U

BLUE NOTES
CHAPTER

48 S
L

Prior period errors are omissions from and misstatements in the entity’s financial statements for one or more periods
arising from a failure to use or misuse of reliable information that:
a. Was available when financial statements for these periods were authorized for issue.
b. Could reasonably be expected to have been obtained and take into account in the preparation and
presentation of those financial statements.
Example of prior period error:
Mathematical mistakes Oversights or misinterpretation of facts
Mistake in applying accounting policies Fraud
Type of error Accounts affected Correction
 Real accounts only  Reclassify the account balances
A. Statement of Example: improper
financial statement classification of an asset,
errors
liability and capital account

 Nominal accounts only  Reclassify the account if the error is

Example: improper discovered in the same year it is
classification of revenue committed but if the discovery of error
B. Income statement
and accounts is in subsequent year, no need to
errors
reclassify accounts because the nominal
accounts for the current year are
correctly stated

C. Combined statement  Both real and nominal  It depends whether the error is counter
of financial position accounts balancing or noncounterbalancing
and income Result in a misstatement of net
statement errors income
Combined statement of financial position and income statement errors
Example: If accrued salaries payable is over looked, the effects are;
a. Salaries expense is understated (income statement error)
b. Liability is understated (statement of financial position error)
c. Net income is overstated (income statement error)
d. Retained earnings account is overstated (statement of financial position error)

Practical Accounting 1 Theory of Accounts

Chapter 48 – Error Correction USL Blue Notes 181

Classification of combined SFP and IS errors

Effect in subsequent
Error Effect of error Example
years

1. The income statements for

two successive periods are If not detected, they
Counterbalancing incorrect. are automatically Misstatement of the ff;
errors 2. The statement of financial counter balanced or
position at the end of the first Inventory, prepaid
corrected in the next
period is incorrect. accounting period. expense, accrued expense,
3. The statement of financial deferred income and
position at the end of the accrued income
second period is correct.
1. The income statement of the
period in which the error is
committed is incorrect but They are not Misstatement of depreciation
the succeeding income automatically and doubtful accounts
Non statement is not affected. counterbalance or
counterbalancing 2. The statement of financial corrected.
error position of the year of the
error and succeeding
statements of financial
position are incorrect until
the error is corrected.
Treatment of prior period errors
PAS 8 provides that an entity shall correct material prior period errors retrospectively in the first set of financial
statements authorized for issue after their discovery by:
a. Restating the comparative amounts for the prior period presented in which the error occurred.
b. Restating the opening balances of assets, liabilities and equity for the earliest prior period presented if the
error occurred before the earliest period presented.
In other words, a prior period error shall be corrected by retrospective restatement, meaning, if comparative
statements are presented, the prior year statements are restated to correct the error.
Note: The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered. Instead, it should
be adjusted to the beginning balance of retained earnings of the earliest period presented.

Theory of Accounts Practical Accounting 1