Topic to be tested:

• Rectification of Errors and Financial Statements

Learning Objectives:

• To understand the basic concepts regarding the rectification of errors.
• To understand the effects of errors on financial performance.

GDB Question

Akram is running a small business under the name of Akram Bros. He has recently hired Anwar as a junior accountant to maintain the books of accounts of his business. Owing to little knowledge in accounting, Anwar could not perform well and following errors have been found in his work. You are required to give your opinions/answers as required in all the following cases regarding the given errors.

1. There was an error in the valuation of closing stock of the previous year. In the previous year, the closing stock was valued more by Rs. 5,000. What will be its effect on current year’s profit? (Just mention whether the current year’s profit will be overstated, understated or remains unaffected).
2. Amount of Rs. 1,000 was paid as rent to Iqbal, but it was wrongly debited to a debtor Ihsan’s account. What will be the effect of this error on arithmetical accuracy of trial balance? (Just mention whether the arithmetical accuracy of trial balance will be overstated, understated or remains unaffected).
3. A revenue expenditure of Rs. 2,000 is treated as a capital expenditure in the books of accounts. What will be the effect of this error on Net profit? (Just mention whether the profit will be overstated, understated or remains unaffected).
4. What will be the correct amount of profit if the profit before the correction of above errors is Rs. 40,000?

Note: To the point answers are required because unnecessary detail has no marks.