Questions and Answers
What is an Error of Transposition?
What defines Errors of Omission?
Failing to make an entry at all.
What is an Error of Principle?
Making a correct double entry but not observing accounting principles.
What are Errors of Commission?
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What are Compensating Errors?
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How can errors leaving discrepancies in the accounts be corrected?
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When are Suspense Accounts opened?
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What is a suspense account?
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What are some ways to use a suspense account?
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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.
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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: ______.
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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.
