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Goods purchased from Keshav Rs. 13,500 has been recorded as Rs. 13,000 in Purchase Book. The error in this entry is:
- a)Error of Principle
- b)Compensating Error
- c)Error of Commission
- d)Error of Omission
Correct answer is option 'C'. Can you explain this answer?
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Goods purchased from Keshav Rs. 13,500 has been recorded as Rs. 13,000...
The error in this entry is an "Error of Commission". Let's understand what this means and why it applies to the given scenario.
Error of Commission:
An error of commission occurs when an incorrect entry is made in the accounting records. It means that a transaction has been recorded, but with incorrect details. In this case, the error occurred in recording the purchase of goods from Keshav.
Explanation:
The purchase of goods from Keshav was actually Rs. 13,500, but it has been recorded as Rs. 13,000 in the Purchase Book. This means that the amount recorded is lower than the actual amount. As a result, the books will not reflect the true value of the purchase transaction.
Impact of the Error:
1. Understated Purchases: The error leads to the understatement of purchases by Rs. 500 (13,500 - 13,000). This means that the total value of goods purchased will be lower than it actually is.
2. Overstated Profit: Since the purchases are understated, it will result in an overstatement of the profit. The cost of goods sold will be lower, leading to a higher profit figure. This can mislead the users of financial statements and affect decision-making.
3. Incorrect Inventory Valuation: The value of inventory will also be incorrect due to the understated purchases. The closing inventory will be overstated, as the goods purchased have been recorded at a lower value.
Rectification:
To rectify this error, a correcting entry needs to be made. The Purchase Book should be updated to reflect the correct amount of Rs. 13,500. The entry should be recorded with the correct amount and the difference of Rs. 500 should be debited to the Purchase Account and credited to the Keshav Account.
In conclusion, the error in recording the purchase of goods from Keshav as Rs. 13,000 instead of the actual amount of Rs. 13,500 is an example of an "Error of Commission". It leads to the understatement of purchases, overstatement of profit, and incorrect inventory valuation. Rectification requires the recording of a correcting entry to reflect the correct amount.
Error of Commission:
An error of commission occurs when an incorrect entry is made in the accounting records. It means that a transaction has been recorded, but with incorrect details. In this case, the error occurred in recording the purchase of goods from Keshav.
Explanation:
The purchase of goods from Keshav was actually Rs. 13,500, but it has been recorded as Rs. 13,000 in the Purchase Book. This means that the amount recorded is lower than the actual amount. As a result, the books will not reflect the true value of the purchase transaction.
Impact of the Error:
1. Understated Purchases: The error leads to the understatement of purchases by Rs. 500 (13,500 - 13,000). This means that the total value of goods purchased will be lower than it actually is.
2. Overstated Profit: Since the purchases are understated, it will result in an overstatement of the profit. The cost of goods sold will be lower, leading to a higher profit figure. This can mislead the users of financial statements and affect decision-making.
3. Incorrect Inventory Valuation: The value of inventory will also be incorrect due to the understated purchases. The closing inventory will be overstated, as the goods purchased have been recorded at a lower value.
Rectification:
To rectify this error, a correcting entry needs to be made. The Purchase Book should be updated to reflect the correct amount of Rs. 13,500. The entry should be recorded with the correct amount and the difference of Rs. 500 should be debited to the Purchase Account and credited to the Keshav Account.
In conclusion, the error in recording the purchase of goods from Keshav as Rs. 13,000 instead of the actual amount of Rs. 13,500 is an example of an "Error of Commission". It leads to the understatement of purchases, overstatement of profit, and incorrect inventory valuation. Rectification requires the recording of a correcting entry to reflect the correct amount.
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Goods purchased from Keshav Rs. 13,500 has been recorded as Rs. 13,000 in Purchase Book. The error in this entry is:a)Error of Principleb)Compensating Errorc)Error of Commissiond)Error of OmissionCorrect answer is option 'C'. Can you explain this answer?
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