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Notes Accounting-Errors

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86 views

Notes Accounting-Errors

Uploaded by

camanayezekhieladrianjisraphel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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ACCOUNTING ERRORS

- may arise from the unintentional misapplication of accounting principles or incorrect


recording of transactions and fraudulent financial reporting. In addition, errors can
arise in respect of the recognition, measurement, presentation, or disclosure of
elements of financial statements. Consequently, errors may result to financial
statements not complying with PFRSs

Types of errors

Balance sheet errors Income statement errors Mixed errors


Errors affecting only balance Errors affecting only income Errors affecting at least one
sheet accounts. For example, statement accounts. For balance sheet accounts and
PPE items that were example, administrative at least one income
classified as investment expenses classified as selling statement account
properties expenses

Mixed errors are the most common type of error that an entity commits.

Non-counterbalancing Counterbalancing
Errors that will still make the financial Errors that, cumulatively, will self-correct
statements misstated if no corrections are even if there are no corrections made by the
made by the entity entity. These errors affect at least two
periods

Examples of counterbalancing errors:


a. errors involving ending inventory
b. Errors involving purchases recorded during the wrong periods
c. Errors involving non-accrual of income or expense
d. Errors involving prepayments that were initially recorded using expense method,
but no adjusting entries were made
e. Errors involving advances from customers that were initially recorded using
income/revenue method but no adjusting entries were made
f. Errors involving the acquisition of a capitalizable long-term asset that was charged
to expense outright

Note: All counterbalancing errors involve timing issues when items of income or expense are recorded
during an incorrect period.

Examples of non-counterbalancing errors:


a. All other errors involving long-term assets
b. Errors involving prepayments that are initially recorded using asset method, but no
adjusting entries were made
c. Errors involving advances from customers that were initially recorded using
liability method, but no adjusting entries were made

Accounting for Error correction


Timing of discovery or detection Correcting entry
Before closing any oncome statement Directly to the accounts affected
account
After closing income statement accounts to Directly to the Income Summary account
Income Summary account but before
closing to Retained Earnings account
After closing Income Summary account to Directly to the Retained Earnings account
Retained Earnings account
Only during the succeeding periods (i.e., Directly to the beginning retained earnings.
prior period error) This is equivalent to retrospective
restatement

Summary of effects of errors in net income

Errors during the Current Adjustments to Net Income From the


Year Current Year Succeeding Year
Overstatement of ending Deduction Addition
inventory
Understatement of ending Addition Deduction
inventory
Overstatement of purchases Addition Deduction
Understatement of Deduction Addition
purchases
Non-accrual of income Addition Deduction
Non-accrual of expense Deduction Addition
Non-recognition of Deduction Addition
unearned income
Non-recognition of prepaid Addition Deduction
asset
Overstatement of Addition No effect
depreciation
Understatement of Deduction No effect
depreciation

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