Unusual expenses, Effects of error
Unusual expenses, Effects of error: The income statement is a financial statement that details sales, costs, and earnings for a certain accounting period. Cost of products sold, operational and non-operating expenditures, and unexpected expenses are all included in expenses. Administration and advertising are examples of operational expenditures, whereas interest and taxes are examples of non-operating expenses. Unusual costs are one-time or unusual in nature. These costs are rarely incurred on a regular basis, yet they may have a major impact on profitability and cash flow.
Types of Unusual expenses, Effects of error
Discontinued activities, remarkable items, and changes in accounting standards are examples of unusual things. The sale or closure of a substantial operational unit is referred to as discontinued operations. Costs linked with closing down foreign manufacturing facilities, for example, would be considered exceptional expenditures. Extraordinary costs are one-time or uncommon occurrences, such as damage from natural catastrophes or accidents. Changes in accounting standards, such as switching from cash to accrual accounting, are also unusual expenditures.
- Accounting
Unusual items are included in a separate area at the bottom of income statements. To be included in this area, items must be both exceptional and uncommon. Gains and losses from the sale of fixed assets, as well as changes in inventory values, are not included in this section. Companies may report net income from ongoing or normal operations as a distinct line item, then list exceptional and discontinued items before reporting net income. These odd items are shown on the income statement net of taxes. If the corporation tax rate is 20% and the flood damage losses total $10,000, the net loss is $8,000 — $10,000 x (1 – 0.20) = $10,000 x 0.80 = $8,000.
- Impact
Unusual items have an impact on the income statement’s net income computation, sometimes resulting in a loss. A fire that destroys a small business’s manufacturing facilities, for example, may result in a net loss since the firm would have to repurchase inventory, repair building damage, and acquire or lease replacement equipment. Unusual items have an impact on earnings per share, which is calculated by dividing net income by the number of outstanding shares. Operating cash flow is also affected by changes in net income.
- Considerations
Investors should examine the unexpected elements to see whether they point to an underlying issue. If a corporation closes its Latin American operations, for example, investors may be curious as to why management stopped the business or was unable to find a buyer. To make the net income from continuing operations amount appear better, certain corporations may designate certain items as exceptional in each accounting quarter. External stakeholders should evaluate if the company’s management is attempting to conceal operational flaws using unique things.
- Accounting blunders
Accounting errors are blunders made in the bookkeeping and accounting departments. It’s possible that the error is one of habit or one of principle. They may happen while you’re entering transactions in the journal or subsidiary books, or when you’re publishing to the ledger.
As a result, mistakes may occur during the recording, classification, or summarization of accounting transactions. An act of omission or conduct may have resulted in the mistake.
Unusual expenses, Effects of Errors are classified as follows:
Errors may be categorised into one of four categories, depending on their nature:
- (1) Omission Errors
- (2) Commission Errors
- (3) Principles Errors
- (4) Error Correction
- Omissional errors:
An error of omission occurs when a transaction is not recorded in the books of accounts by mistake. It might be a partial or total omission. Any secondary book may be subject to partial omission. The transaction is recorded in the subsidiary book but not in the general ledger.
For example, a customer’s returned products were recorded in the sales returns book but not credited to the customer’s account. Similarly, cash paid to a supplier has been noted in the Cash Book’s payment side but not sent to the supplier’s account as a debit. When a transaction is fully missing from the books of accounts, this is known as complete omission. A bookkeeper, for example, forgot to input an invoice from the sales daybook.
- Commission Error:
It’s possible that a transaction may be recorded incorrectly in the books of accounts. It might be incomplete or wrongly entered. A commission mistake is a kind of error. These mistakes are often caused by the accountant’s ignorance, carelessness, or inattention. It might be of several sorts. The following are some examples of such errors:
(a) Unusual expenses, Effects of Errors relating to subsidiary books:
These are three types:
(i) Entering wrong amount in a subsidiary book, e.g., a purchase of Rs.430 may be entered in the Purchase Day Book as Rs.340 due to wrong transposition of figures.
(ii) Entering the transaction in a wrong subsidiary book, e.g., a purchase transaction may be entered in sales daybook and a sales transaction may be entered in the purchase daybook.
