Examples of PRIOR PERIOD - For error committed in the current year, it is corrected

through correcting entry - December 31, 2020

- Mathematical Mistakes
- Mistakes in applying accounting policies – mistakes in
interpretation
(different from change in accounting policy)
- Oversights
- Misinterpretation of Facts
- Fraud
How errors are recorded?
Through Retrospective Restatement (PAS 8)
PAS 8 – Retrospective Restatement and Retrospective Application
Retrospective Application – change in accounting policy, apply
retrospectively, for errors not to apply but rather restate.
Retrospective Restatement – for errors, it is correcting the
recognition, measurement, disclosures of elements of FS as if a prior
period error had never occurred.
The ERRORS can either occur
Immediately preceding year December 31, 2019
- Restating the comparative amounts for the prior period(s)
presented in which the error occurred,
For example: your fs covers they year 2020, required by pas
1, you’re going to disclose a comparative information, so
you have your 2020 fs information and present a
comparative period 2019, if the error was committed in
2019, you’re going to change the balances, correct, restate,
the items in 2019 comparative period, or
Error which refers to years before the immediately
preceding year, then present a 3rd balance sheet, for the
date, January 1, 2019, since errors refer items to fs before
January 1, 2019, all accumulating changes will only be
reflected in beginning balance of retained earnings on
January 1, 2019
- If the error occurred before the earliest prior period
presented, restating the opening balances of assets,
liabilities, and equity for the earliest prior period presented.

- In the current year 2020

- In the immediately preceding year (error was made in that
year and discovered in the subsequent year) 2019
- Prior to immediately preceding year(it covers all years in
2019)

When are prior period error corrected?

Entity shall correct materiel prior period errors retrospectively in

the first set of financial statement authorized for issue after their
discovery by:
 PRIOR PERIOD ERROR DIAGRAM

TYPES SUB-TYPE EXAMPLES EFFECTS

Balance sheet
Balance Sheet Debiting
for the current
Accounts Only Machinery
succeeding
instead of
year would be
service vehicle
incorrect
Income
Statement
Prior Period
Accounts Only Debiting
Errors liabilities, Current year
expense, income
instead of statement is
Counter not affected
miscellaneous
Balancing
expenseOnly
Errors
Over/understat IS for the
ement of current year
Mixed Balance salespurchases and
Sheet and Purchases, immediately
Income Non-Counter overstatement preceding year
Statement Balancing and incorrect, but
Accounts Only Errors
Only current
Over/Understa year IS in
tent of incorrect but
Inventories BS is misstated
until corrected

Accruals/Deferr
als

Mistatement of
Depreciation

Deprecaition
expense and
accumulated
BS ACCOUNT ERRORS 2020 – The AR account is overstated, while Cash is understated

Only includes Balance Sheet accounts Income Statement is correct, because the sales was correct

Effects on FS *Balance Sheet is correct- the total assets is the same,

however, the individual balances are incurred.
Financial Statement Current Year Imm. Succe. Yr. Succeeding Year
Income Statement*, Correct (check) Correct (check) Correct (check) 2021
It may affect income
statement, error, for
example, instead of Income Statement is still correct, there are no other mistakes
debiting machinery committed next year
you debited service
vehicles, and both
accs have different
Balance Sheet is correct- the total asset is the same however the
uselful life, you may individual balances are incorrect.
also commit
depreciation, it Assumption of no correcting entry omit.
would depend
Balance Sheet Erroneous, tho the Erroneous (wrong) Erroneous (wrong)
total baance is the
If this discovered in 2021 and the correcting entry
same, the individual
amount or items To correct, it only needs reclassification entry
would be erroneours
Debit Cash, Credit Accounts Receivable, this correct the
understatement of cash and the overstatement of accounts
For example: receivable
Case: In the current year, the entity made cash sales to some “If you make a correcting year in 2021, all the succeeding year will
customers. However, instead of debiting cash, it erroneously be correct.
debited Accounts Receivable.
INCOME STATEMENT ERRORS – only includes income statement
Cash Sales accounts.
Proper JE: Debit Cash, Credit Sales but instead, the bookkeeper may Financial Statement Current Year Imm. Succe. Yr. Succeeding Year
reinstate debited AR and credit Sales Income Statement* Accrued Net income Correct (check) Correct (check)
is Correct (check),
The credit to sales- no way an error because it’s correct, however however, the
individual balances is
instead of debiting AR you should debit cash incorrect
Balance Sheet Correct (check), does Correct (check) Correct (check)
Analysis: not affect also RE
EFFECTS If discovered in 2020

