ERRORS

OBJECTIVES:
• DEFINE AND IDENTIFY TYPES OF ERRORS.
• GIVE EXAMPLES OF ERRORS.
• ACCOUNTING TREATMENT FOR ERRORS.

Intermediate Accounting 3 (2020 edition) by Zeus Vernon B. Millan By: Jamlie Tongao
 ERRORS INCLUDE
• Misapplication of accounting policies
• Mathematical mistakes
• Oversights or misinterpretations of facts
• Fraud

• Errors of commission – doing something wrong

• Errors of omission – not doing something that should be done
ERRORS

• Financial statements DO NOT COMPLY Material Errors – those that cause the FSs
WITH PFRSS if they contain either to be misstated.
material errors or immaterial errors
made INTENTIONALLY to achieve a Intentional Errors = fraud
particular presentation of an entity’s
financial position, financial
performance or cash flows. Fraud
✓Error is material
PAS 8.41 ✓Error is immaterial
TYPES OF ERRORS (ACCORDING TO PERIOD)
CURRENT PERIOD ERRORS
Errors in the current period
Discovered:
✓During the current period
✓After the current period but before the FSs
were authorized for issue
Correction:
✓Correcting entries
PRIOR PERIOD ERRORS
Errors in one or more prior periods
Discovered:
✓During the current period
✓After the current period but before the FSs
were authorized for issue
Correction:
✓Retrospective restatement
RETROSPECTIVE RESTATEMENT

• Restating the comparative amounts for the prior period(s) presented in which the error occurred;
or
• 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.
RETROSPECTIVE RESTATEMENT RETROSPECTIVE APPLICATION

Correcting a prior period error AS IF THE ERROR HAD NEVER Applying a new accounting policy AS IF THE POLICY HAD
OCCURRED. ALWAYS BEEN APPLIED.

If retrospective is impracticable → prospectively from the earliest date practicable

ILLUSTRATION 1: CURRENT PERIOD ERROR

On January 10, 20x2, prior to Prepare correcting entries assuming:

authorization of ABC Co.’s December ✓Books are still open
31, 20x1 FSs for issue, the accountant of ✓Books are already closed
ABC Co. received a bill for an
advertisement made in the month of
December 20x1 amounting to Php
400,000.00. This expense was not
accrued as of December 31, 20x1.
ILLUSTRATION 1: CURRENT PERIOD ERROR

On January 10, 20x2, prior to Books are still open

authorization of ABC Co.’s December Dec 31,20x1
31, 20x1 FSs for issue, the accountant of
ABC Co. received a bill for an
advertisement made in the month of Advertising expense 400,000
December 20x1 amounting to Php Advertising payable 400,000
400,000.00. This expense was not
accrued as of December 31, 20x1.
ILLUSTRATION 1: CURRENT PERIOD ERROR

On January 10, 20x2, prior to Books are already closed

authorization of ABC Co.’s December Jan 10, 20x2
31, 20x1 FSs for issue, the accountant of
ABC Co. received a bill for an
advertisement made in the month of Retained Earnings 400,000
December 20x1 amounting to Php Advertising payable 400,000
400,000.00. This expense was not
accrued as of December 31, 20x1.
ILLUSTRATION 1: CURRENT PERIOD ERROR

On January 10, 20x2, prior to authorization Books are already closed

of ABC Co.’s December 31, 20x1 FSs for (income tax is not ignored)
issue, the accountant of ABC Co. received Jan 10, 20x2
a bill for an advertisement made in the
month of December 20x1 amounting to
Php 400,000.00. This expense was not Retained Earnings 280,000
accrued as of December 31, 20x1. Income Tax Payable 120,000
Advertising payable 400,000

Assume an income tax rate of 30%.

(400,000*70%)= 280,000
(400,000*30%)=120,000
• ORIGINAL • WITH ADVERTISING EXPENSE
• Income before tax 1,000,000 • Income before tax 600,000
• Income net of tax 700,000 • Income net of tax 420,000
• Income tax payable 300,000 • Income tax payable 180,000

• 700,000-420,000=280,000 net dec in inc

• 300,000-180,000=120,000 net dec in tax
payable
ILLUSTRATION 1: PRIOR PERIOD ERROR

On January 15, 20x3 while finalizing its Prepare entries to correct the prior
20x2 financial statements ABC Co. period error.
discovered that depreciation expense
recognized in 20x1 is overstated by Php January 15, 20x3
400,000.
Accumulated Depreciation 400,000
Retained earnings 400,000
PRIOR PERIOD ERROR

