.
(v) ZT uses periodic inventory method.
Required:
(a) Prepare adjusting / correcting entries for the year ended 30 June 2019. (Narrations are
not required)
(b) Compute the net effect of the above on ZT’s profit for the year ended 30 June 2019.
(Autumn 2019 Q7)
Question 07.
The trial balance of Sibi Brothers (SB), dealer of equipment and machines, did not agree as at 31
December 2018 and the difference was carried to suspense account. The financial statements
prepared from the trial balance showed a gross profit of Rs. 854,000.
During review, following errors were detected:
(i) A sales invoice of Rs. 24,000 was debited to the debtor’s account as Rs. 42,000.
(ii) A purchase of Rs. 23,000 was entered in purchases day book as Rs. 32,000 and posted
to the creditor’s account as Rs. 3,200.
(iii) An item was included in closing inventory at its cost of Rs. 94,000. Due to lower
demand, it had a net realizable value of Rs. 81,000.
(iv) A sub-total of Rs. 49,000 was carried forward in the sales day book as Rs. 94,000.
(v) Return inward and return outward appearing in the trial balance were Rs. 82,000 and
Rs. 99,000 respectively. While preparing the financial statements, the amount of return
inward was shown as return outward and vice versa.
(vi) Discount received of Rs. 4,100 was posted to the debit of discount allowed.
(vii) SB started using an inventory item as office machine effective from 1 October 2018. No
adjustment has been recorded and this item is included in closing inventory. The cost
and selling price of this item are Rs. 145,000 and Rs. 182,000 respectively.
(viii) Another office machine costing Rs. 270,000 with a carrying value of Rs. 127,200 as on
1 January 2018 was disposed of on 1 September 2018 for Rs. 80,000. The sale
proceeds were credited to accumulated depreciation account and whole year’s
depreciation was provided on the machine.
The balance as per bank statement as on 31 December 2018 was reconciled with cash book.
During review, following matters were noted in bank reconciliation statement:
(i) List of unpresented cheques included:
a. a cheque issued to a creditor on 30 April 2018 amounting to Rs. 28,000.
b. a cheque dated 30 December 2018 amounting to Rs. 16,000 which was handed
over to the creditor on 6 January 2019.
(ii) List of deposits in transit included a cheque dated 15 January 2019 from a debtor
amounting to Rs. 35,000.
(iii) Bank charges of Rs. 3,100 correctly debited by bank had been added back.
Other information:
SB uses periodic inventory method to record the inventory. Office machines are depreciated at
10% from the month of addition to the month prior to disposal using reducing balance method.
Control accounts are not maintained for Debtors and Creditors.
Required:

Prepare journal entries to correct the above errors. (Narrations are not required), also compute the
corrected gross profit. (18)
(Spring 2019 Q6)
Question 08.
Draft income statement of Timothy Enterprises (TE) for the year ended 31 December 2017 shows
gross profit of Rs. 850,000 and net profit of Rs. 460,000.
During the review following errors were noticed
(a) an invoice of Rs. 3,700 was debited to purchases but the goods were received after year-
end and were not included in the closing inventory.
(b) that transportation inward amounting to Rs. 2,000 was included in transportation outward.
(c) the sub-total of a closing stock sheet had been carried forward as Rs. 21,830 instead of
Rs. 21,380.
(d) a receipt of Rs. 21,850 was credited to sales. The amount was received from a credit
customer as full and final settlement of an outstanding balance of Rs. 23,000
(e) goods having sales value of Rs. 4,500 were used for office repairs. No entry has been made
in the books.
(f) purchase of office computer on 1 April 2017 amounting to Rs. 42,000 was entered in the
purchase account.
(g) an item of furniture was sold on credit for Rs. 3,000 and entered in sales day book. The
book value of this item was Rs. 5,000
(h) purchase return amounting to Rs. 6,700 has been recorded as sales return.
(i) the owner had withdrawn goods costing Rs. 4,680 for personal use. No entry has been
made in the books.
TE uses periodic inventory method and goods are sold at cost plus mark up of 25%.
Depreciation on office computer is provided at the rate of 25%
Required:
Compute the corrected gross profit and net profit for the year (14)
(Autumn 2018 Q6)
Question 09.
(a) While reviewing the draft financial statements of Sky Electronics (SE) for the year ended
31 December 2017, following errors have been identified:
(i) Computers costing Rs. 240,000 purchased on 1 September 2017 for office use were
debited to purchases account. SE depreciates computers at 20% per annum using straight
line method.
(ii) Furniture costing Rs. 1,200,000 and having a book value of Rs. 670,000 as on 31
December 2017 had already been sold on 1 November 2017. The proceeds of Rs.
700,000 were credited to sales. SE depreciates furniture at 10% per annum using straight
line method.
(iii) On 1 April 2017, SE rented-out one of its premises at an annual rent of Rs. 900,000
payable in advance. The rent received was credited to income.
(iv) Trade receivables include a balance of Rs. 180,000 which is irrecoverable but has not
been written-off. Further, a recovery of Rs. 96,000 against receivables written off in prior
years was credited to trade receivables. As per SE's policy, provision for doubtful
receivables has already been made at 5% on year-end balance.
(v) A cheque of Rs. 192,000 was received after a settlement discount of 4% from a customer.
However, in the cash book, the amount received was entered in the discount allowed
column and the amount of discount was entered in the bank column. SE does not maintain
separate settlement discount accounts in its ledgers.
Required:

