Masteringcorrectionofaccountingerrors 150119082707 Conversion Gate02

Mastering Correction of
Accounting Errors
American Institute of
Professional Bookkeepers
American Institute of Professional Bookkeepers, 2010
Correcting Accounting Errors
Types of Accounting Errors

Omission
Accrual or Deferral
Error
Classification Error
Arithmetic Error
Use of an Incorrect
Accounting Principle
Use of an Improper
Estimate
Transposition Error
Slide Error
Posting Error
An event was never

recorded
No
accrual or deferral
was recorded (or was
recorded
forwas
theposted
An amount
wrong
amount)
to
the
wrong
account
Incorrect addition,
within a category
(e.g.,
multiplication,
etc.
For example, revenue
the bill for rent was
was recognized before
posted to Insurance
it
was
earned.
For
example,
Expense)
The decimal point
was
depreciation
expense
put
the wrong
place
was
computed
the
Two in
digits
wereusing
An
account
was
(for
example,
1,000
wrong
useful
life
reversed
(for
credited
it should
should
bewhen
100)was
example,
739
have
been
recorded
asdebited
379) (or
vice versa)
When Accounting Errors Are

Found
The monthly
Accounting
errors
are reconciliation
usually discovered
bank
during:
Preparation of the trial balance
Reviews of end-of-period
adjustments
Routine internal audits
Year-end audits by external
auditors
The Bank Reconciliation

Cash is the lifeblood of a business
Even profitable companies can fail
without adequate cash management
Cash can easily be hidden or moved,
making it an attractive target for theft
The Bank Reconciliation

One important control on cash is the
monthly bank reconciliation
The bank reconciliation accounts for the
difference between the balance on the
bank statement and the balance in the
company general ledger Cash account(s)
Therefore, to be most effective, the
bank reconciliation should be done by an
employee who neither has custody of nor
keeps records of cash
Cash v. Bank Balance

Differences
The Cash account balance and bank

statement balance often differ
because:
Items on the
companys books are
not on the current
bank statement
Outstanding checks
Deposits in transit
Book errors
Company checks that

have not cleared the
bank
Company bank deposits
not yet credited to its
account
Cash v. Bank Balance

Differences
The Cash account balance and bank

statement balance often differ
because:
Items on the current
Recent bank fees and bank statement are
not yet on the
charges
companys books
Bank service
Customer loans
charges
recently
(with
Customerrepaid
checks
interest)
to the Collections of notes
returned directly
for
bank
insufficient funds
Nonsufficient funds
(bounced checks)
(NSF) checks
Bank Reconciliation:
Example
XYZ Corp 1
Bank Reconciliation
August 20X9
Balance per books, 8/31 x,xxx
Reconcile:
Items on the bank statement
not (yet) recorded by
the company
Corrected book bal., 8/31x,xxx
Balance per bank, 8/31
x,xxx
Reconcile:
Items on the companys
books not on the
current bank statement
Corrected bank bal., 8/31 x,xxx
The goal: Make these two balances equal

Example
XYZ Corp 1
Bank Reconciliation
August 20X9
Balance per books, 8/31 x,xxx
Add to book balance:

Collection
of note
xxx
Reconcile:
Interest on note
xxx
Items on the bank statement
not (yet) recorded by
Deduct:
the company
NSF check
xxx
Bank service charge
xxx
Corrected book bal., 8/31x,xxx
Balance per bank, 8/31
x,xxx
Add to bank
balance:
Reconcile:
Deposits
inthe
transit
Items on
companysxxx
books not on the
Deduct:
current bank
statementxxx
Outstanding
checks
Corrected bank bal., 8/31 x,xxx
Example 2
As of 11/30, Gym-Bos ledger Cash account balance
is $16,150 and its bank statement balance is
$33,520
Bank
Two checks, totaling $9,810, are outstanding.
A night deposit of $12,150
from the 30 th is not on
Bank
the current bank statement.
The bank charged Gym-Bos account
Bank for a check
written by another company for $160.
The bank statement shows collection
of a $20,000
Book
note receivable plus $900 interest.
The bank statement shows an NSF check for $1,000
Book
and a bank service charge for the check of $30.
Example
2
Gym-Bo
Bank Reconciliation
November 20X9
Balance per books 11/3016,150 Balance per bank 11/30 33,520

