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Effect on Net Profit

In order to calculate the effect on net profit, it is essential to understand that only those accounts which are taken to the trading account, namely, Sales account, Stock at the end account, wages, salaries, commission, rent, depreciation, interest, discount, bad debts, etc., affect the net profit because they are shown either in Trading account or in Profit and Loss account.
 

If any one of these accounts is debited in the rectification entry, it reduces the amount of net profit and if any one of these accounts are credited in the rectification entry it increases the profit.

 

Example: Suspense account, building, furniture, bank, cash, debtors, creditors, bills receivable, bills payable, capital etc., which are shown in the Balance Sheet, does not affect the net profit. The effect of rectification of error on profit/loss is summarised as under:

 

1. If a nominal account is debited in a rectifying entry

Profit will be decreased or loss will be increased

2. If a nominal account is credited in a rectifying entry

Profit will be increased or loss will be decreased


Illustration 9

A trader has ₹ 25,000 as net profit. Identify whether the profit will increase, decrease or will not have any effect if below mention rectifications are done

  1. Amount of sales ₹ 1,000 was omitted to be posted
  2. Purchase book was carried forward as ₹ 125 instead of ₹ 225
  3. Sales of a furniture of ₹ 500 to Yadav was not entered anywhere
  4. Sales to Raju ₹ 200 was recorded in the Sales book as₹ 2,000
  5. Purchase of a furniture of ₹ 5,000 was passed through the purchase book

Solution:

  1. Amount of sales ₹ 1,000 was omitted to be posted - Increase
  2. Purchase book was carried forward as ₹ 125 instead of ₹ 225 - Decrease
  3. Sales of a furniture of ₹ 500 to Yadav was not entered anywhere – No effect
  4. Sales to Raju ₹ 200 was recorded in the Sales book as ₹ 2,000 - Decrease
  5. Purchase of a furniture of ₹ 5,000 was passed through the invoice book - Increase





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