Only involves nominal accounts Correcting Entries

- If discovered before closing the books, then reclassify If discovered in the same year
- If discovered after the books have been closed, no need for
Debit Misc. Exp.
any correcting entry
- Balance sheet accounts and income statement accounts are Credit Repair and Mainte. Expe
correctly stated. (after closing the books, the BS correctly
stated, the IS is correct however, the individual is incorrect. TO correct the understatement of Misc. Exp. And overstatement
Rep. and Main. Since they are both expense, they don’t affect the
Example: NI at all
In the current year, an entity mistakenly debited Repairs and If discovered in the succeeding year
Maintenance instead of Miscellaneous Expense.
NO ENTRY NEEDED, because this misc. exp. And re. and main. Are
Analysis: closed to retained earning acc, and re is correctly stated and ni is
correctly stated, so there’s no entry.
2020 – Repairs and Maintenance is overstated Misc. Exp. Is
understated. MIXED INCOME STATEMENT AND BALANCE SHEET ACCOUNTS
(Counterbalancing Errors vs Non-counterbalancing errors)
IS is correct – net income is correct, because they are both expense
in repair or misc. exp, it wont matter because they were allexpense* - It involves one nominal account and one real account
however, the individual balance is incorrect.
Counter balancing errors- are error which is automatically counter
BS is correct – since net income is closed to retained earnings balanced over two periods meaning it corrects itself over 2 period, if
account, and net income is correctly stated, retained earnings is also it discovered 3 or 5years later, no entry, because it is counter
correct balance and it is automatically corrected.
It does not involve BS, it wont affect BS at all Financial Statement Current Year Imm. Succe. Yr. Succeeding Year
Income Statement* Erroneous (wrong) Erroneous (wrong) Correct (check)
2021 no mistakes Balance Sheet Erroneous (wrong) Correct (check) Correct (check)

IS is correct

BS is correct
The importance of relationship among accounts

Whether direct or indirect.

relationship among certain accounts

EXERCISES

1. If sales is understated, net income is? Understated,

Sample Income Statement:
Sales 300,000 if (200,000)
COGS
Inve. Beg 50,000
Puchases 150,000
Less Inv. End 30,000 170,000
Gross Profit 130,000 then (30,000)
Other Income 30,000
Total Income 160,000 then (60,000)
Less: Operating Exp. 50,000
Net Income 110,000 then (10,000) 110,000 (sales is understated)
If sales decreases, then net income decrease, if it sales increases then net income will also increase. It is directly related
2. If purchases is overstated, COGS is? Overstated, thus it is also DIRECTLY RELATED
Same Example:
Sales 300,000
COGS
Inve. Beg 50,000
Puchases 150,000 If (200,000) – (overstate purchases)
Less Inv. End 30,000 170,000 COGS (170,000), then it will become (220,000)
Gross Profit 130,000
Other Income 30,000
Total Income 160,000
Less: Operating Exp. 50,000
Net Income 110,000
3. If purchases in understated, net income is? OVERSTATED, it is indirectly related
Same Example:
Sales 300,000
COGS
Inve. Beg 50,000
Puchases 150,000 If (100,000) – (understate purchases)
Less Inv. End 30,000 170,000 COGS (120,000)
Gross Profit 130,000
Other Income 30,000
Total Income 160,000
Less: Operating Exp. 50,000
Net Income 110,000 then (160,000) – (net income is OVERSTATED)