(a) Prepare rectification entries to correct the above errors. (Narrations are not required) (11)
(b) A trial balance merely a proof of arithmetical accuracy. Name the types of errors which a
trial balance fails to disclose. (02)
(Spring 2018 Q7)
Question 10.
The Accountant of Saleem Limited has made the following adjustments for the year ended 30 June
2015 in arriving at the net profit of Rs. 15,500,000.
1. While preparing the draft financial statements, opening stock of Rs. 1,500,000 was included
as Rs. 5,100,000. The error was timely identified and the accountant reduced the value of
closing stock by Rs. 3,600,000.
2. Goods purchased worth Rs. 550,000 were recorded in sales journal. The error was rectified
by reducing sales by Rs. 550,000.
3. On 1 January 2015, miscellaneous items of machinery were purchased for Rs. 250,000 but
were recorded as Rs. 25,000. The said entry was corrected by debiting the difference to
the repairs expense account. It is the company’s policy to provide depreciation annually on
straight line basis at the rate of 10%.
4. Prepaid insurance amounting to Rs. 740,000 pertaining to the period from 1 July 2014 to
31 December 2014 was not brought forward from the previous year. Difference in trial
balance was removed by creating a suspense account. At year-end, when actual error was
identified, suspense account was credited by debiting prepaid insurance.
5. Purchase return to a supplier amounting to Rs. 400,000 was not recorded. The error was
rectified by debiting the supplier account and crediting the suspense account. The balance
in the suspense account was included in current liabilities.
Required:
Compute the correct net profit. (08)
(Autumn 2015 Q2)
Question 11.
The trial balance of A.A. Enterprise for the year ended 30 June 2013 shows a difference of Rs
12,950 which has been placed to the debit of a suspense account. A careful analysis of the
accounting records has revealed the following:
(i) Wages included Rs. 60,000 towards installation of a new plant in August 2012. The
company charges depreciation on plant and machinery @ 15%.
(ii) A cheque of Rs. 13,500 was paid to a creditor who allowed 10% cash discount, but the
payment was posted to purchase account as Rs. 1,350 only.
(iii) Goods invoiced at Rs. 5,700 returned by a debtor were entered in the purchase day
book whereas the amount recorded in the debtors account was Rs. 7,500
(iv) The sub-total of a stock sheet had been carried forward as Rs. 21,380 instead of Rs.
21.830 and another sheet had been over-casted by Rs. 1,000.
(v) Mr. Arslan, the owner, had withdrawn goods worth Rs. 4,680 for personal use. No entry
has been made in the books.
(vi) A cheque of Rs. 10,000 received from a customer has not been posted to his ledger.
(vii) A sales invoice for Rs. 14,000 had been wrongly passed through the sales day book as
Rs.1,400.
(viii) Goods invoiced at Rs. 12,000 returned by Salman Khan were entered in the purchase
day book and posted therefrom to Saleem Khan's account, who is a creditor, as Rs.
21,000.
(ix) Goods worth Rs. 14,700 purchased on 27 June 2013, had been entered in the purchase
day book and credited to the supplier's account but the goods were not delivered till 3
July 2013. The title of the goods had however passed on 27 June 2013.

(x) The trial balance shows a debtor control account balance of Rs. 82,500 and a credit of
Rs. 16,320 in provision for bad debts account. Rs. 11,560 is no more receivable and
needs to be written off. A provision for doubtful debts is required to be maintained at
10% of debtors
Required:
Pass rectification entries to correct the above errors. (Narrations are not required) (20)
(Autumn 2013, Q3)
Question 12.
While closing his books on 30 June 2013, Mr. Rehan identified a difference in the trial balance
which he kept in a suspense account. He prepared his P & L account on the basis of this trial
balance and arrived at a profit of Rs. 679,000. While trying to reconcile the trial balance he detected
the following errors:
(i) A cheque of Rs. 25,000 received from the insurance company in respect of loss of
inventory has been paid into the proprietor’s personal bank account and has not been
recorded in the books. No entry has been passed in respect of the loss.
(ii) Bill received from ABC Furnishings on 1 July 2013 for repairs to furniture Rs. 3,000 and
for new furniture supplied Rs. 10,000 was entered in the purchase day book as Rs.
11,000. Depreciation on furniture is provided @ 10 % per annum.
(iii) Furniture which stood in the books at Rs. 5,000 was sold on 1 July 2013 for Rs. 2,750
in part exchange of new furniture costing Rs. 8,750 and the net invoice of Rs. 6,000
was passed through the purchase day book.
(iv) Sale of goods on approval amounting to Rs. 5,000 was included in sales account, cost
of these goods being Rs. 4,200. Out of these, goods having invoice value of Rs. 3,000
were returned and taken into inventory at cost but no entry was made in the books.
(v) Goods worth Rs. 10,200 purchased from a creditor on 28 June 2013 had been entered
in the Purchase Day Book and credited to him but were not delivered till 5 July 2013.
However, the title of the goods had passed on 28 June 2013.
(vi) A computer bought originally for Rs. 70,000 four years ago and depreciated to Rs.
12,000 had been sold for Rs. 15,000 on the first day of the year. The amount deposited
was entered in the bank book but no other entry was passed.
(vii) Goods valuing Rs. 13,000 were returned by Zahid. These were entered in the Purchase
Day Book and posted to a supplier’s account as Rs. 31,000.
(viii) Discount of Rs. 3,700 was allowed but posted to the credit of discount received a/c as
Rs. 7,300.
(ix) A cheque of Rs. 10,800 was paid to a creditor who allowed 10% cash discount, but the
payment was wrongly posted to purchase account as Rs. 1,080 only without any other
entry.
Required:
(a) Pass rectification entries (without narration) to correct the above errors. (20)
(b) Recalculate the profits after taking into account the above corrections. (04)
(Autumn 2012 Q2)
Question 13.
The trial balance of Ayub Brothers did not agree as at 31 December 2013 and the difference was
carried to a suspense account. On scrutinizing the books of account, the following types of errors
were detected:
(i) Receivables include Rs. 15,000 which are irrecoverable and need to be written off.
(ii) Goods invoiced at Rs. 4,600 were returned by a customer. It was entered in the
purchase book and posted from there to a creditor’s account as Rs. 6,400.
(iii) A cheque of Rs. 8,000 received from a customer was not posted to his ledger account.