Collection of note
Interest on note
Deduct:
NSF check
Bank service charge
20,000
900
Add to bank balance:

Deposits in transit
Bank error
Deduct:
1,000 Outstanding checks
30
12,150
160
9,810
Corrected book bal., 11/30

36,020 Corrected bank bal., 11/3036,020
Example
2
Gym-Bo
Bank Reconciliation
November 20X9
Balance per books 11/3016,150
Collection of note
Interest on note
Deduct:
NSF check
Bank service charge
20,000
900
1,000
30
Book items to be
reconciled require
journal entries to adjust
the current Cash
account balance of
$16,150 to the
reconciled balance of
$36,020

36,020
Example
2
Gym-Bo
Bank Reconciliation
November 20X9
Balance per books 11/3016,150
Collection of note
Interest on note
Deduct:
NSF check
Bank service charge
20,000
900
1,000
30

36,020
Cash
20,900
Notes Rec.
20,000
Interest Revenue
900
Accts Rec.
1,000
Cash
1,000
Misc. Expense
Cash
30
30
Finding Errors in a Trial

Balance
To find errors in the unadjusted trial balance,
follow these steps:
1. Check that all account balances have been
correctly transferred to the trial balance
Scan account balances to see if they are in the correct
column (Dr v. Cr)
Make sure that every account with a balance was
transferred to the trial balance
Verify that the balance listed in the debit or credit
column matches the one in the account
Example
Accounts
Payable is a
liability
account
(normal
credit
balance)
Account
Dr
Cr
Cash
577
Prepaid Assets
48
Accounts Receivable
699
Accounts Payable
702
Salaries Payable
254
R. Smith Capital
566
Sales
4,001
Cost of Goods Sold
1,287
Salaries Expense
1,179
Rent Expense
637
Utilities Expense
344
Interest Expense
200
Tax Expense
552

Balance
To find errors in the unadjusted trial

balance, follow these steps:
1. Check that all account balances were
correctly transferred
2. Total the debits and credits. If the
totals are not equal, take these steps:
a. Check for a doubling error
Example
Calculate
the
difference
between the
two totals
Account
Cash
Prepaid Assets
Accounts Receivable
Accounts Payable
Salaries Payable
R. Smith Capital
Sales
Cost of Good Sold
Salaries Expense
Rent Expense
Utilities Expense
Interest Expense
Tax Expense
Total
Dr
577
48
699
702
Cr
Look for this

amount in
254 the trial
566 balance
4,001
1,287
1,179
637
344
200
552
6,225 4,821= 1,404 / 2 =
702
Example
Account
Cash
Prepaid Assets
Accounts Receivable
Accounts Payable
Salaries Payable
R. Smith Capital
Sales
Cost of Sales
Salaries Expense
Rent Expense
Utilities Expense
Interest Expense
Tax Expense
Total
Dr
577
48
699
702
Cr
254
566
4,001
1,287
1,179
637
344
200
552
6,225 4,821
5,523 5,523
After the
correction
is made,
the totals
should be
equal
Finding Errors in a Trial Balance

