PURCHASE ACCOUNT IS OVERCAST BY 200 NAIRA, WHILE WAGES ACCOUNT IS UNDERCAST BY 200 NAIRA. THIS IS
- A. an error of omission
- B. a compensating error ✓
- C. an error of commission
- D. an error of principal
The answer to the question is: B. a compensating error
A compensating error in accounting occurs when two errors cancel each other out, resulting in the overall accuracy of the accounts being maintained. In the scenario provided, the purchase account is overcast by 200 naira, while the wages account is undercast by 200 naira. This means that there is an overstatement of purchases and an understatement of wages. However, since these errors are equal in amount but opposite in nature, they offset each other, resulting in the overall accuracy of the accounts being maintained.
When a purchase account is overcast, it means that the total purchases have been recorded at a higher value than they actually are. On the other hand, when a wages account is undercast, it means that the total wages have been recorded at a lower value than they actually are. These errors would normally cause discrepancies in the financial records. However, since both errors are of equal amounts but opposite in nature, they compensate for each other. As a result, the net effect on the overall accuracy of the accounts is zero.
This type of error can be difficult to detect because it does not affect the balancing of the accounts. It is important for accountants to be vigilant and thorough in their review of financial records to identify such compensating errors and rectify them to ensure accurate financial reporting.