Explanation of the adjustment

The adjustment in question relates to a discount received from a supplier, which was mistakenly included with a cheque entered in the Bank Column of the Cash Book in April 2006. This adjustment needs to be made in order to rectify the error and accurately reflect the financial transactions in the books of accounts.

Importance of accurate recording

Accurate recording of financial transactions is crucial for maintaining the integrity of the accounting records. Errors and discrepancies can lead to incorrect financial statements and misrepresentation of financial performance. Therefore, it is essential to identify and rectify any errors or omissions promptly.

Identification of the error

In this case, the error was made when the discount received from the supplier was included with a cheque entered in the Bank Column of the Cash Book. The discount should have been recorded separately as a reduction in the accounts payable to the supplier, rather than being included as part of the bank transaction.

Impact on the books of accounts

Including the discount in the Bank Column of the Cash Book has resulted in an overstatement of the bank balance. This means that the bank balance shown in the Cash Book is higher than the actual balance in the bank account. This discrepancy can lead to inaccurate financial reporting and mismanagement of funds.

Adjustment entry

To correct the error, an adjustment entry needs to be made in the Cash Book. The discount amount of Rs. 100 should be deducted from the Bank Column of the Cash Book to reflect the correct bank balance. The entry would be as follows:

Bank Account Dr. Rs. 100
Discount Received Cr. Rs. 100

The Bank Account is debited to decrease the bank balance, while the Discount Received account is credited to reduce the liability to the supplier.

Impact on financial statements

The adjustment will have an impact on the financial statements. The correction of the error will result in a decrease in the bank balance and a corresponding decrease in the liabilities to the supplier. This adjustment will ultimately lead to a decrease in the assets and liabilities of the company, resulting in a change in the financial position as reflected in the balance sheet.

Conclusion

In conclusion, the adjustment in question relates to a discount received from a supplier that was mistakenly included with a cheque entered in the Bank Column of the Cash Book. This error has resulted in an overstatement of the bank balance and needs to be rectified through an adjustment entry. Accurate recording of financial transactions is essential for maintaining the integrity of the accounting records and producing reliable financial statements.