Moreover, the corresponding sales invoice for Rs. 12,000 was incorrectly passed
through the sales day book as Rs. 2,000.
(iv) Sales include goods sold for cash amounting to Rs. 25,000 on behalf of Mr. Yasir. Ayub
Brothers were entitled to a commission of 10% on the sales plus selling expenses, for
which no adjustment was made. The related selling expenses amounted to Rs. 1,500.
(v) An amount of Rs. 3,800 owed by Zahid & Company for goods supplied was to be
adjusted against an amount of Rs. 8,500 owed to Zahid & Company. No entry has been
made in this regard.
(vi) A purchase of Rs. 15,100 was entered in the purchase day book as Rs. 1,500 and
posted to the supplier’s account as Rs. 5,100.
(vii) Goods invoiced at Rs. 23,000 and returned by Hamid Khan, a debtor, were entered in
the purchase day book and posted therefrom to Hammad Khan, a creditor, as Rs.
32,000.
(viii) A supplier’s invoice for Rs. 12,300 had been entered in the purchase day book on 28
December 2013. However, the goods were received on 2 January 2014.
(ix) Ayub Brothers maintains an allowance of 5% of the gross amount of receivables.
Required:
Prepare journal entries to rectify the errors identified above. (Narrations are not required.) (21)
(Spring 2012 Q3)
Question 14.
The accountant of BA Enterprises prepared a statement of comprehensive income for the year
ended December 31, 2013 which showed gross profit of Rs. 1,050,000 and net profit of Rs.
650,000. The company sells goods at cost plus mark-up of 20%.
The following errors/omissions were found on a detailed review of the financial statements.
a) Items not included in the statement of comprehensive income:
(i) Free samples costing Rs. 25,000 were sent to potential and regular customers.
(ii) Goods costing Rs. 10,000 were taken by the owner for personal use and goods
having sales value of Rs. 2,500 were used for office repairs.
(iii) Unpaid salaries and transportation (inward) expenses payable, amounting to Rs.
20,000 and Rs. 10,000 respectively.
b) Old furniture items were sold for Rs. 3,000 and entered in the sales day book. The book
value of these items was Rs. 2,000.
c) Rs. 24,500 were paid to a creditor as full and final settlement of an amount of Rs. 25,000
and debited to purchases.
d) The sales day book was overcast by Rs. 30,000.
e) An amount of Rs. 67,000 was carried forward in the purchase day book as Rs. 6,700.
Required:
Ascertain the correct amount of gross and net profit for the year. (13)
(Spring 2011, Q2)

OBJECTIVE BASED QUESTIONS

01. Amna wrongly credited return inwards of Rs. 3,500 to returns outward although
Receivable Account was correctly credited.
What will be the difference in trial balance prepared at the year end?
(a) Total of trial balance on the debit side will be Rs. 3,500 more than total of credit
side
(b) Total of trial balance on credit side will be Rs. 3,500 more than the total of debit
side
(c) Total of trial balance on the debit side will be Rs. 7,000 more than total of credit
side
(d) Total of trial balance on credit side will be Rs. 7,000 more than the total of debit
side
02. For the year ended 31 December 2018 Ahmad showed a profit of Rs. 15,500.
It was further discovered; during the year he purchased a piece of equipment for Rs.
5,000. Transaction was recorded as Debit Repairs account and Credit Cash account. It
is policy to depreciate equipment at 10% and charging full year’s deprecation in the year
of purchase.
What is the impact of correcting the error on statement of profit or loss for the year?
(a) Profit will be increased by Rs. 5,000
(b) Profit will be reduced by Rs. 5,000
(c) Profit will be increased by Rs. 4,500
(d) Profit will be decreased by Rs. 4,500
03. Which of the following errors will require creating a suspense account?
(a) Repairs expense was considered a purchase of asset
(b) Purchase of inventory was considered purchase of non–current asset
(c) An invoice of Rs. 2,500 was totally omitted from the books
(d) Petty cash expenses of Rs. 500 were only credited to bank account
04. Zahid granted an early settlement discount of Rs. 1,500 to one of its customers. The
discount amount was correctly entered in the account receivable account but it was
wrongly credited to revenue account. The sales to this customer were originally recorded
at gross amount and Zahid does not maintain separate discount allowed account.
In order to balance the trial balance at year end, what should be the balance of suspense
accountin trial balance?
(a) Rs. 3,000 Cr
(b) Rs. 3,000 Dr
(c) Rs. 1,500 Dr
(d) Rs. 1,500 Cr
05. The suspense account shows a debit balance of Rs. 500. Which of the following errors
could be the cause of suspense?
(a) Overstatement of salaries expense by Rs. 500
(b) Overcasting sales account by Rs. 500
(c) Under-casting of sales by Rs. 500
(d) Payment to supplier Rs. 500 was wrongly omitted (completely) from records
06. Interest expense of Rs. 100 has been wrongly debited to stationery expense. What
entry isrequired to correct the error?
(a) Dr Interest expense Rs. 100; Cr Suspense Account Rs. 100