To find errors in the unadjusted trial
balance, follow these steps:
1. Check that all account balances
were correctly transferred
2. Total the debits and credits. If the
totals are not equal, take these steps:
a. Check for a doubling error
b. Check for a slide or transposition error
Example
Calculate
the
difference
between the
two totals
Account
Cash
Prepaid Assets
Accounts Receivable
Accounts Payable
Salaries Payable
R. Smith Capital
Sales
Cost of Goods Sold
Salaries Expense
Rent Expense
Utilities Expense
Interest Expense
Tax Expense
Dr
Cr
Look for the
577
same total
48
7,990
with an extra
702 0 at the end
354
566
4,011
1,287
1,179
637
344
210
552
12,824 5,633= 7,191 / 9 =
799
Example
Account
Dr
Cr
Cash
577
Prepaid Assets
48
Accounts Receivable
799
Accounts Payable
702
Salaries Payable
354
R. Smith Capital
566
Sales
4,011
Cost of Goods Sold
1,287
Salaries Expense
1,179
After
Rent Expense
637
correcting
Utilities Expense
344
the error,
Interest Expense
210
make sure
Tax Expense
552
12,824 5,633 the totals are
now equal
5,633
Transposition Errors
A transposition error occurs when two
digits have been reversed. For
example:
123 is recorded as 213
7,912 is recoded as 9,712
476 is recorded as 467
Example
Account
Dr
Cr
Cash
757
Prepaid Assets
48
Accounts Receivable
699
Accounts Payable
702
Salaries Payable
254
R. Smith Capital
566
Sales
4,011
Cost of Goods Sold
1,287
Salaries Expense
1,179
Rent Expense
637
Utilities Expense
344
Interest Expense
210
Calculate the
Tax Expense
552
difference
5,713 5,533=
between the
totals and
divide by 9
When the
difference
between the
totals is
divisible by
9, there may
be a
transposition
error
180 / 9 = 20
Transposition Errors
To find an amount that has been
transposed:
Find the difference between total debits and
total credits and add 1 to the first digit
Example: You find a difference between the totals
of 180. The first digit is 1. Add 1 and you get 2.
Find account balances with that difference

between the first and second digits
Example: Look for account balances where the
difference between the first and second digits is 2
Transposition Errors:
Example
Account
Dr
Cr To the first
Cash
757
digit of the
Prepaid Assets
48
difference
Accounts Receivable
699
add 1
1+1=2
Accounts Payable
702
Salaries Payable
254
Now look for a
R. Smith Capital
566
difference of
Sales
4,011
this amount
Cost of Goods Sold
1,287
between the
Salaries Expense
1,179
first and
Rent Expense
637
second digits
Utilities Expense
344
Interest Expense
210
Tax Expense
552
5,713 5,533= 180
Transposition Errors:
Example
Account
Dr
Cr
Cash
577
Prepaid Assets
48
Accounts Receivable
699
Accounts Payable
702
Salaries Payable
254
R. Smith Capital
566
Sales
4,011
Cost of Goods Sold
1,287
Salaries Expense
1,179
After the
Rent Expense
637
error is
Utilities Expense
344
corrected,
Interest Expense
210
make sure
Tax Expense
552
5,713 5,533 the totals
balance
5,533

Balance
To find errors in the unadjusted trial balance,
follow these steps:
1.Check that all account balances have been
correctly transferred to the trial balance
2.Total debits and creditsif not equal, look for
a doubling, slide or transposition error.
3. Examine journal entries and postings
a. Verify that JEs were posted correctly to the
ledger accounts
b. Review JEs for obvious errorsyou may need
to examine source documents
Accrual Errors
Recall from Mastering Adjusting Entries
that an accrual is an expense incurred or
revenue earned before cash flows
At the end of the period, an adjusting
entry is recorded to accrue revenues
(and receivables)and expenses (and
payables)
The adjusting entry to
The adjusting entry to
accrue revenue is:
____ Receivable
____ Revenue
accrue expenses is:

____ Expense
____ Payable
Accrual Errors
Accrual errors fall into three
categories:
1. Failure to record the adjusting entry
2. Accruing too much
3. Accruing too little
If the error is found before the books

are closed for the year, it can be
corrected with a simple journal
entry
Accrued Revenue Errors

Review: The adjusting entry to accrue
revenue is: ____ Receivable
xxx
____ Revenue
xxx
Error:
Failure to record the adjusting
entry
Correction:
Record the adjusting entry
____ Receivable
____ Revenue
xxx
xxx

xxx
____ Revenue
xxx
Error:
Too much revenue was accrued
Correction:
Record an adjusting entry with the
accounts reversed. The amount must
reduce the revenue account to the correct
balance.____ Revenue
xxx
____ Receivable
xxx

xxx
____ Revenue
xxx
Error:
Too little revenue was accrued
Correction:
Record an adjusting entry that increases
the revenue account to the correct balance
____ Receivable
____ Revenue
xxx
xxx

Example
AdviceCo is doing a
$30,000 consulting job and The year-end AJE should be:
will be paid upon
Accts. Receivable 9,000
completion. At year end,
Consulting Rev.
9,000
30% of the job has been
completed.
If no AJE was recorded, the
correction is simply to
Correct the error if
record it:
AdviceCo:
(a) failed to record an AJE
9,000
Consulting Rev.

