Question

Topic to be tested:

Rectification of errors


Learning Objectives:

To understand type of error and effects of identified error on financial statements


GDB Question:



Mr. Hamid is running his small retail business under the name of Hamid Store. He has recently hired Mr. Imran as a junior accountant to maintain the books of accounts of his business. Mr. Imran has little knowledge in accounting. Recently, it has been observed that Mr. Imran wrongly treated installation charges of plant and machinery worth Rs. 500,000 as revenue expenditure under the heading of administration expenses. As a result, financial statements failed to reflect true and fair business affairs.



Required:

Identify the “type of error” committed by Mr. Imran.
What will be the effect of given error on asset side of a balance sheet? (Just mention whether the assets would be overstated, understated or remains unaffected)
What will be correct amount of fixed assets, if current assets and fixed assets before correcting this error were Rs. 160,000 and Rs. 940,000 respectively?
What will be correct amount of operating profit, if operating loss before correcting this error was Rs. 300,000?

Answer 1

GDB solution:

Topic: Rectification of error

GDB Solution of accountancy of course code mgt101:

• Here the type of error committed by Mr. Imran is Error of principal

• The effect of given error should be “Understand”.

• The correct amount of fixed assets after correct should be 14, 40,000.

• The correct amount of operating profit is 200000.

Hope it helped.....