An expense was understated by $250. What is the effect on the draft profit?

It is overstated by $250. Too little was deducted, so the profit is too high.

Sales were overcast by $600. What must be done to the draft profit?

deduct $600. Income was too high, so profit was too high.

Which error has no effect on the profit for the year?

a payment from one customer credited to another customer's account. Both accounts are trade receivables. No income or expense is involved.

The purchase of a motor van was debited to the motor expenses account. What is the effect on profit?

understated. An expense is too high, so the profit is too low. Non-current assets are understated too.

Draft profit is $8000. Rent paid of $700 was entered twice. What is the corrected profit?

$8700. The expense was $700 too high, so add it back.

How errors change profit and the statement of financial position

In plain words

Finding an error after the profit has been worked out means the profit is wrong too. There is no need to redo the whole statement: take the draft profit and adjust it, one error at a time.

6 things to know

For each error, ask whether it changed an income or an expense. If it did not, the profit is not affected.
An expense that was too low, or an income that was too high, made the profit too high. Deduct to correct it.
An expense that was too high, or an income that was too low, made the profit too low. Add to correct it.
An error between two accounts of the same type, such as a sale posted to the wrong customer, does not change profit.
In the statement of financial position, correcting errors changes the assets and liabilities involved, and the corrected profit changes the owner's equity.
If a suspense account still has a balance when the statement is prepared, a debit balance is shown with the assets and a credit balance with the liabilities.

Worked example

The draft profit for the year is $12 400. Then three errors are found: wages of $300 were not recorded; the sales journal was undercast by $500; and equipment costing $2000 was debited to the purchases account. Calculate the corrected profit.

Wages left out: an expense was too low, so profit was too high. Deduct 300.
Sales undercast: income was too low, so profit was too low. Add 500.
Equipment in purchases: an expense (purchases) was too high, so profit was too low. Add 2000.
Corrected profit = 12 400 − 300 + 500 + 2000 = $14 600.

Tips and tricks

Set the answer out as a statement: draft profit, then a line for each error with a plus or a minus, then the corrected profit. One mark is given for each line.
Decide by the effect on profit, not by debit or credit. "Was profit too high or too low because of this?"

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

How errors change profit and the statement of financial position: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

An expense was understated by $250. What is the effect on the draft profit?
- It is overstated by $250. (the answer)
- It is understated by $250.
- There is no effect.
- It is overstated by $500.
Too little was deducted, so the profit is too high.
Sales were overcast by $600. What must be done to the draft profit?
- add $600
- deduct $600 (the answer)
- nothing
- add $1200
Income was too high, so profit was too high.
Which error has no effect on the profit for the year?
- wages paid but not recorded
- closing inventory overvalued
- a payment from one customer credited to another customer's account (the answer)
- rent received recorded as $90 when it should be $900
Both accounts are trade receivables. No income or expense is involved.
The purchase of a motor van was debited to the motor expenses account. What is the effect on profit?
- overstated
- understated (the answer)
- no effect
- doubled
An expense is too high, so the profit is too low. Non-current assets are understated too.
Draft profit is $8000. Rent paid of $700 was entered twice. What is the corrected profit?
- $7300
- $8000
- $8700 (the answer)
- $9400
The expense was $700 too high, so add it back.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

2 questions, 5 marks. Write your answers on paper, then check them.

How errors change profit and the statement of financial position

Cambridge IGCSE Accounting 0452 · 5 marks · papermunch.org

Name ______________________________ Date ______________

A draft profit of $9500 was calculated before these errors were found: rent received of $400 had been omitted, and discount allowed of $150 had been recorded twice. Calculate the corrected profit.[3]
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$10 050. Add 400 (income was too low). Add 150 (an expense was too high). 9500 + 400 + 150.
I got this one
A sale of $200 to J. Lim was debited to the account of K. Lim. Explain the effect of this error on the profit for the year.[2]
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No effect. The sale was recorded correctly in the sales account. Only the customers' accounts are wrong, and they are not in the statement of profit or loss.
I got this one

Answers: How errors change profit and the statement of financial position

1. $10 050. Add 400 (income was too low). Add 150 (an expense was too high). 9500 + 400 + 150.
2. No effect. The sale was recorded correctly in the sales account. Only the customers' accounts are wrong, and they are not in the statement of profit or loss.