(b) Dr Interest expense Rs. 100; Cr Stationery expense Rs. 100

(c) Dr Suspense Account Rs. 100; Dr Interest expense Rs. 100 Cr Stationery
expense Rs. 200
07. Which of the following errors will not affect a trial balance?
(a) Rs. 5,000 utility expenses were entirely omitted from recording
(b) Rent paid Rs. 2,500 has been recorded as Rs. 1,500 in rent account.
(c) Sales revenue account was under-casted by Rs. 10,000
(d) Cash paid Rs. 3,000 for repair of equipment was credited to repairs account
08. Which error will cause an entry in the suspense account?

(a) a transposition error when transferring a ledger account balance to the trial
balance
(b) an error of commission where the wrong account is used for a transaction but it
is the correct type of account
(c) an error of omission
(d) an error of principle
09. The correction of which of the following error would require an entry in the suspense
account?
(a) A cheque, Rs. 2,000, paid to Asif had been debited to Arif’s account.
(b) A purchase of stationery, Rs. 80, had been debited to the purchases account.
(c) Commission income, Rs. 120, had been debited to a loan interest account.
(d) Salaries account had been undercast by Rs. 300 and the entertainment
account had been overcast by Rs. 300.
10. A trial balance was extracted from the books of Nizam. It was found that debit side
exceeded credit side. Following errors were identified:
(i) Purchases account was over-casted by Rs. 120,000.
(ii) An amount paid to Sajjad was debited to his account as Rs. 98,000 instead of Rs.
89,000.
(iii) Sales account was under-casted by Rs. 11,000.
What was the balance of suspense account before correction of errors?
(a) Rs. 140,000 Credit
(b) Rs. 140,000 Debit
(c) 0
(d) Rs. 271,000 Debit
11. The credit side of a business trial balance is Rs. 2,000 more than the debit side. Which
one of the following could be the reason for that?
(a) Credit purchase of Rs. 6,000 was recorded in Purchase Day book as Rs. 4,000
(b) Cash paid to supplier Rs. 2,000 was omitted from books
(c) Overpayment of Rs. 2,000 was received from a customer
(d) Credit sales of Rs. 7,000 was posted to account receivable control account as
Rs. 5,000 while it was correctly entered in sales account
12. A suspense account was opened when a trial balance failed to agree. The following errors
were discovered afterwards:
(i) An electricity bill of Rs. 620 had been recorded in the electricity charges account
as Rs. 250
(ii) A discount allowed of Rs. 200 was wrongly credited to revenue account
(iii) Interest given by bank Rs. 450 was debited to bank account only.
At what amount the suspense account should be shown in trial balance in order to make

trail balance agree?

(a) Rs. 320 Dr
(b) Rs. 320 Cr
(c) Rs. 120 Dr
(d) Rs. 120 Cr
13. Trial balance of a business did not agree and a suspense account was created. On
investigation it was revealed that while posting payments from bank book, insurance
expense was posted as Rs. 254,000 instead of Rs. 245,000.
What entry is required to correct the error?
(a) Dr Suspense Rs. 9,000 Cr Insurance expense Rs. 9,000
(b) Cr Suspense Rs. 9,000 Dr Insurance expense Rs. 9,000
(c) Dr Insurance expense Rs. 245,000 Cr Cash Rs. 245,000
(d) Cr Insurance expense Rs. 245,000 Dr Suspense Rs. 245,000
14. A sales return of Rs. 400 has been wrongly posted to the credit of the purchases return
account,but has been correctly entered in the customer’s account.
Which of the following will be the effects of the error?
(a) Profit for the year will be overstated by Rs. 400
(b) Profit for the year will be overstated by Rs. 800
(c) Credit side of the trial balance will be Rs. 400 more than debit side
(d) Debit side of the trial balance will be Rs. 800 more than credit side
15. A company’s trial balance failed to agree, the total

being:Debit Rs. 950,300
Credit Rs. 955,300
Which one of the following is the reason of this difference?
(a) Utilities expense of Rs. 5,000 entirely omitted from recording
(b) Transportation in of Rs. 5,000 is recorded as transportation out
(c) Purchase return Rs. 2,500 debited in error to the Sales return account, while
transaction was correctly posted to party’s account.
(d) Sales return Rs. 2,500 was wrongly recorded as Purchase return, while
transaction wascorrectly posted to party’s account.
16. Following errors occurred in books of Majid & Co.

