Accounting Process – II – CS Foundation Fundamentals of Accounting and Auditing Notes

→ Error:
An accounting error is a non-ffaudulent discrepancy in financial documentation. The term is used in financial reporting. A Trial Balance is said to be a statement of proof done arithmetically to prove that proper double was observed in making accounting entries. The assumption is that the Trial balance totals will not agree whenever there is an accounting error. There are several errors in fact which will not affect the agreement of the trial balance totals. This means that there are two basic types of accounting errors:

Errors which do not affect the Trial balance totals
Errors which do affect the trial balance totals

The correction of all accounting errors must be journalized by way of the General Journal. Accounting errors not detected by the trial balance are listed below.

→ Clerical Errors
Below mentioned three errors are also called clerical errors

Errors of Omission
Error of Commission
Compensating Errors

1. Errors of Omission: The Errors of Omission will occur when a transaction is not recorded in the books of accounts or omitted by mistake. The Errors of Omission may happen as partial or complete. The partial errors may happen in relation to any subsidiary books. This is the result of when a transaction is entered in the subsidiary book but not posted to the ledger. For example, cash paid to the suppliers has been entered in the payment side of the cash book but it will not be entered in the debit side of the suppliers account. The complete omission may happen the transaction is completely omitted from the books of accounts. For example, an accountant fails to enter a specific invoice from the sales day book.

2. Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong amount. The Errors of Commission may happens because of ignorance or negligence of the accountant.

3. Compensating Errors: These occur where two or more accounting errors cancel out their effect on the trial balance.

→ Errors of Principles
This kind of errors are occurs when the entries are made against the principle of accounting. These Errors are made because of the following reasons:

Errors happens due to the inability to make a distinction between the revenue and capital items.
Errors happens due to the inability to make a difference between the business expenses and personal expenses.
Errors happens because of the inability to make a distinction between the productive expense and
nonproductive expenses
When the accounting principle is disregarded e.g. A capital item is taken as revenue item and vice versa, i.e. purchase of furniture posted to Purchases Account.

→ Errors disclosed by the Trial Balance:
A Trial Balance will not agree on account of the following errors:

Wrong posting of entries e.g. A debit entry of Rs. 1,000 for purchase of furniture wrongly posted as Rs.100 in the account.
Omission of posting of debit or credit e.g. A debit entry of Rs. 1,000 for purchase of furniture is not posted at all.
Duplication of posting e.g. When debit entry of Rs. 1000 for purchase of furniture has been posted twice in the account.
Wrong side of posting e.g. When debit entry is posted on the credit side or credit entry is posted on the debit side, e.g. When a debit entry of Rs. 1000 is posted on the credit side, i. e. When debit entry of Rs.1000 is posted on the credit side and vice versa.
Errors in casting the totals of debit or credit side of the Trial Balance.
Wrong transfer of balances in the Trial Balance.
Omission of entering the balance of account in the Trial Balance.
Balance of cash book omitted to be recorded in the Trial Balance.
Wrong balancing of account.
Errors in the total or posting or entries of subsidiary book.
Wrong carry forward of balance in the various books, i. E. Day books, cash book, etc.

→ Errors not disclosed by Trial Balance
The following errors do not affect the agreement of the Trial Balance:

Errors or omission; omission to record any transaction
Posting of wrong amount both debit and credit side of the account
Error made in posting of debit or credit entry is compensated by an identical error of equal amount. These errors are known as compensating errors.
Errors made in posting a transaction on the correct side of wrong account.
Recording a transaction twice erroneously. These are known as errors of duplication.

→ Steps to locate errors

The first step in finding an error is to simply add the credit and debit columns again to check your math
Opening balances of all the accounts are properly brought down in the current year’s books of account.
Recheck the totals of the subsidiary books
Check that there is no mistake in balancing of various accounts
Ledger accounts have been properly balanced and the balances of ledger accounts have been correctly shown in the trial balance.
If the difference is large one, compare the figures with the trial balance of corresponding trial balance of previous year

→ Stages of correction of accounting errors
All types of errors in accounts can be rectified at two stages:

before the preparation of the final accounts; and
after the preparation of final accounts.

→ Errors rectified within the accounting period
The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed Normally, the procedure of rectification, if being done, before the preparation of final accounts is as follows:
(a) Correction of errors affecting one side of one account: Such errors do not let the trial balance agree as they effect only one side of one account so these can’t be corrected with the help of journal entry, if correction is required before the preparation of final accounts. So required amount is put on debit or credit side of the concerned account, as the case may be. For example For example, Sales Book is overcast by Rs.1000. In this case only Sales Ale is wrongly credited by excess amount of Rs.1000 while the corresponding account of the various debtors have been correctly debited.

