Tamil Nadu HSE Second Year Accountancy common mistakes
Tamil Nadu HSE Second Year Accountancy · Understand the traps and how to avoid them.
When a trial balance does not tally, the candidate adjusts the suspense account by inserting the difference directly into the capital account or into the debit column of the trial balance itself, instead of opening a Suspense Account and then locating the error by checking books of original entry, ledger postings and balances.
Textbooks show the suspense account only as a final step, so students memorise 'difference goes to suspense' without learning the sequence: total the trial balance, transfer the difference to suspense, then classify the error as one of omission, commission, principle, compensating or one-sided. Under exam pressure they skip straight to writing off the difference.
What to do instead
Practise a fixed routine: (1) total both columns twice, (2) if unequal, open Suspense A/c with the difference on the shorter side, (3) list each identified error and state whether it affects the trial balance (one-sided errors do, two-sided errors do not), (4) pass the rectifying entry and show the Suspense A/c balancing. Do five worked examples covering each error type before the exam.
In depreciation problems the candidate computes depreciation on the closing book value for every year, or charges a full year's depreciation on an asset purchased mid-year, producing a schedule that is internally consistent but wrong.
Straight-line and written-down-value methods are taught together, and the phrase 'on the reducing balance' is often missed. Mid-year purchase conventions are usually shown only in one illustration, so students default to a full year.
What to do instead
Before calculating, write the method name and the date of purchase at the top of the answer. For SLM use original cost every year; for WDV use opening book value each year. For mid-year purchases, compute months held and pro-rate, then show a year-by-year schedule with columns for opening value, depreciation, closing value and accumulated depreciation. Verify that closing value equals cost minus total accumulated depreciation.
While preparing final accounts the candidate puts carriage outward, discount allowed, bad debts, interest on loan and similar items in the Trading Account, or places closing stock on the debit side of the Trading Account.
Students group items by 'looks like a purchase or sale expense' rather than by function. The distinction between direct expenses that bring goods to saleable condition and indirect expenses is not applied systematically.
What to do instead
Build and memorise a two-column classification table: Trading Account (opening stock, purchases, direct wages, carriage inward, freight, octroi, factory rent, fuel, power, manufacturing expenses, closing stock) versus Profit and Loss Account (carriage outward, discount allowed and received, bad debts, salaries, rent of office, interest, depreciation, advertisement). Closing stock always appears on the credit side of the Trading Account and as a current asset in the balance sheet.
When converting a single-entry set of records into a statement of affairs, the candidate treats the opening capital as unknown and cannot proceed, or mixes drawings and fresh capital introduced into the profit calculation.
Incomplete-records problems require the closing-capital formula (closing capital plus drawings minus additional capital equals opening capital plus profit), but students try to compute profit as total receipts minus total payments, which is a cash-based figure and ignores credit transactions and outstanding items.
What to do instead
Always start by preparing the opening statement of affairs to derive opening capital, then the closing statement of affairs to derive closing capital. Apply the formula: Profit = Closing capital + Drawings - Additional capital - Opening capital. Separately prepare a total debtors and total creditors account to find credit sales and credit purchases, and remember that cash sales and cash purchases must be added back to those totals.
In admission of a partner, the candidate revalues assets and records the gain or loss entirely in the new partner's capital account, or omits the adjustment for the sacrifice ratio when transferring the revaluation profit to old partners.
The revaluation account, partners' capital accounts and the sacrifice ratio are all taught in one chapter, and students confuse the revaluation profit sharing (old ratio) with the goodwill sharing (sacrifice ratio). The new partner is not entitled to pre-admission revaluation gains.
What to do instead
Follow a fixed order: prepare the Revaluation A/c, transfer its balance to old partners in the old profit-sharing ratio; compute goodwill and raise the new partner's share through the old partners' capital accounts in the sacrifice ratio; then prepare the capital accounts and the new balance sheet. Write 'old ratio' or 'sacrifice ratio' beside each transfer as you make it.