(1) Carriage inwards of Rs. 100 was debited to carriage outwards
(2) Purchase of inventory Rs. 5,000 was debited to repairs account
(3) Rent expense was Rs. 200 and it was credited to rent account.
What will be the balance of Suspense account before correction of above errors?
(a) Rs. 100
(b) Rs. 200
(c) Rs. 400
(d) Rs. 5,400
17. A return inward of Rs. 180 has been wrongly recorded as carriage inwards and a repair
expense of Rs. 250 was wrongly debited to salaries account. What is the impact on net
profit of the correction of these errors?
(a) Rs. Nil
(b) Rs. 180 Decrease
(c) Rs. 250 Decrease
(d) Rs. 70 Decrease

18. A suspense account was opened when a trial balance failed to agree. The following
errors were discovered afterwards:
(i) A payment of Rs. 5,000 to a supplier was credited to his account
(ii) A return outward of Rs. 400 was wrongly debited to return inwards account
(iii) Payment for establishment of petty cash fund by Rs. 1,000 was only credited
to bankaccount
At what amount the suspense account would have been created before correction of
these errors?
(a) Rs. 5,400 Credit
(b) Rs. 10,200 Debit
(c) Rs. 5,400 Debit
(d) Rs. 10,200 Credit
19. After extracting trial balance, a business has identified following errors:
(i) Owner’s home rent paid Rs. 1,500 has been debited to business rent account
(ii) Purchase of stationery Rs. 500 has been debited to machinery account.
Depreciation rate is 10%
(iii) Freight paid Rs. 150 for inventory has been debited to stationery account Profit
for the year before correction of these errors was Rs. 10,500.
What is the amount of corrected profit?
(a) Rs. 11,500
(b) Rs. 11,550
(c) Rs. 11,600
(d) Rs. 11,750
20. A cash refund of Rs. 20,000 due to customer A was correctly treated in the cash book
and then credited to the accounts receivable ledger of customer B.
At what amount the suspense account should be shown in trial balance in order to
make trial balance agree?
(a) Rs. 20,000 debit
(b) Rs. 20,000 credit
(c) Rs. 40,000 debit
(d) Rs. 40,000 credit
21. “Treating a revenue expense as a capital expenditure" is an example of?

(a) Compensating errors
(b) Error of omission
(c) Error of commission
(d) Error of principle
22. If an effect of an error is cancelled by the effect of some other error, it is commonly
known as
(a) Errors of principle
(b) Errors of omission
(c) Compensating errors
(d) Errors of commission
23. Goods of Rs.100,000 purchased from Abbas Traders were recorded in sales book,
the rectification of this error will
(a) Increase the gross profit
(b) Reduce the gross profit

(c) Have no effect on gross profit

(d) None of the given options
24. What would be the total of the trial balance if a purchase return of Rs.84,000 has been
wrongly posted to the debit of the sales return account, but had been correctly entered
in the suppliers account?
(a) The credit side to be Rs.84,000 more than debit side
(b) The debit side to be Rs.84,000 more than credit side
(c) The credit side to be Rs.168,000 more than debit side
(d) The debit side to be Rs.168,000 more than credit side
25. When opening stock is overstated, net profit for the accounting period will be
(a) Overstated
(b) Understated
(c) No effect
(d) None of the above
26. Difference of totals of both debit and credit side of the trial balance is transferred to
(a) Difference account
(b) Trading account
(c) Miscellaneous account
(d) Suspense account
27. Goods purchased from supplier worth Rs.200,000, no entry made in purchases book
is an example of
(a) Error of posting
(c) Error of principle
(d) Compensating errors
28. Purchase of fuel for the car is capitalised to motor vehicles. It is a type of
(a) Error of posting
(c) Error of principle
(d) Compensating errors
29. A company incorrectly recorded a credit sales invoice of Rs. 45,000 as Rs. 54,000.
What is the appropriate entry, the company should follow regarding the error of Rs.
9,000?
(a) Add Rs. 9,000 to its Cash account
(b) Sales (Dr) and Receivable (Cr) with Rs. 9,000
(c) Receivable (Dr) and Sales (Cr) with Rs. 9,000
(d) None of the above
30. Which of the following account(s) will be affected, while rectifying the error of Carriage
paid Rs.50,000 for the newly purchased machinery mistakenly debited to carriage
account?
(a) Only machinery account
(b) Only carriage account
(c) Both carriage and machinery account
(d) Only cash account

