Podcast
Questions and Answers
What is an Error of Transposition?
What is an Error of Transposition?
What defines Errors of Omission?
What defines Errors of Omission?
Failing to make an entry at all.
What is an Error of Principle?
What is an Error of Principle?
Making a correct double entry but not observing accounting principles.
What are Errors of Commission?
What are Errors of Commission?
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What are Compensating Errors?
What are Compensating Errors?
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How can errors leaving discrepancies in the accounts be corrected?
How can errors leaving discrepancies in the accounts be corrected?
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When are Suspense Accounts opened?
When are Suspense Accounts opened?
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What is a suspense account?
What is a suspense account?
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What are some ways to use a suspense account?
What are some ways to use a suspense account?
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Suspense accounts should not exist when drawing up financial statements.
Suspense accounts should not exist when drawing up financial statements.
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The effect of correction of errors on profit for the year is that profit will decrease by the amount of the asset's annual depreciation charge.
The effect of correction of errors on profit for the year is that profit will decrease by the amount of the asset's annual depreciation charge.
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If the closing inventory is higher, it ______ the profit value because the cost of sales will be lower.
If the closing inventory is higher, it ______ the profit value because the cost of sales will be lower.
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The formula for calculating cost of sales is: ______.
The formula for calculating cost of sales is: ______.
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Study Notes
Types of Errors
- Error of Transposition: Involves reversing the order of numbers; identified by checking discrepancies between credits and debits.
- Errors of Omission: Occur when an entry is completely left out, impacting one side of the double entry system.
- Error of Principle: Accurate double entry but violates accounting principles; e.g., incorrectly treating revenue expenses as capital expenditures by charging costs of non-current assets to revenue accounts.
- Errors of Commission: Occur when the wrong action is taken, such as misclassifying debits or credits to incorrect accounts or miscasting financial figures.
Compensating and Suspense Errors
- Compensating Errors: Independent mistakes that offset each other, leading to a neutral net effect on financial statements.
- Correctable Errors: These must be corrected through journal entries; a suspense account is opened initially to manage discrepancies until resolved.
- Suspense Accounts: Created to capture amounts when the appropriate distribution to accounts isn't clear; assists in correcting errors.
Purpose and Management of Suspense Accounts
- Definition: A suspense account displays a balance reflecting discrepancies in the trial balance during error investigations.
- Utilization: Serves multiple purposes, including error correction, unclassified amounts, or when there are unknown postings.
- Temporary Nature: Should not remain open upon completion of financial statements at the accounting period's end.
Impact of Error Corrections on Financials
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Maintenance Expense Misclassification: Misrecording maintenance costs as non-current assets will reduce profits due to depreciation expenses affecting net income.
- Formula: Profit before correction - Depreciation charge = Profit after correction.
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Inventory Errors: Including post-period inventory in previous year statements can lead to asset and profit value decreases, impacting the cost of sales calculation.
- Cost of Sales Formula: Opening inventory + Additions - Closing inventory = Cost of Sales.
- Higher closing inventory results in lower reported profits and asset values.
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Description
This quiz focuses on Chapter 16, which covers the various types of errors in accounting, including transposition errors, omissions, and principle errors. Each flashcard presents a definition and example to facilitate understanding. Perfect for students looking to reinforce their knowledge of correction of errors in financial statements.
