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No company whether large or small is immune from errors. Errors may be intentional or unintentional.

Intentional errors are significant because of the presence of fraud or intent to deceive. These errors are made for the purpose of concealing fraud or misappropriation, evading taxes, manipulating or window-dressing the company's financial statements. Unintentional errors were not deliberately committed. They result from carelessness or ignorance on the part of the company's personnel or it may result from poor internal control. The risk of material errors may be minimized through the installation of good internal control and the application of sound accounting procedures. Prior period adjustments, also called fundamental errors are reported in the current year as adjustment in the beginning balance of the Retained Earnings account. Prior period statements should be restated to correct the error when comparative statements are prepared. Accounting Procedure: 1. If detected in the period the error occurred, correct the accounts through normal accounting cycle adjustments. 2. If detected in subsequent period, adjust errors by making prior period adjustments directly to Retained Earnings or restate the beginning balance of the Retained Earnings account. 3. Correct all previously presented prior period statements. Examples of Accounting errors: a. A change from an accounting principle that is not generally accepted to an accounting principle that is generally accepted. b. Mathematical mistakes c. Mistake in the application of accounting of accounting principle d. Oversight e. Misuse of facts f. Incorrect classification of expense as an asset or vice versa g. Changes in estimates which are not prepared in good faith TYPES OF ERRORS 1. Balance Sheet Errors This type of error refers to improper classification of real accounts such as assets, liabilities or stockholders' equity accounts. They have no effect on net income 2. Income Statement Errors This type of error affects only the presentation of nominal accounts in the Income Statement. It involves the improper classification of revenues and expenses accounts, hence, only the details of the Income Statement are misstated. A reclassifying entry is necessary only if the error is discovered in the same year it is committed. It has no effect on the Balance sheet and in the Income Statement. If the error is discovered in a subsequent year, no classification entry is necessary. 3. Combined Balance Sheet and Income Statement errors This affects both the balance Sheet and the Income Statement because they result in the misstatement of net income. Classifications of Combined Balance Sheet and Income Statement Errors:

a.

Counter Balancing Errors Errors which if not detected are automatically offset or corrected over two periods. Restatement is necessary even if a correcting journal entry is

not required.

Effect: Net Income of two successive periods are misstated. The amount of misstatement in one period is equal to but opposite in effect in the income of the next period. Counterbalancing errors include the misstatements of the following accounts: 1. Inventories to include the following a. Purchases b. Sales 2. Prepaid expenses 3. Deferred Income 4. Accrued expense 5. Accrued Income