(b) Correction of errors affecting two sides of two or more accounts: As these errors affect two or more accounts, rectification of such errors, if being done before the preparation of final accounts can often be done with the help of a journal entry. While correcting these errors the amount is debited in one account/accounts whereas similar amount is credited to some other account/accounts. Example of such error is purchase of machinery for Rs.1000 has been entered in the Purchases Book. In this case, Purchases A/c is wrongly debited while Machinery A/c has been omitted to be debited. So two accounts i.e. Purchases A/c and the Machinery A/c are affected.

→ Rectification of error after the preparation of trial balance but before Final Accounts
Sometimes errors are detected after preparation of trial balance. The errors detected after the completion of accounting year may be one-sided and two-sided errors. Rectification of the errors seen after preparation of trial balance can be made by preparing rectifying journal entries in the subsequent year only.

→ Double entry system is followed to rectify the errors detected after preparation of trial balance. Two accounts are affected by the two-sided errors. Therefore, one account is debited and another affecting account is credited for such errors. But one-sided errors are rectified by opening ‘Suspense Account’. Suspense account is opened in two cases:

To balance the disagreed total of trial balance
To post some of the items whose proper and correct information is not available so in such case temporarily it is posted in suspense account.

If debit total exceeds the credit total then the difference will be put to credit totals as suspense account and vice versa.

→ Rectification of error in next accounting period: If errors are identified in the next accounting period then they are rectified the moment they are identified in usual manner but if the errors affect trading and profit and loss account then a Profit & Loss Adjustment account is opened. When making adjustments all the nominal accounts are replaced by Profit & Loss Adjustment Account. If Profit & Loss Account reveal profit then Profit & Loss account of the previous year is rectified and the additional profit is added to find the correct profit and vice versa.

Accounting Process – II MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Which of the following errors will affect agreement of trial balance?
a. Repairs on building have been debited to building account.
b. The total of purchase book is short by Rs. 10
c. Freight paid on new machinery has been debited to freight account.
d. Sales of Rs. 500 to Ram has been debited to Shyam’s account.
Answer:
b. The total of purchase book is short by Rs. 10

Hint:
The total of purchase book is short by Rs. 10.
Due to this error the total of debit side of trial balance will be short by Rs. 10 than the total of credit side of Trial Balance.
The other 3 errors will not cause disagreement of trial balance because due to these errors the debit side and credit side of trial balance will remain unchanged.

Question 2.
After preparing the Trial Balance, the accountant finds that the total of the debit side of Trial Balance is short by Rs. 1,000. This difference will be:
a. Credited to suspense account
b. Debited to suspense account
c. Adjusted to any of account having debit balance
d. Adjusted to any of account having credit balance
Answer:
b. Debited to suspense account

Hint:
Suspense account is opened in two cases:

To balance the disagreed total of trial balance
To post some of the items whose proper and correct information is not available so in such case temporarily it is posted in suspense account.

If debit total exceeds the credit total then the difference will be put to credit totals as suspense account and vice versa.
If total of the debit side of Trial Balance is short by Rs. 1,000 the difference will be debited to suspense account.

Question 3.
Overcasting of sAlcs book by Rs. 1,000 is a type of.
a. One sided error
b. Two Sided error
c. Compensating error
d. Error of principle
Answer:
a. One sided error

Hint:
Overcasting of sales book by Rs 1,000 is a one sided error because due to this error only credit side of trial balance will be increased by Rs 1,000

Question 4.
Which one of the following is correct about errors?
a. Errors always have impact on profits
b. Errors do not have any impact on profits
c. Errors mayor may not have impact on profits
d. Errors always lead to decrease in profit.
Answer:
c. Errors mayor may not have impact on profits

Hint:
An accounting error is a non-fraudulent discrepancy in financial documentation. The assumption is that the Trial balance totals will not agree whenever there is an accounting error. There are several errors in fact which will not affect the agreement of the trial balance totals. This means that there are two basic types of accounting errors:

Errors which do not affect the Trial balance totals
Errors which do affect the trial balance totals Thus, errors mayor may, may not have impact an profits.