(iii) Wrong casting or carry forward of a subsidiary book. Casting refers to the process of totaling the daybooks periodically. A mistake in relation to totaling is called ‘error in casting’.
If there is excess totaling, the error is ‘over casting’ and short totaling is ‘under casting’. Sometimes, error may be the result of wrong carry forward of the total from one page of the daybook to another, e.g., the total of a page may be Rs.235 and carried forward to the next page as Rs.325.
(b) Unusual expenses, Effects of Errors relating to ledger:
These errors may be subdivided broadly into two types. They are: errors of posting and errors in balancing.
Unusual expenses, Effects of Error of posting may be further being subdivided as follows:
(i) Posting wrong amount on the right side of an account. Example. Sale of Rs.560 to Mr.Raja is entered as Rs.650 in the debit side of his account from the Sales Day Book.
(ii) Posting the same amount twice to an account. Example. A cash receipt of Rs.1000 from Mr.Ram is credited twice to his account.
(iii) Posting the correct amount to the wrong side of the right account. Example. A purchase of goods from Mr. Raj for Rs.1000 is debited to his account [instead of crediting],
(iv) Posting wrong amount to the wrong side of right account. Example. A purchase of Rs.1000 from Mr.Sam is debited to his account as Rs. 10,000.
(v) Posting the correct amount to the wrong account but on the right side. Example. A sale of goods to S.Anish for Rs.1000 is wrongly debited to G.Anish a/c.
(vi) Posting correct amount to the wrong account and on the wrong side. Example. A sale of Rs.1000 to S.Anish is wrongly credited to G.Anish a/c.
Mistakes in balancing:
Errors in account balancing might result in an account balance that is either too high or too low.
- Principle Errors:
When entries are made that are not in accordance with accounting standards, these mistakes arise. Example. The purchase of a computer for use in the workplace is incorrectly recorded in the Purchases Day Book. Revenue expenditures should not be considered capital expenditures.
These mistakes might be made:
- (a) Because it is impossible to distinguish between income and capital items;
- (b) Due to an inability to distinguish between business and personal costs;
- (c) Wages paid for production may be charged to salaries a/c, or salaries paid to office staff may be debited to wages a/c, due to an inability to distinguish between productive and non-productive expenditures.
- Unusual expenses, Effects of Error Compensation:
These are mistakes that compensate for themselves in the net results, i.e., an over debit in one account is offset by a similar over credit in another account. Similarly, a mistaken credit might have been offset by a mistaken debit in another account.
For example, if tax paid Rs.2, 500 is debited in Tax a/c as Rs.3, 000 and interest received Rs.3, 500 is credited in the interest a/c as Rs.4, 000, the excess debit of Rs.500 in tax a/c is compensated by an excess credit of Rs.500 in interest a/c.
This type of error may be committed in combination of different errors in different accounts. Normally the presence of this type of errors will not be revealed by the trial balance.
Impact of Errors on Trial Balance: The agreement of the Trial balance is confirmation of the books of accounts’ arithmetical correctness. It is, however, a final evidence of the correctness of books of accounts; it merely ensures that every debit is matched by an equal and matching credit.
If the trial balance does not correspond, it is a clear indicator that the books of accounts are incorrect. Even if the trial balance agrees, the books of accounts may include inaccuracies.
As a result, based on the trial balance agreement, the mistakes might be categorised as follows:
- (a) Errors that do not alter the trial balance agreement.
- (b) Errors that impact the trial balance’s agreement.
The mistakes of principle, total omission, commission, and compensation are the most common flaws that are not reported by Trial balance or do not influence the Trial balance agreement. Certain mistakes, such as entering a transaction in two subsidiary books, putting the incorrect amount in a subsidiary book, mis-posting to the wrong account but right side, and so on, are difficult to locate, but they can always be corrected using journal entries.
The most common faults that are revealed by trial balance or influence the Trial balance’s agreement include errors of incorrect or omitted posting, incorrect summing of subsidiary books, incorrect carry-forward, and incorrect balancing of ledger accounts, among others.
Wrong posting may take the form of entering the incorrect amount into a ledger account, posting to the incorrect side of an account, or double posting. Because these mistakes usually only impact one side of the ledger accounts, the trial balance will display them as a discrepancy in debit and credit totals.