▪ Corrected by adjusting the beginning balance of RETAINED EARNINGS for the earliest period
presented.
▪ The effect of a correction of prior period error is excluded from P/L for the period in which the
error is discovered.
▪ If the 20x1 FSs are presented as COMPARATIVE to the 20x2 FSs, the 20x1 financial statements are
RESTATED to correct the overstatement in depreciation.
 TYPES OF ERRORS (BROAD CLASSIFICATION)
ERRORS IN PRINCIPLE
• This arise from lack of knowledge of
accounting standards or procedures, misuse
of available information, misinterpretation of
accounting standards whether intentional of
unintentional.
CLERICAL AND SIMILAR ERRORS
Includes mathematical mistakes, oversights or
misinterpretations of facts.
▪ Trans placement error – incorrect number of digits
▪ Transposition error – digits in an amount are interchanged
▪ Errors of omission – ex. The accountant forgot to record a
transaction
▪ Errors of commission – ex. The accountant recorded a
transaction twice or partially
▪ Compensating errors – ex. Erroneous credit is compensated by
an erroneous debit (this error will not be revealed in TB)
▪ Accounting system error – ex. There is a “bug” in a computer
program
▪ Counterbalancing and Non-counterbalancing errors
Beginning Inventory 100,000

Add: Purchases 500,000

Goods Available for sale 600,000

Less: Ending Inventory (50,000)

Cost of Goods Sold 550,000

Sales 1,000,000

Less: Cost of Sales (550,000)

Profit 450,000
Prepaid Insurance
Profit

Prepaid Insurance
Insurance Expense

Expense
Profit

Sales xxx
Expenses xxx
Profit xxx
Sales xxx
Expenses xxx
Profit xxx
 Correct Retained Earnings

Alternative Solution:

20x1 20x2
Unadjusted retained earnings 1,600,000 2,200,000
Net adjustment to 20x1 profit (see above) (135,000) (135,000)
85,000 = 20,000 + 40,000 + 25,000 Net adjustment to 20x2 profit (see above) 0 85,000
A B C Corrected Retained Earnings 1,465,000 2,150,000
 ILLUSTRATION 3: COMPREHENSIVE
ABC Co. made the following errors:
a. December 31, 20x1 inventory was understated by 25, 000.
b. December 31, 20x2 inventory was overstated by 40, 000.
c. Purchases on account in 20x1 were understated by 100,000 (not included in physical
count).
d. Advances to suppliers in 20x2 totaling 130,000 were inappropriately charged as
purchases.
e. December 31, 20x1 prepaid insurance was overstated by 5, 000.
f. December 31, 20x1 unearned rent income was overstated by 26, 000.
g. December 31, 20x2 interest receivable was understated by 17, 000.
h. December 31, 20x2 accrued salaries payable was understated by 30, 000.
i. Advances from customers in 20x2 totaling 60, 000 were inappropriately recognized as
sales but the goods were delivered in 20x3.
j. Depreciation expense in 20x1 was overstated by 7, 200.
k. In 20x2, the acquisition cost of a delivery truck amounting to 90, 000 was inappropriately
charged as expense. The delivery truck has a useful life of five years. ABC’s policy is to
provide a full year’s straight line depreciation in the year of acquisition and none in the
year of disposal.
l. A fully depreciated equipment with no residual value was sold in 20x3 for 50, 000 but the
sale was recorded in the following year.
Profits before correction of errors were Php 123, 000, Php 156, 000, and Php 210, 000 in
20x1, 20x2, and 20x3, respectively.
Retained earnings before correction of errors were Php 1,123,000, Php 1,279,000 and Php
1,489,000 in 20x1, 20x2, and 20x3, respectively.
Requirements: Ignoring income taxes, compute for the following:
1. The NET EFFECT of the errors on the following:
a. 20x1, 20x2, and 20x3 profit
b. 20x1, 20x2, and 20x3 year-end retained earnings
c. 20x1, 20x2, and 20x3 year-end working capital
2. The CORRECTED PROFITS for the years 20x1, 20x2, and 20x3.
3. The CORRECTED RETAINED EARNINGS for years 20x1, 20x2, and 20x3.
4. Provide all necessary correcting entries assuming the errors were discovered in 20x3
while the books in 20x3 are STILL OPEN.
5. Provide all necessary correcting entries assuming the errors were discovered in early
20x4 after the books in 20x3 are ALREADY CLOSED.