31. If a cash sale is made for Rs. 400,000 and posted as follows:
Account Debit Credit
Sales 400,000
Cash 400,000
What would be the correcting entry?
(a) Sales (debit) = Rs. 800,000 and Cash (credit) = Rs. 800,000
(b) Cash (debit) = Rs. 400,000 and Sales (credit) = Rs. 400,000
(c) Cash (debit) = Rs. 600,000 and Sales (credit) = Rs. 600,000
(d) Cash (debit) = Rs. 800,000 and Sales (credit) = Rs. 800,000
32. Received cheque from debtor – Faraz worth Rs. 100,000 was treated as received from
debtor- Sarfaraz. What would be correcting entry?
(a) Sales (debit) = Rs. 100,000 and debtor - Faraz (credit) = Rs. 100,000
(b) Debtor - Faraz (debit) = Rs. 100,000 and debtor – Sarfaraz (credit) = Rs. 100,000
(c) Debtor - Sarfaraz (debit) = Rs. 100,000 and debtor –Faraz (credit) = Rs. 100,000
(d) Sales (debit) = Rs. 100,000 and debtor – Sarfaraz (credit) = Rs. 100,000
33. Which of the following errors will create balance in a suspense account?
(a) Repairs expense was considered as purchase of asset
(b) Purchase of inventory was considered as purchase of non-current asset
(c) An invoice of Rs. 2,500 was totally omitted from the books
(d) Petty cash expenses of Rs. 500 were only credited to bank account
34. Office supplies purchased (and held in stock) were mistakenly debited to Purchases
account.This type of error is called:
(a) error of omission
(b) compensating error
(c) error of principle
(d) error of transposition
35. While reviewing the draft financial statements of Sky Electronics (SE) for the year
ended 31 December 2017, following error has been identified:
Computers costing Rs. 240,000 purchased on 1 September 2017 for office use were
debited to purchases account. SE depreciates computers at 20% per annum using
straight line method.
What would be the impact of correcting the above error on property, plant and
equipment as at31 December 2017?
(a) Increase by Rs. 240,000
(b) Increase by Rs. 224,000
(c) Increase by Rs. 200,000
(d) Increase by Rs. 192,000
36. While reviewing the draft financial statements of Sky Electronics (SE) for the year ended
31 December 2017, following error has been identified:
Trade receivables include a balance of Rs. 180,000 which is irrecoverable but has not
been written-off. Further, a recovery of Rs. 96,000 against receivables written off in prior
years was credited to trade receivables. As per SE's policy, provision for doubtful
receivables has already been made at 5% on year-end balance.
If the profit before correcting the above was Rs. 800,000, what would be amount of
corrected profit?
(a) Rs. 716,000
(b) Rs. 720,200

(c) Rs. 711,800

(d) None of above
37. While reviewing the draft financial statements of Sky Electronics (SE) for the year ended
31 December 2017, following error has been identified:
A cheque of Rs. 192,000 was received after a discount of 4% from a customer. The
related revenue was recorded at gross amount. However, in the cash book, the amount
received was entered in the discount allowed column and the amount of discount was
entered in the bank column. SE does not maintain separate account for discount allowed
and any revenue reversal is directly posted to Sales account.
What would be the correcting entry for above?
(a) Debit Bank Rs. 192,000 and Credit Sales Rs. 192,000
(b) Debit Bank Rs. 184,000 and Credit Sales Rs. 184,000
(c) Debit Sales Rs. 192,000 and Credit Bank Rs. 192,000
(d) Debit Sales Rs. 184,000 and Credit Bank Rs. 184,000
38. Draft income statement of Timothy Enterprises (TE) for the year ended 31 December 2017
showsgross profit of Rs. 850,000 and net profit of Rs. 460,000.
It was subsequently discovered that an invoice of Rs. 3,700 was debited to
purchases but the goods were received after year-end and were not included in the
closing inventory.
Compute the corrected gross profit and net profit for the year.
(a) Gross Profit Rs. 846,300 & Net Profit Rs. 456,300
(b) Gross Profit Rs. 853,700 & Net Profit Rs. 463,700
(c) Gross Profit Rs. 850,000 & Net Profit Rs. 463,700
(d) Gross Profit Rs. 853,700 & Net Profit Rs. 460,000
It was subsequently discovered that transportation inward amounting to Rs. 2,000 was
included in transportation outward.
It was subsequently discovered that the sub-total of a closing stock sheet had
been carried forward as Rs. 21,830 instead of Rs. 21,380.
shows gross profit of Rs. 850,000 and net profit of Rs. 460,000.
It was subsequently discovered that a receipt of Rs. 24,000 was credited to sales. The
amount was received from a credit customer who availed a cash discount of Rs. 1,000

on this payment. It was already expected that this customer will avail the cash discount
at the time of sale.
It was subsequently discovered that purchase of office computer on 1 April 2017
amounting to Rs. 42,000 was entered in the purchase account. Depreciation on office
computer is provided atthe rate of 25%.
It was subsequently discovered that goods having sales value of Rs. 4,500 were used
for office repairs. No entry has been made in the books. TE uses periodic inventory
method and goods are sold at cost plus mark up of 25%.
It was subsequently discovered that purchase return amounting to Rs. 6,700 has been
recorded as sales return.
It was subsequently discovered that the owner had withdrawn goods costing Rs. 4,680
for personal use. No entry has been made in the books. TE uses periodic inventory
method and goods are sold at cost plus mark up of 25%.

46. A cheque dated 25 June 2019 for Rs. 150,000 was received from an insurance company
and deposited by the owner in his personal bank account. The cheque was received in
settlement of an inventory loss claim. Actual inventory loss was determined at Rs.
180,000. No entries have been made for loss of inventory and insurance claim. The
business uses periodic inventory method.
Which of the following effect would be part of correcting entry?
(a) Debit Abnormal loss Rs. 30,000
(b) Debit Drawings Rs. 150,000
(c) Credit Purchases Rs. 180,000
(d) All of above
47. Goods amounting to Rs. 350,000 received from a supplier after proper inspection on 30
June 2019 were included in the year-end physical inventory count but recorded in
purchases day bookon 1 July 2019. The business uses periodic inventory method.
What would be appropriate correcting entry if the year-end is June 30, 2019?
(a) Trade payables Debit Rs. 350,000 and Purchases Rs. 350,000
(b) Drawings Debit Rs. 350,000 and Purchases Rs. 350,000
(c) Purchases Debit Rs. 350,000 and Trade payables Rs. 350,000
(d) None of above
48. Zeta Traders (ZT) has prepared its draft financial statements for the year ended on 30 June
2019.
On review it was discovered that third party stock of Rs. 500,000 lying on ZT premises
has been included in ZT’s year-end inventory. ZT uses periodic inventory method.
What correcting entry is required?
(a) No entry is required.
(b) Inventory (debit) Rs. 500,000 and Cost of Sales (credit) Rs. 500,000
(c) Third party (debit) Rs. 500,000 and Purchase return (credit) Rs. 500,000
(d) Cost of Sales (debit) Rs. 500,000 and Inventory (credit) Rs. 500,000
49. On 1 July 2021, a repair expense of Rs. 100,000 was debited to office machinery
account. Depreciation of 15% has been recorded at year end of 31 December 2021.
What will be impact of correcting above error on gross profit?
(a) Rs. Nil
(b) Rs. 100,000 Decrease
(c) Rs. 85,000 Decrease
(d) Rs. 92,500 Decrease
50. ‘Correct accounts, correct amounts but incorrect sides’, which of the following type of
error isindicated by preceding phrase?
(a) Error of commission
(b) Error of principle
(c) Error of original entry
(d) Complete reversal of entries

