EPFO EO/AO 2023 General Ability Test · Question 43 of 120

Correct — C, (c) Errors of principle. What makes this an error of principle, rather than a mere slip about which book to open, is the class of account that ends up being debited. The Purchases Book is a subsidiary book for credit purchases of GOODS — that is, of the things in which the business deals and which it intends to resell. Everything written into it is posted, in total, to the debit of the Purchases account, which is a revenue item that finds its way into the Trading Account. Machinery is not goods. It is a fixed asset, bought to be used and not to be resold, and a credit purchase of a fixed asset is one of the standard occasions for the Journal Proper, precisely because no subsidiary book exists for it. So the entry has debited a revenue account where it should have debited an asset account. That is a violation of the capital-and-revenue distinction itself, and an error that violates a fundamental accounting principle is classified as an error of principle whatever else it also is. The consequences are the reason the classification matters. The debit and the credit are still equal, so the Trial Balance agrees and the error hides — errors of principle are among those that do not disturb the Trial Balance at all. Purchases are overstated, so gross profit and net profit are understated; the Balance Sheet omits the machinery, so assets are understated; and because no asset stands in the books, no depreciation is charged on it in this or any later year, which carries the error forward indefinitely. The rectifying entry, once discovered, is to debit the Machinery account and credit the Purchases account with the amount (through a Suspense account only if one has been opened, which it would not be here since the Trial Balance never disagreed).

• (a)Compensating errors — Compensating errors are two or more independent errors whose effects on the Trial Balance cancel each other — an excess debit of Rs. 500 in one account neutralised by an excess credit of Rs. 500 in another, so the totals agree and both errors survive undetected. The stem describes a single error with nothing offsetting it. The family resemblance that tempts a candidate is that compensating errors also leave the Trial Balance in agreement; but agreement is a symptom shared by several classes of error, not a definition of this one.
• (b)Errors of commission — Errors of commission are errors of execution made while working within the right class of account — a wrong amount posted, a posting to the debit instead of the credit, a wrong casting or carry forward, or an entry in the personal account of the wrong customer. The book has been kept correctly in principle and mishandled in detail. Here the detail is not what went wrong: the amount, the side and the supplier's account are all fine, and what fails is the decision to treat a fixed asset as goods. Once an error crosses the line between capital and revenue it is classified as an error of principle.
• (d)Errors of omission — An error of omission is a transaction left out of the books — completely, when it is never entered in any subsidiary book, or partially, when it is entered in the book of original entry but never posted to the ledger. Nothing has been omitted here. The purchase was recorded, the supplier was credited, and the amount reached the ledger; it simply reached the wrong account. Note the diagnostic difference: a complete omission leaves the Trial Balance in agreement, while a partial omission usually makes it disagree — and this error leaves it in agreement for a quite different reason.

Book-keeping errors are classified in two cross-cutting ways, and an examiner can ask about either. By nature there are four families: errors of omission (a transaction not recorded, wholly or partly), errors of commission (recorded, but wrongly executed — wrong amount, wrong side, wrong account of the same class, wrong casting), errors of principle (recorded in a way that breaches an accounting principle, classically by confusing capital with revenue), and compensating errors (two or more errors whose effects cancel). By effect there are two: errors that make the Trial Balance disagree, and errors that do not. Errors of principle, complete omissions, compensating errors and the recording of a correct amount in the wrong account of the same class all belong to the second group, which is why an agreed Trial Balance is evidence of arithmetical accuracy only and never proof that the books are correct. Rectification depends on when the error is found — before the Trial Balance, after it through a Suspense account for one-sided errors, or after the final accounts through a Profit and Loss Adjustment account for errors affecting nominal accounts.

For an Accounts Officer this is the diagnostic skill the paper is really testing: given a symptom, name the disease and then know whether the Trial Balance will show it. The examiner has built the item so that the surface facts point one way and the class of account points another — 'recorded in the wrong book' sounds like careless execution, and only the nature of machinery makes it a matter of principle. The habit rewarded is asking what account was ultimately debited or credited, not what book was used.

• The Purchases Book records credit purchases of goods only — goods being items in which the business deals.
• A credit purchase of a fixed asset is entered in the Journal Proper, which handles transactions for which no special journal exists.
• Recording a fixed asset as a purchase of goods confuses capital with revenue and is therefore an error of principle.
• Errors of principle do not disturb the agreement of the Trial Balance, because the debit and credit remain equal.
• Effect here: purchases overstated, gross and net profit understated, fixed assets understated, and no depreciation charged on the asset.
• Rectification: debit Machinery account and credit Purchases account with the amount involved.
• The four classes by nature are errors of omission, of commission, of principle, and compensating errors.
• The Journal Proper also carries opening, closing, adjusting, transfer and rectification entries.

• Answering 'errors of commission' because the wrong book was used, without asking which class of account was debited.
• Assuming an agreed Trial Balance means the books are free of error.
• Confusing a purchase of goods on credit with the purchase of a fixed asset on credit — only the first belongs in the Purchases Book.
• Routing a rectification through a Suspense account when the Trial Balance never disagreed in the first place.

Error classification appears in most EO/AO accountancy blocks in one of two forms: a fact pattern to be classified, as here, or the reverse question of whether a stated error will affect the Trial Balance. Both are answered by the same two-step drill — identify the accounts actually debited and credited, then compare them with the accounts that should have been. Rectification entries are the natural follow-up and are worth rehearsing for the standard half-dozen fact patterns.

No directly related past PYQ was found.

• practice — not a real PYQ

  The rectifying entry for a credit purchase of machinery wrongly recorded in the Purchases Book is :

  • (a)Purchases A/c Dr. — To Machinery A/c
  • (b)Machinery A/c Dr. — To Purchases A/c
  • (c)Machinery A/c Dr. — To Suspense A/c
  • (d)Suspense A/c Dr. — To Purchases A/c

  Answer(b) Machinery A/c Dr. — To Purchases A/c

• practice — not a real PYQ

  Which one of the following errors will NOT be disclosed by the Trial Balance ?

  • (a)A sale of Rs. 500 posted to the debit side of the customer's account as Rs. 5,000
  • (b)The Purchases Book undercast by Rs. 1,000
  • (c)Wages paid for installing a new machine debited to the Wages account
  • (d)A discount allowed omitted from posting to the ledger

  Answer(c) Wages paid for installing a new machine debited to the Wages account