The document discusses types of accounting errors and how to correct them. It recognizes four types of common errors: math errors, posting to the wrong account, misstating an account, and omitting an account. It also discusses how errors are limited to balance sheet accounts, income statement accounts, or both. The key points are that errors counterbalancing within two years require no correction, while non-counterbalancing errors need adjusting entries to the retained earnings account. Examples demonstrate correcting entries for various unrecorded transactions and expenses.
The document discusses types of accounting errors and how to correct them. It recognizes four types of common errors: math errors, posting to the wrong account, misstating an account, and omitting an account. It also discusses how errors are limited to balance sheet accounts, income statement accounts, or both. The key points are that errors counterbalancing within two years require no correction, while non-counterbalancing errors need adjusting entries to the retained earnings account. Examples demonstrate correcting entries for various unrecorded transactions and expenses.
The document discusses types of accounting errors and how to correct them. It recognizes four types of common errors: math errors, posting to the wrong account, misstating an account, and omitting an account. It also discusses how errors are limited to balance sheet accounts, income statement accounts, or both. The key points are that errors counterbalancing within two years require no correction, while non-counterbalancing errors need adjusting entries to the retained earnings account. Examples demonstrate correcting entries for various unrecorded transactions and expenses.
The document discusses types of accounting errors and how to correct them. It recognizes four types of common errors: math errors, posting to the wrong account, misstating an account, and omitting an account. It also discusses how errors are limited to balance sheet accounts, income statement accounts, or both. The key points are that errors counterbalancing within two years require no correction, while non-counterbalancing errors need adjusting entries to the retained earnings account. Examples demonstrate correcting entries for various unrecorded transactions and expenses.
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Learning Objectives
Recognize the various types of errors that
can occur in the accounting process understand when errors counterbalance, and be able to correct errors when necessary. Error Corrections Errors Errors discovered discovered currently currently in in the the course course of of normal normal accounting accounting procedures. procedures.
• Math errors • Posting to the wrong account • Misstating an account • Omitting an account from the trial balance Error Corrections Errors Errors limited limited to to balance balance sheet sheet (SFP) (SFP) accounts. accounts. • Debiting Accounts Receivable instead of Notes Receivable • Crediting Interest Payable instead of Notes Payable • Debiting an investment account instead of Land when property was purchased for plant expansion Error Corrections Errors Errors limited limited to to income income statement statement accounts. accounts. • Debiting Office Salaries instead of Sales Salaries • Crediting Rent Revenue instead of Commissions Revenue Error Corrections
Errors Errors affecting affecting both both income income statement statement accounts accounts and and balance balance sheet sheet accounts. accounts.
• Debiting Office Equipment instead
of Repairs Expense • Crediting Depreciation Expense instead of Accumulated Depreciation Error Corrections
Errors Errors affecting affecting both both income income statement statement accounts accounts and and balance balance sheet sheet accounts. accounts.
• Debiting Office Equipment instead
of Repairs Expense • Crediting Depreciation Expense instead of Accumulated Depreciation Error Corrections Errors Errors affecting affecting both both income income statement statement accounts accounts and and balance balance sheet sheet accounts. accounts. • There are errors in net income that, when not detected, are not automatically counterbalanced in the following fiscal period. • There are also errors in net income that, when not detected, are not automatically counterbalanced in the following fiscal period: •Recognition of capital expenditures as expenses. •The omission of charges for depreciation and amortization. Error Corrections • If detected in current period, before books are closed: – Correct the account through normal accounting adjustment. • If detected in subsequent period, after books are closed: – adjust financial records for effect of material errors. – make adjustment directly to Retained Earnings. Example of Error Corrections (1) Understatement of Merchandise Inventory: Supply Masters, Inc., began operations at the beginning of 2016. Before the accounts are adjusted and closed for 2018, it was discovered that merchandise inventory as of December 31, 2016, was understated by P10,000.
Because Because this this type type of of error error counterbalances counterbalances afterafter two two years, years, no no correcting correcting entry entry is is required required in in 2018. 2018. Example of Error Corrections
IfIf this this error error had had been been discovered discovered in in 2017 2017 instead instead of of 2018, 2018, the the following following entry entry would would have have to to be be made made to to correct correct the the account account balances. balances.
Merchandise Inventory 10,000
Retained Earnings 10,000 Example of Error Corrections (2) Failure to Record Merchandise Purchases It is discovered that purchase invoices of December 31, 2016, for P8,500 had not been recorded until 2017. The goods had been included in the inventory at the end of 2016.
