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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?

Note: Be concise and avoid unnecessary detail to attempt the given questions.

Important Instructions:

Your discussion must be based on logical facts.
Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
Obnoxious or ignoble answer should be strictly avoided.
Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.