Question

Good Costing Rs.10,000 destroyed by fire were not recorded. The error will result in :

• A. is an error of Commission
• B. will affect the Trail Balance
• C. will not affect the net profit
• D. None of these

Answer 1

Answer: (D)

None of these

When goods are destroyed by fire and the transaction is not recorded, this is known as error of omission. Error of omission is when a transaction is not recorded in the books at all, or recorded in journal but not posted in the ledger accounts. Since transaction is not recorded at all, the effect is one debit as well as credit side. This implies trial balance will not be affected because both debit and credit aspect of the entry is missing.

The omission of the transaction affects the net profit. This is because, the entry for goods lost on fire affects the purchases account balance, and purchases account is incuded in trading account for calculating gross profit which is affected by any increase or decrease in the value of purchases account. The gross profit is transferred to profit and loss account for calculation of net profit.