Test: Rectification Of Errors - 2 - Commerce MCQ

An error of commission occurs when entries are made in the wrong accounts or incorrect amounts are recorded. This type of error affects the trial balance and may prevent it from agreeing (balancing correctly). However, it typically does not affect the totaling of the balance sheet, as errors of commission usually impact individual accounts rather than the overall structure. Therefore, it mainly affects the trial balance.

An error of commission occurs when an entry is made to the correct type of account but with some incorrect detail, such as the wrong amount or the wrong person's account, as in this case. Crediting Rs. 25,000 received from Aditi to Prerna's account instead of Aditi's or the appropriate account is a mistake concerning the details of the transaction, hence an error of commission. This type involves correct operation but on the wrong subject or some similar detail error.

To analyze the effect of incorrectly recording a sale as a purchase on the gross profit (G.P.), consider the following:

• Recording as Purchase: By recording sales of Rs. 5,000 as purchases, the total purchases for the period increase by Rs. 5,000. This increases the cost of goods sold (COGS).
• Effect on Sales: Since the Rs. 5,000 was a sale but entered as a purchase, the sales figure is understated by Rs. 5,000.

Net Effect on Gross Profit: The gross profit is calculated as Sales minus Cost of Goods Sold (COGS). In this error:

• The sales are under-reported by Rs. 5,000.
• The purchases (part of COGS) are over-reported by Rs. 5,000.

Both these actions combined lead to the COGS appearing Rs. 5,000 higher, and sales appearing Rs. 5,000 lower, which means the gross profit will be affected by the sum of these two errors:
ΔG.P. = −5,000(due to lower sales) − 5,000(due to higher COGS) = −10,000

Thus, the gross profit will decrease by Rs. 10,000, leading us to the answer: C: G.P. will decrease by Rs. 10,000

Let's analyze the effect of wrongly entering return inward (sales returns) as return outward (purchase returns):

1. Return Inward as Return Outward: If sales returns are mistakenly recorded as purchase returns, it affects both sales and purchase figures:

   • Sales: They are overstated because the returns that should have reduced the sales are not recorded.
   • Purchases: They are understated because the entries increase the amount of returns, which decreases the net purchases.

2. Net Effect on Gross Profit: Gross Profit (G.P.) is calculated as Sales minus Cost of Goods Sold (COGS). Here’s the impact:

   • Sales are higher by the amount of the return (let's assume Rs. 100).
   • Purchases are lower by the same amount (Rs. 100), which implies COGS is also lower by Rs. 100.

3. Combined Impact:

   • The sales not decreasing by Rs. 100 (when they should have due to returns) effectively increases the G.P. by Rs. 100.
   • The purchases being reduced by Rs. 100 (mistakenly increasing returns) further reduces the COGS, increasing the G.P. by another Rs. 100.

Therefore, the total increase in G.P. is Rs. 100 + Rs. 100 = Rs. 200.

The correct choice reflecting this scenario is: C: Gross Profit is increased by Rs. 200.

In this scenario, sales of Rs. 1,540 to Mr. X were under-recorded in his account as Rs. 1,450. This means that Mr. X's account was credited less than it should have been by Rs. 90.

To rectify this error, the difference needs to be addressed by adding Rs. 90 to Mr. X's account to match the correct amount of sales that should have been credited. Since sales are typically recorded by crediting a customer's account, the rectification will involve crediting Mr. X's account with the missing Rs. 90.

Thus, the correct action to rectify the error is: B: Credited

This means that Rs. 90 will be credited to Mr. X’s account to make up for the under-credited amount previously posted.

To determine the net effect on profit after rectifying these errors, we need to analyze each correction:

1. Bad debts recovery of Rs. 500 was credited to debtors A/c wrongly:

   • Correction: Instead of crediting the debtors' account, the bad debts recovery should have been credited to the income account. By correcting this, we effectively recognize Rs. 500 as income that was not previously accounted for.
   • Effect on profit: Increase by Rs. 500.

2. Bank charges of Rs. 50 was wrongly entered twice in the Bank Book:

   • Correction: One of the duplicate entries of Rs. 50 for bank charges needs to be removed.
   • Effect on profit: Increase by Rs. 50 (since expenses are decreased).

3. Purchase return of Rs. 100 was omitted to be entered in the books of A/c:

   • Correction: The purchase return needs to be recorded, which decreases the total purchases (expenses).
   • Effect on profit: Increase by Rs. 100.