When issuing shares at a premium or at a discount, the candidate credits the full amount received to Share Capital, ignoring the Securities Premium Account, or records calls in arrears and calls in advance in the wrong accounts.
Students treat the share application and allotment account mechanically as one lump receipt. The rule that share capital is always credited with face value, and premium with the separate Securities Premium Account, is not applied when the money arrives in instalments.
What to do instead
For every instalment, split the entry: debit Bank with the amount received; credit Share Application/Allotment/Calls with the amount due; credit Share Capital with the face value only; credit Securities Premium with the premium. Keep Calls in Arrears as a deduction from the called-up capital and Calls in Advance as a current liability. Show the vertical format: authorised, issued, subscribed, called-up, paid-up capital.
In ratio analysis the candidate computes the current ratio as current assets divided by total liabilities, or averages the opening and closing balances for a liquidity ratio where a year-end figure is required, and then interprets a high current ratio as automatically good.
Formulae are memorised as strings without attaching each ratio to its purpose. The idea that a very high current ratio may indicate idle stock or poor receivables collection is rarely practised.
What to do instead
Write the formula and the purpose beside each ratio before substituting figures: liquidity (current ratio, quick ratio, absolute liquid ratio), solvency (debt-equity, proprietary ratio), activity (stock turnover, debtors turnover, creditors turnover) and profitability (gross profit ratio, net profit ratio, operating ratio, return on capital employed). State the components explicitly (current assets exclude loose tools and prepaid expenses where relevant) and always add a one-line interpretation, including the risk of overtrading.
In the cash flow statement, the candidate starts from net profit and then adds back non-cash items that were already excluded, or classifies interest paid on debentures and dividend paid as operating outflows, and forgets to adjust for changes in working capital.
The indirect method has many adjustments and students apply them as a list of tricks rather than understanding that operating activities start from profit before tax and remove non-cash and non-operating items. Interest and dividends paid are financing outflows under the standard classification taught for this syllabus.
What to do instead
Prepare three working notes first: (1) provision for tax and tax paid, (2) fixed assets (opening WDV, additions, depreciation, sale, closing WDV), (3) changes in each current asset and current liability. Then build operating activities from net profit before tax, adding back depreciation, goodwill written off, loss on sale of assets and interest on borrowings, and deducting interest received and profit on sale. Place interest paid and dividend paid under financing, and purchase and sale of fixed assets under investing. Check that the net change in cash equals the difference between opening and closing cash and bank balances.
In the journal, the candidate debits the receiver of the benefit inconsistently, for example debiting Cash when goods are sold on credit, or fails to record the narration and the L.F. column, and posts compound entries by splitting them incorrectly.
The rule 'debit the receiver, credit the giver' is memorised for personal accounts but not extended to real and nominal accounts. Students also treat the journal as a place to write explanations rather than a book of original entry with a defined format.
What to do instead
For every transaction state the two accounts affected, classify each as personal, real or nominal, then apply the rule: personal - debit the receiver, credit the giver; real - debit what comes in, credit what goes out; nominal - debit expenses and losses, credit incomes and gains. Write the journal in the standard five-column form with date, particulars, L.F., debit, credit, and add a one-line narration beginning 'Being ...'. Practise ten mixed transactions daily until classification is automatic.
While preparing the bank reconciliation statement the candidate adjusts the cash book balance for cheques issued but not yet presented, or adds cheques deposited but not yet collected, producing a statement that moves in the wrong direction.
The reconciliation starts from the cash book or the pass book and the direction of each adjustment reverses depending on the starting point. Students memorise a single list of 'add' and 'deduct' items without noting which balance they started from.
What to do instead
Write the starting balance and its source at the top of the answer. If starting from the cash book (debit balance), add cheques issued but not presented and deduct cheques deposited but not collected; if starting from the pass book (credit balance), reverse both. Handle dishonoured cheques, bank charges, interest credited and direct debits by first correcting the cash book, then reconciling. Finish by proving the pass book balance, and state the treatment of any overdraft explicitly.