OBJECTIVE BASED ANSWERS

01. (d) Instead of debiting returns inwards; returns outwards have been credited. Hence
the effect of error is that credit side exceeds by double amount = Rs. 3,500x2 =
Rs. 7,000
02. (c) Profit will be increased by Rs. 5,000 as repairs expense will be reversed.
Depreciation expense of Rs. 5,000x10%= Rs. 500 will be charged.
So the total net impact is Rs. 4,500 increase in profit.
03. (d) Petty cash transaction has not been debited anywhere. Suspense account is
created when debit and credit side of trial balance are not equal. This does not
arise when an entry is posted to incorrect account or totally omitted.
04. (b) Since the amount that should have been debited to revenue account has been
credited to revenue account; hence total of credit side exceeds debit side by
double amount i.e. Rs. 3,000.
05. (b) Sales are credit and over casting it is excess credit side (debit side short by Rs.
500),so suspense account of Rs. 500 balance would be created on debit side.
06. (b) Interest expense was incorrectly not debited, it should be debited now.
Stationery expense was incorrectly debited; it should be credited now to reverse
the effect.
07. (a) There is no impact of complete omission of double entry on trial balance
since neither debit nor credit entry has been recorded.
08. (a) Any error while transferring balance of ledger account to trial balance would
affectone balance (and one side) only, and suspense account would be created.
09. (c) Commission income is credited but it was incorrectly debited to interest
account,creating a difference by double amount.
10. (a) Debit120,000+ Debit (98,000 - 89,000)+ Debit 11,000=Rs. 140,000
In all three corrections, the suspense account would be debited and it means,
before correction it had balance on credit side.
11. (d) Debit and credit sides of the entry are not equal hence suspense arises.
12. (a) (i) Dr side short (Rs. 620-250) =Rs. 370
(ii) Dr side short 200 x 2 =Rs. 400
(iii) Credit side short = Rs. 450
Total = Rs. 370 + Rs. 400 - Rs. 450= Debit side short by Rs. 320 (net).
13. (a) Insurance expense was overstated, and now to correct this, it is to be credited
with the difference of Rs. 9,000, and suspense account will be debited.
14. (b) Not recording sales return, increased the profit by Rs. 400 and Incorrect
recording of purchase returns, further increased the profit by Rs. 400 hence
profit increased by Rs. 800 in total due to error.
15. (d) Difference = Rs. 955,300 Credit – 950,300 Debit = Rs. 5,000 Debit side is shorter
The option (a) & (b) would not result in disagreement of trial balance. The option
(c) would create shorter credit side of trial balance.
Impact of recording sale return Rs. 2,500 as purchase return of Rs. 2,500 is that
the debit side is short by Rs. 5,000
16. (c) Error (1) and (2) do not affect trial balance
Error (3) is single side error and affects trial balance with double amount as
rentexpense should have been debited and it was rather credited. Rs. 200 x 2 =
Rs. 400
17. (a) The recording of return inwards (sales return) would have reduced the profit by
Rs.180, the same was effect of recoding carriage inwards (an expense), there