Adding the effects together:

• Increase by Rs. 500 (from bad debts recovery correction)
• Increase by Rs. 50 (from removing the duplicate bank charge entry)
• Increase by Rs. 100 (from recording the omitted purchase return)

Total increase in profit = Rs. 500 + Rs. 50 + Rs. 100 = Rs. 650

Therefore, the net effect on profit after the rectifications is: A: Increase Rs. 650

When a cheque for Rs. 500 received from Yuvraj & Co. was dishonoured, it was incorrectly debited to the Discount Account. Typically, a Discount Account records reductions in revenue, not expenses or losses from non-payment.

Rectification: The proper accounting treatment for a dishonoured cheque should move the erroneous debit from the Discount Account to the correct account, typically Accounts Receivable or a similar account for bad debts. This shift does not involve real income; it corrects the way the income was recorded.

Impact on Net Profit: Correcting this by removing the debit from the Discount Account means the discounts given are effectively increased by Rs. 500 (or reducing the incorrect reduction in expenses that never should have been recorded as such). Therefore, it looks as if we're reversing an incorrect expense reduction, which will appear as if net profit increases by Rs. 500 because the initially recorded 'expense' from the Discount Account was erroneous.

So, when corrected, it appears as if the company's income statement was relieved of an improper Rs. 500 reduction, thus increasing net profit. Hence, Answer B: Increase by Rs. 500 is selected as the correction results in a reversal of a debit that should not have been in Discount but should have reflected an uncollected income or a receivable.

To address the rectification of errors that are detected in the subsequent financial year, it is essential to understand the role of various accounts in accounting practices.
Here’s a structured breakdown:

• Understanding Error Rectification: Errors in accounting can occur due to various reasons, such as clerical mistakes, miscalculations, or incorrect entries. Ideally, these errors should be corrected in the same financial year they are identified to maintain the integrity of financial statements
• When Errors are Detected in the Next Financial Year: If errors are discovered after the closure of the financial year, they cannot be adjusted directly in the previous year’s accounts. Instead, they must be addressed in the current financial year
• Utilizing the Profit and Loss Adjustment Account: The Profit and Loss Adjustment Account is specifically designed for rectifying errors that have been carried over into the next financial year. This account allows for the adjustments to be reflected in the current year’s financial statements without altering the previous year’s records
• Implications of Using the Profit and Loss Adjustment Account: By utilizing the Profit and Loss Adjustment Account, the organization can ensure that the financial statements present a true and fair view of its financial position. This method helps in accurately reflecting the profits or losses resulting from the rectified errors

Therefore, the correct choice for rectifying errors detected in the next financial year is the Profit and Loss Adjustment Account

The situation described involves a cheque for Rs. 1,000 received from Ramesh that was dishonored, and the incorrect entry was made by debiting the Sales Return account. This is incorrect because a dishonored cheque should impact the accounts receivable or a specific dishonored cheque account, not the Sales Return account.

Correcting the Error:

• Sales Return Account was incorrectly debited. This account is used to record returns of goods by customers, which reduces revenue. It is incorrect to use this account for a dishonored cheque.
• Ramesh’s Account (Accounts Receivable) should reflect the fact that the payment was not received, hence it needs to be debited to increase the amount owed by Ramesh back to its original status before the cheque was assumed to have cleared.

Correct Journal Entry:

• Debit Ramesh’s Account (Accounts Receivable): This increases the receivable indicating that the amount is still owed by Ramesh as the cheque was dishonored.
• Credit Sales Return Account: This reverses the incorrect debit entry to the Sales Return account, rectifying the error that implied a return of goods had occurred when, in fact, it was a dishonored payment.

Choice B: Ramesh A/c Dr. 1,000 To sales return A/c 1,000

(A) Error of Principle: This occurs when a transaction is recorded against accounting principles, such as recording a capital expenditure as a revenue expense. This error reflects an incorrect application of accounting principles rather than a posting error between the journal and the ledger.

(B) Error of Commission: This occurs when entries are posted to the wrong account but the correct type of account. For example, debiting or crediting another account of similar nature (like debiting Rent Expense instead of Repair Expense). This is a common error in the process of transferring journal entry details into the ledger.

(C) Error of Partial Omission: This happens when a transaction is partially recorded. For example, recording the debit side but failing to record the credit side in the ledger. This directly affects the ledger as not all aspects of the journal entry are posted.

(D) Error of Complete Omission: This occurs when a transaction is not recorded at all in the ledger, an omission of posting both the debit and credit sides from the journal. This is a straightforward failure in transferring the journal entries into the ledger.

The correct answer, B, includes (B) Error of Commission, (C) Error of Partial Omission, and (D) Error of Complete Omission, as these are directly related to errors that can happen while posting journal entries to the ledger, reflecting mistakes in the actual transfer of data.