Question 5.
Whitewash charges of building Rs. 500 have been wrongly debited to building account. It is an example of:
a. Compensating error
b. Error of principle
c. Error of omission
d. Error of commission
Answer:
b. Error of principle

Hint:
Errors of Principles -This kind of errors are occurs when the entries are made against the principle of accounting

Question 6.
If the effect of an error is cancelled by the effect of some other errors, the errors are known as:-
a. Error of principle
b. Compensating Error
c. Error of omission
d. Error of commission Questions of June 2013
Answer:
b. Compensating Error

Hint:
Compensating Errors – These occur where two or more accounting errors cancel out their effect on the trial balance.

Question 7.
Which of the following errors will not cause the disagreement of Trial Balance?
a. Rs. 821 received from Ravi has been debited to Kavi.
b. A purchase of Rs. 281 Irorn Sanju has been debited to his account as Rs. 281
c. An invoice for Rs. 480 is entered in the SA/cs Book as Rs. 840.
d. All of the above.
Answer:
c. An invoice for Rs. 480 is entered in the SA/cs Book as Rs. 840.

Hint:
Errors not disclosed by Trial Balance
The following errors do not affect the agreement of the Trial Balance:

Errors or omission; omission to record any transaction
Posting of wrong amount both debit and credit side of the account
Error made in posting of debit or credit entry is compensated by an identical error of equal amount. These errors are known as compensating errors.
Errors made in posting a transaction on the correct side of wrong account.
Recording a transaction twice erroneously. These are known as errors of duplication

Hence An invoice of Rs. 480 is entered in the sales book as Rs.840 will not be disclosed by trial balance as due to this error the sales A/c will be credited by. Rs. 840 and debtor A/c will be debited by Rs. 840 and hence the trial balance will match.

Question 8.
Error of principle will not permit:
a. Correct total of the balance sheet
b. Correct total of the trial balance
c. The trial balance to agree
d. None of the above
Answer:
d. None of the above

Hint:
Errors of Principles:
This kind of errors are occurs when the entries are made against the principle of accounting. Error of principle has no impact on the agreement of trial balance

Question 9.
Which of the following errors is an error of omission
a. SA/c of Rs. 1,000 was recorded in the purchase journal
b. Salary paid to Mohan and Vikas have been debited to their personal – accounts
c. The total of sA/cs journal has not been posted to the sA/cs account
d. Repairs to building have been debited to building account,
Answer:
c. The total of sA/cs journal has not been posted to the sA/cs account

Hint:
Errors of Omission: The Errors of Omission will occur when a transaction is not recorded in the books of accounts or omitted by mistake. The Errors of Omission may happen as partial or complete.
Thus the total of sales journal has not been posted to the sales A/c’ is an error of omission.

Question 10.
Which of the following errors are reveA/cd by the trial balance
a. Errors of principle
b. Errors of omission
c. Errors of commission
d. None of the above
Answer:
c. Errors of commission

Hint:
Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong account. The Errors of Commission may happens because of ignorance or negligence of the accountant.
The error will be revealed by the Trial Balance.

Question 11.
Which of the following errors will result into non-agreement of the trial balance?
a. Totaling the returns inwards journal as Rs. 11,400 instead of Rs. 12,600
b. Recording a sA/cs invoice for Rs. 5,600 as Rs. 6.500 in the SA/cs Journal
c. Failing to record a purchase invoice for Rs. 54,000 in the Purchases Journal
d. Recording in the Purchases Journal, an invoice, for acquiring a non current asset for Rs. 60,000.
Answer:
a. Totaling the returns inwards journal as Rs. 11,400 instead of Rs. 12,600

Hint:
A Trial Balance will not agree on account of wrong posting of entries . Totaling the return inwards journal as Rs. 11,400 instead of Rs. 12,600 is an error which means that the return inward account will be posted with wrong amount and this mistake will be reflected in the Trial Balance as the Trial Balance will not agree.

Question 12.
Rs.1,000 was paid as rent to the landlord Krishna. This amount was debited to Krishna’s personal account. This error will
a. Affect agreement of the trial balance.
b. Not affect agreement of the trial balance
c. Affect the suspense account
d. None of the above.
Answer:
b. Not affect agreement of the trial balance

Hint:
Errors of Principles
This kind of errors are occurs when the entries are made against the principle of accounting. Error of principle has no impact on the agreement of trial balance

Question 13.
It SA/cs is done and by mistake A’s account is transferred to Purchase A/c in such a case which accounts are affected?
a. Purchase a/c
b. A’s a/c
c. Both (a) and (b)
d. None of the above.
Answer:
c. Both (a) and (b)

Hint:
It affects both, Purchases’ A/c and A’s A/c.
The accounting entry for the transaction of sales to A should be ( Right entry)

Question 14.
The credit side of trial balance show:
a. Bank
b. Cash
c. Equipment
d. None of the above.
Answer:
d. None of the above.

