Rectification of errors and their impact on profit.

A company's statement of profit or loss for the year ended 31 December 2015 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the company's policy to depreciate motor vans at 25% per year on the straight-line basis, with a full year's charge in the year of acquisition.
What would the net profit be after adjusting for this error?

asked Sep 15, 2015 in Rectification of Errors by hussain (38 points) 986 views

1 Answer

0 votes
This is an error of Principle.  The wrong entry has been:

Motor Expenses A/c    Dr.  18000

  To Bank A/c                                        18000

Correct entry should have been:

Motor Van          A/c     Dr.   18000

   To Bank A/c                                        18000

Rectified entry will be:

Motor Van A/c              Dr.   18000

   To Motor Expenses A/c                     18000

Now entry for charging depreciation  on straight line method will be:

Depreciation on Motor Van A/c   Dr.  4500

   To Motor Van A/c                                             4500

Now let us see what will be the impact of the rectification entry and entry for charging depreciation on net profit.

Net Profit before rectification of Error                                  = $83600

Add increase in income due to rectification of error        = $18000

Less Depreciation expenses on Motor Van                     =  $  4500

Net Profit after correction and depreciation                      =  $97100

Depreciation is charged @25% on straight line basis = $18000 x 25/100 = $4500
answered Sep 15, 2015 by jbsclasses (3,971 points)
Sir, why would we add $18000 after doing the rectification?
How there will be an increase in income?
Earlier you had treated the payment made for Motor Van as an expense (motor expense A/c).  Due to this  profits had reduced.  After rectification $18000 have been treated as an asset.  This will reduce the expenses of the business, hence increase its profits.