is no effect of correction of this error on profit. Same reason for the other
transaction.
18. (b) (i) Double impact Rs. 10,000 debit side short
(ii) Double impact Rs. 800 credit side short
(iii) Rs. 1,000 debit side short
Net impact is = Rs. 10,000+1,000-800 = Rs. 10,200 debit
19. (b) Owner’s home rent is drawings not business expense, so expense shall be
reversed.Impact of asset related error would be net of depreciation. Debiting
one expense instead of other does not affect profit.
Corrected profit = Rs. 10,500 + 1,500 - (500 x 90%) = Rs. 11,550
20. (c) Effect on trial balance is double of the amount on debit side since amount has
been posted on wrong side (credit side).
21. (d) Error of principle: Correct amount but wrong type of account.
22. (c) Compensating errors: Two or more errors balance each other out.
23. (b) Correction would reduce revenue and increase purchases (and cost of sales),
both would reduce gross profit.
24. (d) Not recording purchase return (credit side short by Rs. 84,000)
Recording incorrect sales return (credit side short by further Rs.
84,000)
25. (b) Overstatement of opening stock would lead to overstatement of cost of
salesresulting in understatement of gross profit and net profit.
26. (d) Suspense account is created temporarily for the difference in trial balance.
27. (b) Error of omission: Entry missed from the accounting records completely.
28. (c) Error of principle: Correct amount but wrong type of account.
29. (b) Receivables and sales both were overstated by Rs. 9,000.
30. (c) Machinery account shall be debited and carriage account shall be credited to
correctthe error.
31. (d) The error was complete reversal of entry. It has to be rectified by
recording the double amount now.
32. (c) Receipt of cheque from customer does not affect sales. The relevant
customer account should be credited for cheque received.
33. (d) Petty cash expenses of Rs. 500 were only credited to bank account, no
account wasdebited that would cause trial balance to disagree resulting in
suspense account.
34. (c) Error of principle: Correct amount but wrong type of account.
35. (b) Recording of computer would increase PPE by Rs. 240,000
Then depreciation of Rs. 16,000 (Rs. 240,000 x 20% x 4/12) would decrease
PPE by year-end.
The net increase would be by Rs. 224,000
36. (b) Bad debts expense Rs. 180,000 would decrease profit.Recovery of bad debts
Rs. 6,000 would increase profit.
Receivables would decrease by Rs. 84,000 due to above two corrections (i.e.
credited by 180,000 and debited by Rs. 96,000)
Decrease in allowance for doubtful debts will increase profit by Rs. 4,200 (i.e.
Rs. 84,000 x 5%).
Corrected profit = Rs. 800,000 – 180,000 + 96,000 + 4,200 = Rs. 720,200
37. (b) The revenue reversal should have been Rs. 8,000 (i.e. Rs. 192,000 x 4/96).
Instead it was recorded at Rs. 192,000 (overstating the debit to revenue by Rs.

184,000).
Similarly, the bank should have been debited by Rs. 192,000 but it was debited
byonly Rs. 8,000, causing understatement of Rs. 184,000.
38. (b) Reversal of purchase would increase gross profit by Rs. 3,700 (same effect will
carryto net profit).
39. (a) Recording of transportation inwards would increase cost of sales, hence,
decreasinggross profit by Rs. 2,000. However, there would be nil impact on net
profit (increase in transportation in expense and same decrease in
transportation out expense).
40. (b) Decreasing the closing stock would increase cost of sales, resulting in
decrease ofgross profit by Rs. 450. The effect of gross profit shall carry to net
profit as well.
41. (a) The receivable should have been credited by Rs. 24,000 and not sales.
Therefore, now sales shall be debited resulting in decrease in gross profit and
net profit. No impact of discount allowed is required as sales would have
already been recorded at net amount.
42. (b) Purchases shall be reduced by Rs. 42,000 (impact on GP and NP both).
Depreciation of Rs. 7,875 (i.e. Rs. 42,000 x 25% x 9/12) would affect net profit
only.
43. (a) Correcting entry would be Repairs debit and Purchases credit by Rs. 3,600 (i.e.
Rs.4,500 / 125%). Gross profit would increase but there would be net impact
on net profit of Rs. Nil.
44. (b) Recording of purchase return would increase GP and NP by Rs. 6,700.
Also, reversal of sales return would increase GP and NP by further Rs. 6,700.
45. (a) The correcting entry would be Drawings debit and Purchases credit by Rs.
4,680. The reduction in purchase would increase gross profit and net profit. The
drawings will decrease owner’s capital but would not affect profit.
46. (d) The option (a) to (c) reflect complete correcting entry.
47. (c) The control of goods was taken on June 30, 2019, therefore, purchase should
be recorded in year 2019 and not in next year. Purchases Debit Rs. 350,000
and Trade payables Rs. 350,000
48. (d) Third party stock is not stock of the entity. Simply record the reversal of
inventoryadjustment. Cost of Sales (debit) Rs. 500,000 and Inventory (credit)
Rs. 500,000
49. (a) Repair expense and depreciation of office machinery will affect net profit but
it hasno effect on gross profit.
50. (d) Complete reversal of entries: Correct accounts and amounts but sides
(debit &credit) reversed.

Chapter 02 Correction of Error. (2a)

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Chapter 02 Correction of Error. (2a)

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Chapter 2

Errors where trial balance does not balance

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Error of part omission

Errors where trial balance still balances

Actually, the journal entry was omitted (causing the error)

This type of error is called error of omission.

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Journal entry that was recorded actually (causing the error)

Journal entries that were recorded actually (causing the error)

This type of error is called error of original entry.

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Date Particulars LF Debit Rs. Credit Rs.

There are two main reasons for creation of suspense account:

Trial balance does not agree

Total 97,000 94,000

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Date Particulars LF Debit Rs. Credit Rs.

Approach to correction of errors

IMPACT OF CORRECTING ERRORS ON FINANCIAL

Effect of correcting entries on profit

Effect of correcting entries on other line items of financial statements

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ICAP PAST PAPERS

During review, following matters were noted:

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(Spring 2022 Q4)

Statement of profit or loss

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Summarized financial position

During the review following matters were identified:

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The following matters are identified:

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OBJECTIVE BASED QUESTIONS

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(b) Dr Interest expense Rs. 100; Cr Stationery expense Rs. 100

08. Which error will cause an entry in the suspense account?

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trail balance agree?

15. A company’s trial balance failed to agree, the total

16. Following errors occurred in books of Majid & Co.

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21. “Treating a revenue expense as a capital expenditure" is an example of?

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(c) Have no effect on gross profit

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(c) Rs. 711,800

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OBJECTIVE BASED ANSWERS