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When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called
- a)Errors of Omission
- b)Compensating errors
- c)Errors of Commission
- d)Error of principle
Correct answer is option 'B'. Can you explain this answer?
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When two or more errors are committed in such a way that the net effec...
When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is NIL, these errors arise, which are called "Compensating Errors."
Example: If purchases book is overcast, say, by 26,000, which results in excess debit of Z6,000 in Purchases Account and if the Sales Returns Book is undercast by the same amount of 26,000, which results in shortage of debit in Sales Returns Account. These type of errors compensate each other. One excess of ?6000 is set off by the other deficit (of the same amount 6,000). The net effect is nil. Hence, these types of errors do not affect the Trial Balance.
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Example: If purchases book is overcast, say, by 26,000, which results in excess debit of Z6,000 in Purchases Account and if the Sales Returns Book is undercast by the same amount of 26,000, which results in shortage of debit in Sales Returns Account. These type of errors compensate each other. One excess of ?6000 is set off by the other deficit (of the same amount 6,000). The net effect is nil. Hence, these types of errors do not affect the Trial Balance.
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When two or more errors are committed in such a way that the net effec...
Compensating errors:
Compensating errors are a type of accounting error where two or more errors are made in such a way that the net effect on the debits and credits of accounts is nil or zero. These errors offset each other, resulting in no overall impact on the accuracy of the financial statements.
Examples of compensating errors:
To understand compensating errors better, let's consider some examples:
1. Error in recording a purchase:
- Error 1: A purchase of $500 is recorded as a debit to the wrong expense account.
- Error 2: The same purchase of $500 is recorded as a credit to the wrong liability account.
The net effect of these errors is that the debit and credit are equal in amount but recorded in the wrong accounts. As a result, the errors cancel each other out, and the overall impact on the financial statements is zero.
2. Error in recording sales and expenses:
- Error 1: Sales of $1,000 are understated by recording only $100.
- Error 2: Expenses of $500 are overstated by recording $5,000.
In this case, the error in sales is offset by the error in expenses. The understatement of sales is compensated by the overstatement of expenses, resulting in no net effect on the overall accuracy of the financial statements.
3. Error in recording assets and liabilities:
- Error 1: A non-current asset is overstated by $10,000.
- Error 2: A long-term liability is understated by $10,000.
These errors offset each other, as the overstatement of the asset is compensated by the understatement of the liability. Therefore, the net effect on the financial statements is zero.
Conclusion:
Compensating errors occur when two or more errors are made in such a way that their combined effect on the debits and credits of accounts is nil. These errors cancel each other out and do not affect the overall accuracy of the financial statements. It is important to identify and rectify compensating errors to ensure the accuracy and reliability of the accounting records.
Compensating errors are a type of accounting error where two or more errors are made in such a way that the net effect on the debits and credits of accounts is nil or zero. These errors offset each other, resulting in no overall impact on the accuracy of the financial statements.
Examples of compensating errors:
To understand compensating errors better, let's consider some examples:
1. Error in recording a purchase:
- Error 1: A purchase of $500 is recorded as a debit to the wrong expense account.
- Error 2: The same purchase of $500 is recorded as a credit to the wrong liability account.
The net effect of these errors is that the debit and credit are equal in amount but recorded in the wrong accounts. As a result, the errors cancel each other out, and the overall impact on the financial statements is zero.
2. Error in recording sales and expenses:
- Error 1: Sales of $1,000 are understated by recording only $100.
- Error 2: Expenses of $500 are overstated by recording $5,000.
In this case, the error in sales is offset by the error in expenses. The understatement of sales is compensated by the overstatement of expenses, resulting in no net effect on the overall accuracy of the financial statements.
3. Error in recording assets and liabilities:
- Error 1: A non-current asset is overstated by $10,000.
- Error 2: A long-term liability is understated by $10,000.
These errors offset each other, as the overstatement of the asset is compensated by the understatement of the liability. Therefore, the net effect on the financial statements is zero.
Conclusion:
Compensating errors occur when two or more errors are made in such a way that their combined effect on the debits and credits of accounts is nil. These errors cancel each other out and do not affect the overall accuracy of the financial statements. It is important to identify and rectify compensating errors to ensure the accuracy and reliability of the accounting records.
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When two or more errors are committed in such a way that the net effec...
Cimpensating errors.
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When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are calleda)Errors of Omissionb)Compensating errorsc)Errors of Commissiond)Error of principleCorrect answer is option 'B'. Can you explain this answer?
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