Hint:
Credit side of trial balance resembles the liabilities & income.

Question 15.
A sold goods of t 500/- to Z which is entered in purchase book as 5,000. What will be the entry after rectification?

Answer:

Hint:
The accounting entry for the transaction should be

Question 16.
‘Wrong Casting of subsidiary book” is which type of error?
a. Error of Omission
b. Error of Commission
c. Error of Principle
d. Compensating Errors.
Answer:
b. Error of Commission

Hint:
Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong account.

Question 17.
When two or more errors are committed in such a way that effect of one error is compensated by another error. Which type of error is this?
a. Error of Commission
b. Compensating Error
c. Error of Principle
d. None of these.
Answer:
b. Compensating Error

Hint:
Compensating Errors: These occur where two or more accounting errors cancel out their effect on the trial balance.

Question 18.
If there is any error in trial balance which is not effecting its total, will it affect any accounting procedure?
a. Yes
b. No
c. Don’t know
d. Partly Yes.
Answer:
b. No

Hint:
If there is any error in trial balance which is’ not affecting its total there will be no effect on accounting procedure.

Question 19.
A Sale of Rs. 100 to ‘A’ recorded in the Purchase Book would affect:
a. Purchases Account and A’s Personal Account Only
b. Sale Account and A’s Personal Account Only
c. A’s Personal Account Only
d. Sales Account, Purchases Account & A’s Personal Account
Answer:
d. Sales Account, Purchases Account & A’s Personal Account

Hint:
Correct entry

Question 20.
If a credit sale of Rs. 15,400 to Pram had been entered as Rs. 14,500. The Journal entry for rectifying the error would be:
a. Debit Cash Account and Credit Sale Account with Rs. 900
b. Debit Prem Account and Credit Sales Account with Rs. 900
c. Debit Sales Account and Credit Pram Account with Rs. 900
d. Debit Prem, Account and Credit Saless Account with Rs. 15,400
Answer:
b. Debit Prem Account and Credit Sales Account with Rs. 900

Hint:
Wrong entry passed

Question 21.
Legal expenses paid to Mohan is debited to his personal account. This is an example of error
a. Duplication
b. Omission
c. Commission
d. Principle
Answer:
c. Commission

Hint:
Error of Commission: This occurs where proper double entry is observed except an entry is made to the wrong account.

Question 22.
Commission received Rs. 2,500 correctly entered in the cash book but posted to the debit side of commission account. In the Trial Balance:
a. The credit total will be greater by Rs. 5,000 than the debit total
b. The debit, total will be greater by Rs. 2,500 than the credit total
c. The debit total will be greater by Rs. 5,000 than the credit total
d. The credit total will be greater by Rs. 2,500 than the debit total
Answer:
b. The debit, total will be greater by Rs. 2,500 than the credit total

Hint:
In trial balance the debit total will be greater by Rs 2500.
Correct entry

Question 23.
Which of the following errors are reveA/cd by the trial balance?
a. Errors in balancing account
b. Errors of principle
c. Errors of complete omission
d. Compensatory Errors.
Answer:
a. Errors in balancing account

Hint:
A Trial Balance will not agree on account of the following errors:

Wrong posting of entries e.g. A debit entry of Rs. 1,000 for purchase of furniture wrongly posted as Rs. 100 in the account.
Omission of posting of debit or credit e.g. A debit entry of Rs. 1,000 for purchase of furniture is not posted at all.
Duplication of posting e.g. When debit entry of Rs.1000 for purchase of furniture has been posted twice in the account.
Wrong side of posting e.g. When debit entry is posted on the credit side or credit entry is posted on the debit side, e.g. When a debit entry of Rs.1000 is posted on the credit side, i. e. When debit entry of Rs.1000 is posted on the credit side and vice versa.
Errors in casting the totals of debit or credit side of the Trial Balance.
Wrong transfer of balances in the Trial Balance.
Omission of entering the balance of account in the Trial Balance.
Balance of cash book omitted to be recorded in the Trial Balance.
Wrong balancing of account.
Errors in the total or posting or entries of subsidiary book.
Wrong carry forward of balance in the various books, i. E. Day books, cash book, etc.