Basis of Difference

Errors Affecting Agreement of Trial Balance

Errors Not Affecting Agreement of Trial Balance

Meaning

These errors cause the total of Debit and Credit columns of Trial Balance to disagree.

These errors do not disturb the equality of Debit and Credit totals in the Trial Balance.

Nature of Errors

One-sided errors (affect only one side – debit or credit).

Two-sided errors (affect both debit and credit sides equally).

Detection

Easily detected because Trial Balance fails to agree.

Not disclosed by Trial Balance &  requires thorough checking of ledger and original entries.

Rectification Process

Rectification is simple and can be done through Suspense Account if needed.

Rectification is more complex as it usually requires journal entries affecting two or more accounts.

Examples

  • Errors of Commission (e.g., wrong posting to one side only, wrong totalling of one account).
  • Wrong casting or balancing of an account.
  • Amount recorded only in one column (debit or credit).
  • Partial Omission (e.g., posting only one aspect of a transaction).
  • Errors of Principle (e.g., Capital expenditure recorded as Revenue).
  • Complete Omission (entire transaction omitted).
  • Compensating Errors (errors that cancel out each other).
  • Errors of Duplication (same transaction recorded twice).
  • Errors of Commission where both debit and credit are recorded with same wrong amount.
ParticularsRs.
Inventory in the beginning50,000
Inventory at the end60,000
Net Profit2,17,900
10% Debentures2,50,000
Revenue from operations4,00,000
Gross Profit1,94,000
Cash and Cash Equivalents40,000
Money received against share warrants20,000
Trade Receivables1,00,000
Trade Payables1,90,000
Other Current Liabilities70,000
Share Capital2,00,000
Reserves and Surplus 1,20,000

Liquid Ratio (Quick Ratio)

Liquid Assets / Current Liabilities

  • Liquid Assets = Cash & Cash Equivalents + Trade Receivables
  • Liquid Assets = 40,000 + 1,00,000 = 1,40,000 
  • Current Liabilities = Trade Payables + Other Current Liabilities
  • Current Liabilities = 1,90,000 + 70,000 = 2,60,000 
  • Liquid Ratio = 1,40,000 / 2,60,000 = 0.54 : 1

Inventory Turnover Ratio

COGS / Average Inventory

  • COGS = Revenue from Operations – Gross Profit
  • COGS = 4,00,000 – 1,94,000 = 2,06,000 
  • Average Inventory = (Opening Inventory + Closing Inventory) / 2
  • Avg. Inventory = (50,000 + 60,000)/2 = 55,000 
  • Inventory Turnover Ratio = 2,06,000 / 55,000 = 3.75 times

Gross Profit Ratio

(Gross Profit / Revenue from Operations) × 100

  • Gross Profit = 1,94,000
  • Revenue from Operations = 4,00,000
  • Gross Profit Ratio = (1,94,000 / 4,00,000) × 100 = 48.5%

Return on Investment (ROCE)

(Earnings Before Interest and Tax/Capital Employed) × 100

  • Interest on Debentures = 10% of 2,50,000 = 25,000
  • EBIT = Net Profit + Interest
  • EBIT = 2,17,900 + 25,000 = 2,42,900 
  • Capital Employed = Share Capital + Reserves & Surplus + Money Received Against Share Warrants + Debentures
  • Capital Employed = 2,00,000 + 1,20,000 + 20.000 + 2,50,000= 5,90,000 
  • Return on Investment (ROCE) = 2,42,900 / 5,70,000 × 100 = 41.17%

Basis

Cash Flows from Investing Activities

Cash Flows from Financing Activities

Meaning

Investing activities involve the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financing activities relate to long-term funds or capital of an enterprise and result in changes in the size and composition of owners’ capital and borrowings.

Purpose

These activities show expenditure made to acquire resources that will generate future cash flows.

These activities show how the business is financed through equity, debt, and dividend payments.

Related to

Purchase and sale of fixed assets and investments.

Raising and repayment of capital and borrowings.

Example:Inflow

Cash receipts from sale of fixed assets.Cash receipts from sale of investments.Interest and dividend received in cash.

Cash proceeds from the issue of equity shares and preference shares.Cash proceeds from the issue of debentures.Cash proceeds from loans and borrowings.

Outflow

  1. Cash payments for purchase of fixed assets.
  2. Cash payments for purchase of investments.
  3. Cash loans and advances given to third parties
  1. Repayment of loans, debentures, and borrowings.
  2. Interest paid on loans and debentures.
  3. Dividends paid on equity and preference shares.

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