4. If inventory beginning is overstated, COGS is? OVERSTATED, it is directly related

Same Example:
Sales 300,000
COGS
Inve. Beg 50,000 if (100,000) – (overstate inv. Beg.)
Puchases 150,000
Less Inv. End 30,000 170,000 then (220,00)
Gross Profit 130,000
Other Income 30,000
Total Income 160,000
Less: Operating Exp. 50,000
Net Income 110,000

5. If inventory end is understated, net income is? UNDERSTATED, directly related

Same Example:
Sales 300,000
COGS
Inve. Beg 50,000
Puchases 150,000
 Less Inv. End 30,000 170,000 if (15,000) (185,000-COGS)
Gross Profit 130,000 115
Other Income 30,000
Total Income 160,000 145
Less: Operating Exp. 50,000
Net Income 110,000 then (95,000) – (net income is UNDERRSTATED)

RELATIONSHIP BETWEEN ITEMS IN INCOME STATEMENT

ACCOUNT ACCOUNT RELATIONSHIP

Expense/Losses Net Income Indirect

Sales/Gains/Revenue Net Income Direct

COGS Net Income Indirect

Purchases COGS Direct

Purchases Net Income Indirect

Beginning Inventory COGS Direct

Beginning Inventory Net Income Indirect

Ending Inventory COGS Indirect

Ending Inventory Net Income Direct

Examples: Overstatement or Understatement of Sales
Case: The entity failed to record a credit sale of P200,000 in the
current year, 2020. The same was recorded during the early part
2021.
Analysis:
2020
The AR and Sales for the current year is understated by P200,000
2020 IS is incorrect – understated so as NI
2020 BS is incorrect – Both AR and RE are understated, not able to
record AR
RE beg. Xxx (why credit? It’s because the NI was
understated, NI is closed to RE, the RE end will be the beg. Balance
next year. The RE beg is also understated, to correct understated
last year the understatement, credit RE
If discovered in 2022
No need for any entry because the overstatement in 2020 is
counterbalanced in 2021.
UNDERSTATEMENT OF PURCHASES
Case: The entity credit purchased P200,000 worth of inventory in
2020. However, upon physical inventory, the same inventory was
correctly included. The credit purchase was included in 2021

2021 Analysis

The Sales for this year is Overstated by P200,000, erroneously 2020

recorded in 2021
Purchases and Accounts Payable is understated
2020 IS in incorrect – Overstated, RE is counterbalanced
2020 IS is incorrect – overstated
2020 BS is Correct – counterbalanced (both AR and RE), the
2020 BS incorrect (AP is understated, RE is overstated so as NI
understatement made in the previous year is counterbalanced by
overstatement in the current year, same thing with RE 2021

Correcting Entries Purchases is overstated because it has erronoerusly included in

2021
If error is discovered in 2020 (ar and sales is understated)
2020 IS is incorrect – understated, (NI is oversatted
AR xx
2020 BS correct – (AP and BS has been counterbalanced)
Sales xx

If discovered in 2021

Sales xxx (why debit?, sales is overstated)

Correcting Entries Retained Earnings xx (reduce it)
Inventory -1/1/2021 xx
If discovered in 2021
If discovered in 2022
RE xx
Purchases xx No need for any entry because the overstatement in 2020 is
counterbalanced in 2021.
If discovered in 2022
Sometimes, There are also times where the errors themselves
No need for any entry because the overstteemnt in 2020 is
counterbalance each other.
counterbalanced in 2021
Overstatement of Purchases and Ending Inventory
OVERSTATEMENT OF ENDING INVENTORY
Case: An entity placed an order of inventories amounting to
Case: The physical count conducted in 2020 inadverteribly included
P100,000, FOB destination (*ownership remains in the seller until it
P150,000 worth of consigned goods from the consignor (included on
reaches the destination). The same inventory is still on high seas as
part of the consignor not in consignee
of the end of the year 2020. However, the entity erroneously
Analysis included it in its credit purchases and in the inventory-end.