Error of Commission occurs when an entry is made to the correct type of account but in the wrong account within that type. In this case, recording a sales transaction in the Purchase Day Book is a mistake involving recording in an incorrect book of accounts. This type of error reflects a clerical mistake, such as posting a transaction under the wrong account or category but still in a logically consistent (though incorrect) place.

Other types of errors:

• Error of Omission would be if the credit sales were not recorded at all.
• Compensatory Error occurs when two or more accounting errors cancel each other out.
• Error of Principle involves a transaction that is recorded in violation of fundamental accounting principles, such as recording a capital expense as a revenue expense.

In this scenario, since the transaction is mistakenly recorded in a different book altogether, the most fitting description is an Error of Commission.

• Debit Sales A/c: This reduces the sales account, reversing the effect of the erroneous entry which wrongly increased your sales revenue.
• Credit Furniture A/c: This increases the furniture account, reversing the effect of the erroneous credit that would have been incorrectly reducing your asset (furniture).

This entry corrects the mistake by ensuring that the revenue from selling the old furniture is removed from the Sales account (where it was mistakenly recorded) and properly acknowledged in the Furniture account (reflecting the disposal of an asset). This restores both accounts to their correct states.
The correct rectification entry for the scenario where the sale of old furniture was erroneously entered in the sales book is: A: Debit Sales A/c, Credit Furniture A/c

The error described—wages paid for the installation of a new machine wrongly recorded to the machinery account—is: B: Principle

Error of Principle: This type of error occurs when an accounting transaction is recorded in violation of fundamental accounting principles. Here, the expenditure, which should have been recorded as an expense related to installation (and thus treated as a revenue expense), is incorrectly capitalized by being added to the machinery account (an asset). This misclassification fails to adhere to accounting principles that distinguish between capital expenditures (which provide benefits over multiple periods) and revenue expenditures (which are consumed within the current accounting period).

Other types of errors are not applicable here:

• Error of Commission would involve posting to the correct type of account but the wrong account within that type.
• Error of Omission would be if the transaction had not been recorded at all.
• Clerical Nature generally refers to simple data entry mistakes and doesn't necessarily indicate the type of accounting principle error seen here.

B: White washing charges debited to Building Account is an error of principle, where an expense that should have been recorded as a revenue expenditure (white washing charges) is wrongly capitalized as an asset (Building Account). Since the total debits and credits remain equal, this does not affect the trial balance.

Other errors will affect the trial balance:

• A: Purchase book was under cost by Rs. 5,000: This will affect the trial balance because one side (purchase) is understated, disrupting the balance between debits and credits.
• C: Credit sales of Rs. 2,000 not posted in P’s account: This is a partial omission (sales recorded, but not posted to the debtor’s account), affecting the trial balance by leaving the debit side unrecorded.
• D: Cash paid to Brij Bihari Rs. 500 debited to Brij Bhushan’s account by Rs. 5,000: This will affect the trial balance because the wrong amount is recorded (Rs. 5,000 instead of Rs. 500), creating a mismatch between the debits and credits.

Therefore, B is the only error that will not affect the trial balance.

When purchasing a second-hand machine, all costs that bring the machinery to its working condition are capitalized. This includes:

• Purchase cost of machinery: Rs. 10,000
• Transportation cost: Rs. 1,500
• Installation cost: Rs. 1,200

Therefore, the total amount to be debited to the machinery account is:

Rs. 10,000 (purchase) + Rs. 1,500 (transportation) + Rs. 1,200 (installation) = Rs. 12,700

This total cost represents the machinery's full value, including the necessary expenses to make it operational.

When a bill is discounted with the bank, the bank pays the amount of the bill to the holder (Rs. 2000 in this case), but when the bill is dishonoured on the due date, the bank will recover the money from the drawee (Govinda in this case). Since the bill was dishonoured, the bank no longer holds the receivable, and the amount needs to be charged back to Govinda's account.

Thus, the rectification entry is:

• Debit Govinda’s A/c: This restores the amount that Govinda owes after dishonour, making Govinda liable for the bill again.
• Credit Bank A/c: This reverses the payment made by the bank when the bill was discounted.

This entry rectifies the omission by reflecting the fact that Govinda is now responsible for paying the bank.
The correct journal entry for rectifying the omission towards the dishonoured bill will be: C: Govinda’s A/c Dr. To Bank A/c

Error of commission occurs when an entry is recorded incorrectly, either in the wrong account or on the wrong side (debit instead of credit or vice versa). This type of error happens due to carelessness or misunderstanding but does not involve breaking any accounting principles.

Other types of errors:

• Error of omission: Occurs when a transaction is completely left out of the books.
• Error of principle: Involves violating accounting principles, such as recording a capital expenditure as a revenue expense.
• Compensating error: Happens when two or more errors offset each other, so the trial balance still tallies.