Because Because this this type type of of error error counterbalances counterbalances afterafter two two years, years, no no correcting correcting entry entry is is required required in in 2018. 2018. Example of Error Corrections IfIf this this error error had had been been discovered discovered in in 2017 2017 instead instead of of 2018, 2018, the the following following entry entry would would have have to to be be made made to to correct correct the the account account balances. balances.
Periodic System: Retained Earnings 8,500 Purchases 8,500 Perpetual System: Retained Earnings 8,500 Inventory 8,500 Example of Error Corrections (3) Failure to Record Merchandise Sales It is discovered that sales on account of P18,000 for the last week of December 2017 had not been recorded until 2018. The goods were included in the inventory at the end of 2017. The following correcting entry would be required in 2018.
Sales 18,000 Retained Earnings 18,000 Example of Error Corrections
(4) Failure to Record Accrued Expense
Accrued sales salaries of P4,500 as of December 31, 2016, were overlooked in adjusting the accounts. Sales Salaries is debited for salary payments.
Because Because this this type type of of error error counterbalances counterbalances after after two two years, years, nono correcting correcting entry entry is is required required in in 2018. 2018. Example of Error Corrections
IfIf this this error error had had been been discovered discovered in in 2017 2017 instead instead of of 2018, 2018, the the following following entry entry would would have have to to be be made made to to correct correct the the account account balances. balances.
Retained Earnings 4,500
Sales Salaries 4,500 Example of Error Corrections
(5) Failure to Record Prepaid Expense
It is discovered that Miscellaneous General Expense for 2016 included taxes of P2,750 that should have been deferred in adjusting the accounts on December 31, 2016.
Because Because this this type type of of error error counterbalances counterbalances after after two two years, years, nono correcting correcting entry entry is is required required in in 2018. 2018. Example of Error Corrections
IfIf this this error error had had been been discovered discovered in in 2017 2017 instead instead of of 2018, 2018, the the following following entry entry would would have have to to be be made made to to correct correct the the account account balances. balances.
Miscellaneous General Expense 2,750
Retained Earnings 2,750 Example of Error Corrections
(6) Failure to Record Accrued Revenue
Accrued interest on notes receivable of P150 was overlooked in adjusting the accounts on December 31, 2016. The revenue was recognized when the interest was collected in 2017.
Because Because this this type type of of error error counterbalances counterbalances after after two two years, years, nono correcting correcting entry entry is is required required in in 2018. 2018. Example of Error Corrections
IfIf this this error error had had been been discovered discovered in in 2017 2017 instead instead of of 2018, 2018, the the following following entry entry would would have have to to be be made made to to correct correct the the account account balances. balances.
Interest Revenue 150
Retained Earnings 150 Example of Error Corrections (7) Failure to Record Unearned Revenue Fees of P225 received in advance for miscellaneous services as of December 31, 2017, were overlooked in adjusting the accounts. Miscellaneous Revenue had been credited when fees were received. The correcting entry in 2017 is:
Retained Earnings 225
Miscellaneous Revenue 225 Example of Error Corrections (8) Failure to Record Depreciation Delivery equipment was acquired at the beginning of 2016 at a cost of P60,000. The equipment has an estimated five- year life. Its depreciation of P12,000 was overlooked at the end of 2016 and 2017.
Misstatements Misstatements arising arising from from the the failure failure to to record record depreciation depreciation are are not not counterbalanced counterbalanced inin the the succeeding succeeding year. year. Example of Error Corrections When When thethe omission omission is is recognized, recognized, Retained Retained Earnings Earnings must must be be decreased decreased byby the the net net income income overstatements overstatements and and Accumulated Accumulated Depreciation—Delivery Depreciation—Delivery Equipment Equipment mustmust be be increased. increased. The The 2018 2018 correcting correcting entry entry is: is:
Retained Earnings 24,000
Accumulated Depreciation— Delivery Equipment 24,000 P12,000 P12,000 perper year year xx 22 Example of Error Corrections (9) Incorrectly Capitalizing an Expenditure Operating expenses of P20,000 were paid in cash at the beginning of 2016. The payment was incorrectly debited to Equipment. The “equipment” was assumed to have a five-year life and no residual value; thus, depreciation of P4,000 was recognized at the end of 2016 and 2017. The required correcting entry is:
Retained Earnings 12,000
Accumulated Depreciation— Equipment 8,000 Equipment 20,000 Required Disclosure for Error Restatements • If comparative statements are provided, apply correction retroactively to prior years. • Restate beginning balance of Retained Earnings for first period presented if error extends beyond. • Disclose and explain error correction in notes.
