Now we are going to proceed with the first classification of the combined SFP and IS

errors.

So counterbalancing errors, let us first define.

Counterbalancing Errors are errors which, if not detected, are automatically

counterbalanced or corrected in the next accounting period.

In other words, counterbalancing errors will be offset or corrected over two periods or
correct themselves over two periods.

It simply means na kapag naka commit ng error ang entity halimbawa sa pagjournalize
ng isang transaction, ay magcocorrect yung balance nito sa financial statements after
two periods.

Meaning, kung sabihin nating nadiscover ng entity na nagkaroon pala ng error pero
after those two periods pa sya nadiscover, tama ang balance na magrereflect sa
financial statements.

Accounting for a counterbalancing error is made by determining if the books for the
current year are closed or not. If the current year books are closed-no entry is
necessary if the error has already counterbalanced. If the error has not counterbalanced
then an entry must be made to retained earnings.

Next slide, here are the effects of counterbalancing errors.

a. The income statement for two successive periods are incorrect.

b. The statement of financial position at the end of the first period is incorrect.

c. The statement of financial position at the end of the second period is correct.

Counterbalancing errors normally include the misstatement of the following:

a. Inventory, including purchases and sales (beginning, ending inventory)

b. Prepaid expense (ex. Bumili ng supplies tapos dinebit mo sa supplies account which
is an asset, kaso at the end of the year hindi naexpense yung nagamit na – understated
expense, overstated income)

c. Accrued expense (ex. Utilities expense, you failed to record the adjusting entry for
utilities – understatement of expense, overstatement of income)
d. Deferred income (ex. Nakareceive ng cash para sa service na irerender kaso cinredit
sa service revenue account instead liability – overstated income)

e. Accrued income (ex. Hindi nairecord yung interest na naearn na dapat ay debit to
Interest receivable, cr to Interest Income – understated income)

Next, (other reference na nasearch online), dito tayo magfofocus sa illustration sa baba
na kulay blue. –explain—

Illustration –explain—

So refer ulit tayo doon sa effects of counterbalancing errors, dito yung sinasabi doon sa
effects of counterbalancing errors na yung income statement for two successive periods
ay incorrect.

Tapos yung sinasabi naman na SFP at the end of first period is incorrect is yung
ending inventory which is overstated and correct naman at the end of second period is
correct dahil kung mapapansin nyo dito tama na yung ending inventory ng 2021 which
is 50,000.

Next, iscreenshot na lang for reference (di na ididiscuss lahat)

Overstatement of Ending Inventory

Effect – Overstated income and inventory kaya iddebit RE and credit sa Inventory dahil
sobra ang narecord

Understatement of Ending Inventory

Effect – Understated inventory at income kaya debit to inventory beginning and cr to RE

Understatement of Purchases

Dito, instead na 2020 irerecord yung purchases, narecord lang siya 2021 na kaya
overstated ang purchases ng 2021 kaya credit siya. Dinebit naman yung RE dahil hindi
narecord yung purchases ng 2020, e ang purchases ay nakakabawas ng income, so
kung hindi siya narecord, meaning naoverstate ang income ng prior year.
Overstatement of Purchases and Ending Inventory

Take note, the entity had no title, meaning hindi dapat nirecord yon ni company ng Dec.
31, 2020 kasi maaaring FOB Destination pala sya so kung in transit ng end of the year,
ang may-ari pa non is si seller, remember sa basic accounting. So ang nangyari, na
understate yung purchases natin for 2021 at ang income, and naoverstate naman yung
beginning inventory natin ng 2021, which is yung ending inventory ng 2020, dahil nga
2020 mo sya nirecord as inventory. Kaya ang entry ay:

Understatement of Sales

Instead na 2020 irecord, narecord na sya 2021 kaya overstated ang sales ng 2021 and
understated naman for 2020. Kaya idedebit ang sales para mabawasan since sales
pertain to current period and credit naman sa RE which represents yung prior year na
income na dapat nairecord.

Overstatement of Sales, Understatement of Ending Inventory

Inexclude ni entity yung cost of merchandise or yung Cost of Goods Sold sa pagrecord
na dapat ay ininclude nya dahil walang title ang customer as of the end of the year so
ang effect is overstated ang income dahil di nga narecord ang COGS. So idedebit mo
yung sa RE and credit naman sa sales dahil 2021 pa naearn since 2021 din dumating
kay buyer yung merchandise.

Yung second entry naman is debit to beg. Inventory dahil na-understate ang ending
inventory natin sa end ng prior period and understated din ang income since
understated ang inventory kaya credit to RE.

Failure to Record Prepaid Expense

Supposed to be, iaadjust dapat ni entity yung insurance which should be debit to
insurance and credit to insurance expense para marecognize yung remaining 25,000 na
di pa nagagamit. So on Dec. 31, 2021 –entry-

Failure to Record Accrued Expense

Dapat na entry nung 2020 ay dr. to rent expense cr. To rent payable
The rent expense is credited because accrual of 2020 was paid in 2021 and the same
was debited to rent expense, thus overstating rent expense of 2021.

Net income naman for 2020 ay overstated dahil hindi understated ang rent expense
while net income ng 2021 ay understated dahil overstated naman dito ang rent
expense.

Failure to Record Deferred Income

Ang naging entry, debit to cash, cr to rent income instead na ang credit is unearned rent
income, dahil dito overstated yung rent income ng 2020 kaya naka debit ang RE. Since
2020 narecord yung buong 50,000 na rent na nareceive ng 2020, di na narecognize ni
entity yung rent income ng 2021 kaya iccredit siya sa 2021.

Failure to Record Accrued Income

Instead na magadjusting entry ng debit to rent receivable and credit to rent income, di
nakapag journal entry si entity kaya magiging understated ang interest income ng 2020
so credit to RE. Debit to Interest income naman dahil 2021 na narecord yung buong
50,000 nung nareceive yung cash, ang ginawa ni entity is nirecognize nya yung buong
50,000 ng 2021 lang so overstated ang interest income.