In this case, the error of posting to the wrong account or the wrong side is an Error of commission.

• When goods purchased are incorrectly recorded in the sales book, it means that a purchase transaction has been treated as a sale. This results in:
  • Understating purchases, which reduces the cost of goods sold (COGS).
  • Overstating sales, which increases the total revenue.
  As a result, the gross profit will increase because the cost of goods sold is lower, and sales revenue is higher than they should be. Thus, the error incorrectly inflates the gross profit.

So, the error will lead to an increase in gross profit.

Wages paid for erecting a machine are considered part of the capital expenditure, as they are directly related to bringing the machine into a usable condition. Therefore, these wages should be debited to the Machine account and not to the repair account or any other account.

This cost is added to the value of the machine, as it is necessary for setting up the machine for its intended use.

Error of commission occurs when a transaction is recorded in the wrong account or in the wrong book. In this case, recording credit sales in the Purchase Day Book is a mistake involving posting the transaction to an incorrect book of accounts. This type of error is due to a clerical mistake, but the transaction type (sales) is still maintained, making it an error of commission.

Other errors:

• Error of omission: Occurs when a transaction is completely left out of the records.
• Compensatory error: Happens when multiple errors cancel each other out.
• Error of principle: Involves misapplying accounting principles, such as treating a revenue expense as a capital expenditure.

Since the issue here is a wrong posting (credit sales in the purchase book), it's classified as an Error of commission.

• Initial Situation: Ram incorrectly charged the purchase of a scooter (Rs. 20,000) as a revenue expense, which reduced the profit by Rs. 20,000.
• Rectification: Since the scooter is a capital expenditure, it should be capitalized, not treated as an expense. Therefore, Rs. 20,000 should be added back to the profit, and instead, depreciation of 15% on the scooter should be charged.
• Depreciation Calculation: Depreciation @ 15% on Rs. 20,000 = Rs. 3,000.
• Corrected Profit:
• Corrected profit = Rs. 1,40,000 + Rs. 20,000 - Rs. 3,000 = Rs. 1,57,000
  • Initial profit: Rs. 1,40,000
  • Add back the scooter expense: Rs. 20,000
  • Subtract depreciation: Rs. 3,000

Thus, after rectifying the error, the correct profit is Rs. 1,57,000.

When goods worth Rs. 50 are given as charity, the goods are no longer part of inventory, and hence the appropriate account to credit is the Purchase account. This is because the goods were originally recorded in the purchases account, and giving them away as charity reduces the available stock. Therefore, to reflect the reduction in goods, the purchase account is credited.

Other accounts:

• Charity account would be debited as it reflects the expense of charity.
• Sales account is incorrect as this transaction does not involve sales.
• Cash account is also incorrect since no cash is involved in this transaction.

Thus, the correct treatment is to credit the Purchase account to adjust the reduction in inventory.

Errors of commission typically do not affect the agreement of the trial balance, because they involve incorrect entries to the wrong account or side, but the debit and credit sides are still recorded. However, if the error of commission includes incorrect amounts, such as posting a different figure on one side (debit or credit), it can lead to an imbalance in the trial balance.

In such cases, the trial balance may not agree because the amounts on the debit and credit sides are unequal due to the mistake. This would prevent the trial balance from balancing.

Thus, C: The trial balance to agree is the correct answer since such errors can cause the trial balance to not balance when amounts are incorrect.

1. Wrong posting of machine purchase:

   • The machine was purchased for Rs. 1,00,000 but only Rs. 10,000 was posted to the Furniture account.
   • This results in an understatement of Rs. 90,000 in the ledger (Rs. 1,00,000 - Rs. 10,000 = Rs. 90,000).

2. Omission of cash received from debtors:

   • The cash received from debtors, Rs. 11,200, was omitted from being posted.
   • This results in a missing Rs. 11,200 on the debit side (cash) in the ledger.

Difference in Trial Balance:

• The Rs. 90,000 error will create a mismatch between the assets and liabilities.
• The Rs. 11,200 omission means the trial balance will show a difference on the debit side.
• To find the net effect on the trial balance, subtract the omission from the machine posting error:
  Rs. 90,000 - Rs. 11,200 = Rs. 78,800.

Thus, the total difference in the trial balance due to these errors will be Rs. 78,800.

• When an amount that was previously written off as bad debt is recovered, it should be credited to the Bad Debts Recovered account. This account reflects the recovery of amounts that were earlier considered irrecoverable.
• Smith's account was already written off, so it should not be credited.
• Cash account would be debited because the cash is received.
• Bad debts account is used when writing off debts, not when recovering them.

Thus, the recovered amount should be credited to the Bad Debts Recovered account.