Example
AdviceCo is doing a
will be paid upon
Consulting Rev.
9,000
But AdviceCo recorded:
completed.
AdviceCo:
(b) accrued 40% (instead
of 30%) of $30,000

Consulting Rev.
12,000
The correcting journal entry
is:
Consulting Rev.
3,000

Example
AdviceCo is doing a
will be paid upon
Consulting Rev.
9,000
But AdviceCo recorded:
completed.
Consulting Rev.
6,000
AdviceCo:
(b) accrued 40% (instead
is:
of 30%) of $30,000
3,000
Consulting Rev.
(c) accrued 20% (instead
of 30%) $30,000
Accrued Expense Errors

Review: The adjusting entry to accrue an
expense is:____ Expense
xxx
____ Payable
xxx
Error:
entry
Correction:
____ Expense
____ Payable
xxx
xxx

xxx
____ Payable
xxx
Error:
Too much expense was accrued
Correction:
Record an adjusting entry that reduces
the expense account to the correct
balance
____ Payable
____ Expense
xxx
xxx

xxx
____ Payable
xxx
Error:
Too little expense was accrued
Correction:
balance
____ Expense
____ Payable
xxx
xxx

Example
ClarkCo takes a $50,000
loan at an annual interest
rate of 12%. Interest is
paid twice a year on 2/1
and 8/1. The last payment
was on 8/1 this year.
ClarkCo:
The year-end AJE should be:

Interest Exp.
2,500
Interest Payable
2,500
If ClarkCo failed to record an
AJE, the correction is simply
to record it:
Interest Exp.
2,500
Interest Payable
2,500

Example
ClarkCo:
(b) accrued 6 (instead of
5) months interest

Interest Exp.
2,500
Interest Payable
2,500
But ClarkCo recorded the
following entry:
Interest Exp.
3,000
Interest Payable
3,000
Therefore, the correcting
entry
is: Payable
500
Interest
Interest Exp.
500

Example
ClarkCo:
(b) accrued 6 (instead of 5)
months interest
(c) accrued 3 (instead of
5) months interest

Interest Exp.
2,500
Interest Payable
2,500
But ClarkCo recorded the
following entry:
Interest Exp.
1,500
Interest Payable
1,500
Therefore, the correcting
entry
is: Exp.
Interest
1,000
Interest Payable
1,000
Deferred Expense Errors

Recall from Mastering Adjusting Entries
that a deferred expense is a prepaid
expense.
The original entry may have an
included
Prepaid an
Exp.asset
xxx accountor
Expensean xxx
Cashaccount:
Cash
xxx
expense
xxx
Expense
xxx
Exp. xxx
Thus,Prepaid
the adjusting
Prepaid Exp. xxx

Expense
entry was
either:xxx

Review: If the prepayment was recorded as
an asset (prepaid expense), the adjusting
entry is:
Expense
xxx
Prepaid Exp.
xxx
Error:
entry
Correction:
Expense
xxx
Prepaid Exp.
xxx

entry is:
Expense
xxx
Prepaid Exp.
xxx
Error:
Too much expense was
recognized
Correction:
reduce the expense account to the correct
xxx
balance. Prepaid Exp.
Expense
xxx

entry is:
Expense
xxx
Prepaid Exp.
xxx
Error:
Too little expense was
recognized
Correction:
balance Expense
xxx
Prepaid Exp.
xxx

Example
On May 1, TruckCo
prepays $2,400 for 2
years insurance and
debits Prepaid Insurance.
TruckCo:
(a) failed to record an AJE.

