Calculate the effect of error on final accounts

To calculate the effect of error on final accounts i.e. Trading and Profit and Loss and Balance sheet. It is essential to know the nature of the accounts in which errors lie, If the error affects the nominal account/accounts, it will increase or decrease the profit because all nominal accounts are transferred to Trading and Profit and Loss account. In this connection following points may be noted:

• Profit will increase or Loss will reduce if a transaction is omitted to be debited to a nominal account. On rectification of an error of such a type, profit will decrease or loss will increase. 
• Profit will reduce or Loss will increase if a nominal account is wrongly debited. When the rectification of such an error, Profit will increase or loss will decrease.
• Profit will increase or Loss will decrease if nominal account is wrongly credited. With rectification of this kind of error, Profit will decrease or Loss will increase. 
•  Profit will decrease or loss will increase if transaction is omitted to be credit to a nominal account. On the rectification the nominal account omitted to be created will be credited and Profit will increase or Loss will reduce

Thus Profit is increased or decreased on account of errors in nominal accounts. Balance Sheet will also be affected by the errors in nominal accounts because profit is ultimate transferred to Capital account which is a part of the Balance Sheet. So it can be concluded that error in nominal account will affect both profit and loss account and balance sheet. Balances of personal and real accounts from part of a Balance Sheet, so errors in such types of accounts will affect Balance Sheet only and not Profit and Loss account