Effect of Errors of Final Accounts

Effect of Errors of Final Accounts

·         1. Errors effecting profit and loss account

·         It is important to note the effect that an en-or shall have on net profit of the firm. One point to remember here is that only those accounts which are transferred to trading and profit and loss account at the time of preparation of final accounts effect the net profit. It means that only mistakes in nominal accounts and goods account will effect the net profit. Error in the these accounts will either increase or decrease the net profit.

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·         How the errors or their rectification effect the profit-following rules are helpful in understanding it :

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·         (I) If because of an error a nominal account has been given some debit the profit will decrease or losses will increase, and when it is rectified the profits will increase and the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but the amount debited to machinery repairs account -this error will reduce the profit. In rectifying entry the amount shall be transferred to machinery account from machinery repairs account, and it will increase the profits.

·         (il) If because of an error the amount is omitted from recording on the debit side of a nominal account-it results in increase of profits or decrease in losses. The rectification of this error shall have reverse effect, which means the profit will be reduced and losses will be increased. For example, rent paid to landlord but the amount has been debited to personal account of landlord-it will increase the profit as the expense on rent is reduced. When the error is rectified, we will post the necessary amount in rent account which will increase the expenditure on rent and so profits will be reduced.

·         (iil) Profit will increase or losses will decrease if a nominal account is wrongly credited. With the rectification of this error, the profits will decrease and losses will increase. For example, investments were sold and the amount was credited to sales account. This error will increase profits (or reduce losses) when the same error is rectified the amount shall be transferred from sales account to investments account due to which sales will be reduced which will result in decrease in profits (or increase in losses).

·         (iv) Profit will decrease or losses will increase if an account is omitted from posting in the credit side of a nominal or goods account. When the same will be rectified it will increase the profit or reduce the losses.

·         For example, commission received is omitted to be posted to the credit of commission account. This error will decrease profits ( or increase losses) as an income is not credited to profit and loss account. When the error will be rectified, it will have reverse effect on profit and loss as an additional income will be credited to profit and loss account so the profit will increase ( or the losses will decrease).

·         If due to any error the profit or losses are effected, it will have its effect on capital account also because profits are credited and losses are debited in the capital account and so the capital shall also increase or decrease. As capital is shown on the liabilities side of balance sheet so any error in nominal account will effect balance sheet as well. So we can say that an error in nominal account or goods account effects profit and loss account as well as balance sheet.

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·         2. Errors effecting balance sheet only

·         If an error is committed in a real or personal account, it will effect assets, liabilities, debtors or creditors of the firm and as a result it will have its impact on balance sheet alone. because these items are shown in balance sheet only and balance sheet is prepared after the profit and loss account has been prepared. So if there is any error in cash account, bank account, asset or liability account it will effect only balance sheet.

Definition: A mortgage is an agreement to give up an interest in something if you fail to perform some duty. In many cases, it means that you'll give up your home if you fail to repay your home loan as agreed. You can use mortgage as a verb, meaning "to pledge".

Mortgage and "home loan" are often used interchangeably. However, the mortgage is really the agreement that makes your home loan work -- the bank wouldn't lend you hundreds of thousands of dollars unless they knew they could claim your home in the event of your default.

A mortgage is a security interest in real property held by a lender as a security for a debt–usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.