2020 The P100,000 should not be included in the purchases and physical
Inventory – end is overstated count hoever, the entity erroneously included in credit purchases
IS is incorrect – overstated, net income is closed to RE, its also and recorded in inventory end. So the purchases is overstate by
overstated 100,000 as well as the ending inventory
BS is incorrect – inventory – end is overstated
Analysis
2021
2020
Inventory – Beg is overstated
IS is incorrect – understated, NI understated (indirectly related) (will Purchases and net income, indirectly related, inversely
be counterbalanced) Purchases is overstated by P100,000 and Ending Inventory is
BS is correct – inventory end is correct (assuming no mistakes in overstated by P100,000
physical count, good are rightfully excluded in the account)
EI and NI is directly related
CORRECTING ENTRIES IS is correct* - purchases is understaed so as NI
BS is incorrect – inventory end is overstated – the total assest is
If discovered in 2021
overstated because end. Inv. Is oversted and liability is overstated
 Case: On October 1, 2020, the entity recorded an advancement
payment for 1-year advertisement costing P12,000. An expense
2021
account was initially debited however, no appropriate adjusting
Purchases is understated by P100,000 and beginning inventory is
entry was made.
overstated by P100,000
(need to adjust to determine how much is the unexpired amount
IS is correct* NI and Purchases is understated, directly. NI and End.
would then be debited prepaid asset credit expense but we failed to
Inv. Understated
do that)
BS is correct
Analysis
AP – overstated last year. Understated this year. Automatically
2020
counterbalanced. Same with RE, RE is correct
The advertising expense is overstated
CORRECTING ENTRIES IS is incorrect – understated (expense is overstated)
BS is incorrect – Prepaid Expense is understated and RE is
If discovered in 2021 understated (not able to record the unexpired portion)
Purchases xx 2021
RE xx The advertising expense is understated
RE xx IS incorrect – overstated expense is understated
Inventory beg. Xx BS is correct – Prepaid Expense is rightfully zero (everything is
expired) and RE is counterbalanced
If discovered in 2022
CORRECTING ENTRIES
No need for any entry because the overstatement in 2020 is
counterbalanced in 2021 If discovered in 2021

PREPAYMENTS, DEFERRALS AND ACCRUALS Expense xx

Retained Earnings xx
PREPAYMENT (TWO METHODS)
If discovered in 2022
EXPENSE METHOD
ASSET METHOD No need for any entry because the overstatement in 2020 is
counterbalanced in 2021 (counterbalanced, because effectively,
Prepayment under EXPENSE METHOD these prepayments be transferred into expense, the asset
recognized or the unexpired portion will still be recognized as
expense next year, all these prepayments will still be DOES NOT COUNTERBALANCE
recognized/expensed next year
CORRECTING ENTRIES
NOTE THAT SUCH EFFECTS DOES NOT APPLY WHEN “ASSET
If discovered in 2021
METHOD” IS USED
Expense xx
PREPAYMENT (ASSET METHOD)
Retained Earnings xx
Case: On October 1, 2020, the entity recorded an advancement
If discovered in 2022
payment for 1-year advertisement costing P12,000. An ASSET
account was initially debited however, no appropriate adjusting No need for any entry because the overstatement in 2020 is
entry was made. counterbalanced in 2021
Debit Prepaid Expense DEFERRAL
Credit Cash
Case: An advertising corporation received P120,000 on April 1, 2020
At year end, determine the expired portion for a one-year advertisemtn. Income method was used upon receipt
Debit Expense of cash. (“Debit Cash Credit Income) However, no adjusting entry
Credit Prepaid Expense, however, failed. was made on year-end.
Analysis Analysis
2020 2020 (full income is in year 2020)
The prepaid advertisement is overstated Advertising Income is overstated. Unearned Income is understated
IS is incorrect – overstated (bc not able to identify the expired
portion, as a result NI is overstated (expense is understated) IS is incorrect – overstetd
BS is incorrect – Prepaid Expense is overstated and RE is overstated BS is incorrect – RE is overstated, liabiltiti is understated

