Finance is a vast subject with several branches. The modern business world is changing rapidly in terms of its functioning. One has to be familiar with the terminologies associated with the finance world. By understanding various financial terms and the mechanism in which it functions, one can reach great heights.
This website, ‘Simplified Fiscal Affairs’ presents to you the various topics/concepts in the form of series and imparts the knowledge in a simplified way.
WHAT ARE ACCOUNTING ERRORS?
- Errors are committed due to negligence or lack of knowledge of the principles of accountancy. They represent the mistakes in the accounts, resulting due to ignorance on the part of those doing the accounting work.
- Detection of errors and prevention of the same is an important objective of an audit. Error is generally taken to be innocent and not intentional.
Types of Errors:
- Error of Principle: These errors are usually committed due to lack of knowledge of principles of book keeping. Errors of principle affect the correctness and reliability of financial statements. Wrong classification of expenses into capital and revenue, treating personal income or expenditure as those of business, providing less or more depreciation, not taking into account all outstanding income or expenditure are a few examples. To prevent such errors, the accounts work should be assigned to a duly qualified person only. He or she must possess good knowledge and experience in the field of dealing with accounts.
- Error of Omission: Here a particular transaction is completely omitted, that is, not at all recorded in the books of accounts. Such errors maybe committed through oversight or even intentionally. The trial balance will tally regardless. Hence, it is difficult to detect them.
- Error of Commission: Here the transaction is recorded but recorded incorrectly in the books of accounts. A certain sum of money received from A may be credited to B’s account. Some such errors may not affect the agreement of the trial balance.
- Error of Duplication: Here the same transaction is written twice. This error will also not affect the agreement of the trial balance. The auditor can detect the error only by carefully conducting the process of vouching and checking the relevant supporting documents.
- Compensating Error: Here, there are two mistakes of the same amount, one on the debit side and the other on the credit side. The total effect of one or more errors on both the sides is the same. Such errors are difficult to detect as the trial balance will tally inspite of such mistakes. Thorough checking of each and every transaction can only detect such errors.
WHAT ARE ACCOUNTING STANDARDS?
- Business entities prepare financial statements to summarise the result of the business activities, during an accounting period in monetary terms.
- These business activities differ from one enterprise to the other. It is difficult to compare the financial statements of different enterprises because of the different accounting methods and principles adopted. Accounting standards are necessary to make these methods and principles uniform and financial statements comparable to the possible extent.
Definition of Accounting Standards:
- Accounting standards provide the framework and norms to be followed in accounting, so that, the financial statements of different enterprises become comparable.
- Accounting standards are written policy documents issued by expert accounting body or by government or other regulatory authorities covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statement.
- Accounting standards ensure the consistency and comparability of the financial statements presented by different enterprises creating a general sense of confidence that users have in the fairness and reliability of the statements they rely upon.
Objectives of Accounting Standards:
- To standardise diverse accounting policies.
- To enhance the reliability of financial statements.
- To eliminate non-comparability of financial statements.
- To provide a framework of norms to be followed by the accounts team.
Advantages of Accounting Standards:
- It provides the accountancy profession with enough working rules.
- It helps in improving the quality of work performed.
- It ensures that various users of financial statements get complete, crystal information on consistent basis from time to time.
- It helps the users to compare and analyse the financial statements of two or more organisations engaged in the same type of business activities
Disadvantages of Accounting Standards:
- Users are likely to think that the reported statements prepared using the accounting standards are foolproof.
- The more standards there are, the more expensive the financial statements are to prepare.
- The working rules may be rigid to some users of financial statement.
