ERROR CORRECTION

Concepts
There are two types of errors, namely the non-counterbalancing and counterbalancing errors.

Non-counterbalancing errors are those that have misstating effects until deliberately corrected.
Counterbalancing errors are those that correct themselves after a certain number of periods even if there
are no deliberate corrections made.

Examples of non-counterbalancing errors include, but not limited to:

a. Incorrect account names used when recording balances. However, the total amounts might not be
in error. For example, an item of PPE was recorded as investment property. The total PPE and
investment property are both misstated but the total assets are correctly stated.
b. Incorrect account names used when recording transactions. For example, amounts paid to
professionals were recorded as salaries expense instead of professional fees expense. Salaries
expense and professional fees expense are both misstated but the total expenses are correctly
stated.
c. Nonrecording of depreciation of depreciable asset.
d. Mistakes in the computation of recoverable amount when impairment loss was recorded.

Examples of counterbalancing errors include, but not limited to:

a. Recording of income when actually received rather than when earned (i.e., non-recording of
accrued income or deferred income).
b. Recording of expense when actually paid rather than when incurred (i.e., non-recording of
accrued expense or prepaid expense).
c. Misstatements in ending and/or beginning inventory balances.
d. Recording of purchases during an incorrect period.

Effects of Errors
The following are examples of the effects of counterbalancing errors:

  Year 1 Profit Year 1 R.E. Year 2 Profit Year 2 R.E.

Non-counterbalancing Errors:        
Non-recording of depreciation expense Overstated Overstated Overstated Overstated
Counterbalancing Errors:        
Recording of income when received
(income earned in Year 1 but received
Understated Understated Overstated No effect
on Year 2, no accrual was made at the
end of Year 1)
Recording of income when received
(income earned in Year 2 but received
Overstated Overstated Understated No effect
on Year 1, no deferral was made at the
end of Year 1)
Recording of expense when paid
(expense incurred in Year 1 but paid
Overstated Overstated Understated No effect
on Year 2, no accrual was made at the
end of Year 1)
Recording of expense when paid
(expense incurred in Year 2 but paid
Understated Understated Overstated No effect
on Year 1, no deferral was made at the
end of Year 1)
Overstatement of Year 1 ending
Overstated Overstated Understated No effect
inventory
Understatement of Year 1 ending
Understated Understated Overstated No effect
inventory
Purchase in Year 1 improperly
Overstated Overstated Understated No effect
recorded in Year 2
Purchase in Year 2 improperly
Understated Understated Overstated No effect
recorded in Year 1