2021 (non-counter balance) 2021

The prepaid advertisement is still overstated (bc no correcting Advertising Income is understated
entry) IS is incorrect – undertstated
IS incorrect – overstated (expense is understated) failed to trecord BS is correct – RE is counterbalanced, Liability is rightfully zero (If
the portion in 2021 you have fully earned 120,000 thers no need to record any
BS is incorrect – Prepaid Expense is still overstated. RE is still unearned income, liability
overstated.
 IS is incorrect – understated

These deferrals will immediately be transferred to income. If you fail BS is correct – Salaries Payable is zero (already paid the salaries), RE
to record an adjusting entry, it does not transfer because all is counterbalanced
deferrals will be transferred to income
CORRECTING ENTRIES
CORRECTING ENTRIES
If discovered in 2021
If discovered in 2021
Retained Earnings xx
Retained Earnings xx Expenses xx
Income xx
If discovered in 2022
If discovered in 2022
No need for any entry because the overstatement in 2020 is
No need for any entry because the overstatement in 2020 is counterbalanced in 2021
counterbalanced in 2021
NON-COUNTERBALANCING ERRORS
ACCRUALS (ACCRUED EXPENSE)
These are errors which do not counterbalance regardless how
Case: An entity has labor workforce who is paid weekly. They are period have passed until it is corrected.
paid every Saturday of the month. The current year 2020 ended on
Financial Statement Current Year Imm. Succe. Yr. Succeeding Year
a Friday, the entity forgot to accrue and recorded the week’s salary Income Statement* Erroneous (wrong) Correct (check) Correct (check)
expense only on Saturday, January 1, 2021 (Salries Expense, credit Balance Sheet Erroneous (wrong) Erroneous (wrong) Erroneous (wrong)
salaries payable)

Analysis
Example:
2020
DEPRECIATION
The salaries expense and salaries payable is understated
Case: An entity erroneously recorded depreciation twice for the
IS is incorrect – overstated
current year. (debit depreciation expense-nominal, credit
BS in incorrect – salaries payabele is underststed, RE is overstated accumulated depreciation – real account. However, the
depreciation in the succeeding year is correct.
2021
The salaries expense is overstated Analysis
2020 On November 1, 2020, an entity made an advance payment for a 1-
Depreciation Expense is overstated (recorded it twice). Acc. Dep. Is year rent, amount of P120,000. An asset account was initially
also overstatetd, thus, the resulting Book Value of the asset is debited, however, no adjusting entry was made at year end.
understated
Analysis
IS is incorrect – understated
BS is incorrect – asset is understsated RE is understated (record acc. 2020
Dep. Twice) The Prepaid Advertisement account is overstated. Adv. Expense is
understated
2021
IS is incorrect- overstated (2 mos of rent)
IS is correct, NI is understated
BS is incorrect – Asset is overstated, RE is overstated (failed to
BS is incorrect. Asset is still understated. RE is still understated.
recognize the expired portion)
2022
2021
IS is correct, asset is still understated, re is still understated IS is incorrect – overstated
BS is incorrect – asset is still overstated, RE is still overstated
CORRECTING ENTRIES
By the year 2021, your advance payments have already been
IF discovered in 2020
expired, no asset to speak off at all but no correcting entries is
Acc. Dep xx recorded the same is overstated.
Dep. Exp. xx
Not counterbalance if use asset method
If discovered in 2021
CORRECTING ENTRIES
Accum. Dep. xx
If discovered in 2021
RE Xx
RE, beg xx (only for the expired portion)
If discovered in 2022
Prepaid Asset xx
Then you would still have the same entry. It does not
Only for the expired portion
counterbalance.
If discovered in 2022
PREPAYMENT (ASSET METHOD)
RE xx
Prepaid Asset xx
*For the full amount. Since all have been expired already. Credit
asset in full.

Overstated – deducted

Understated - added

Sample Comprehensive Problem