Insurance
800
Prepaid
800
Expense
Insurance
If no AJE was recorded, the
correction is simply to
record
it:
Insurance
800
Prepaid
Expense
Insurance
800

Example
On May 1, TruckCo
years insurance and
TruckCo:
(b) recognized $500 of
insurance expense

Insurance
800
Prepaid
800
Expense
Insurance
But TruckCo recorded:
Insurance
500
Prepaid
500
Expense
Insurance
is:
Insurance
300
Prepaid
300
Expense
Insurance

Example
On May 1, TruckCo
years insurance and
TruckCo:
insurance expense
(c) recognized $1,000
insurance expense

Insurance
800
Prepaid
800
Expense
Insurance
But TruckCo recorded:
Insurance
1,000
Prepaid
1,000
Expense
Insurance
is:
200
Prepaid
200
Insurance
Insurance
Expense

an expense, the adjusting entry is:
Prepaid Exp.
Expense
xxx
xxx
Error:
Failure to record the AJE
Correction:
Record the AJE:
Prepaid Exp.
Expense
xxx
xxx

Prepaid Exp.
Expense
xxx
xxx
Error:
Too much expense recognized (too little
deferred)
Correction:
Record an adjusting entry that reduces the
expense account to the correct balance
Prepaid Exp.
Expense
xxx
xxx

Prepaid Exp.
Expense
xxx
xxx
Error:
Too little expense recognized (too much
deferred)
Correction:
increase the expense account to the
Expense
xxx
correct balance.
Prepaid Exp.
xxx

Example
Xylis Entertainment
prepaid $3,600 for 6
months rent on
November 1 and debited
Rent Expense.
Correct the error if Xylis:

2,400
Prepaid Rent
Rent Expense
2,400
If Xylis failed to record an
AJE, the correction is simply
to record it:
Prepaid Rent
Rent Expense
2,400
2,400

Example
Xylis Entertainment
months rent on
Rent Expense.
(b) deferred $3,000 of rent
expense

2,400
Prepaid Rent
Rent Expense
2,400
But Xylis recorded:
Prepaid Rent
Rent Expense
3,000
3,000

is:
Rent Expense
600
Prepaid Rent
600

Example
Xylis Entertainment
months rent on
Rent Expense.

2,400
Prepaid Rent
Rent Expense
2,400
But Xylis recorded:

Prepaid Rent
1,800
(b) deferred $3,000 of rent
Rent Expense
1,800
expense
(c) deferred $1,800 of rent The correcting journal entry
expense
is:
600
Prepaid Rent
600
Rent Expense
Deferred Revenue Errors

Review: If the advance payment was recorded
as a liability (unearned revenue), the
adjusting entry is:
Unearned Revenue xxx
Revenue
xxx
Error:
Correction:
Record the AJE
Revenue
xxx

adjusting entry is:
Revenue
xxx
Error:
Too much revenue recognized
Correction:
reduce the revenue account to the correct
xxx
balance. Revenue

adjusting entry is:
Revenue
xxx
Error:
Too little revenue recognized
Correction:
the revenue account to the correct
balance Unearned Revenue xxx
Revenue
xxx

Example
On Sept. 1, AlarmCo
received $480 in advance
for 24 months alarm
monitoring and credited
Unearned Revenue.
AlarmCo:

Unearned
Revenue
Revenue
80
80
If AlarmCo failed to record

an AJE, the correction is
simply to record it:
Unearned
Revenue
Revenue
80
80

Example
On Sept. 1, AlarmCo
for 24 months alarm
Unearned Revenue.
AlarmCo:
revenue

Unearned
Revenue
Revenue
80
80
But AlarmCo recorded:

Unearned
Revenue
Revenue
60
60

is:
Unearned
20
Revenue
20
Revenue

Example
On Sept. 1, AlarmCo
for 24 months alarm
Unearned Revenue.
AlarmCo:
(c) revenue
recognized $120 of
revenue

Unearned
Revenue
Revenue
80
80
But AlarmCo recorded:

Unearned
Revenue
Revenue
120
120

is:
40
Revenue
40
Unearned
Revenue

Review: If the advance payment was
recorded as revenue, the adjusting entry is:
Revenue
xxx
Unearned Revenue
xxx
Error:
Correction:
Record the AJE
Revenue
xxx
Unearned Revenue
xxx

Revenue
xxx
Unearned Revenue
xxx
Error:
Too much revenue recognized
Correction:
Record an adjusting entry that reduces the
revenue account to the correct balance
Revenue
xxx
Unearned Revenue
xxx

Revenue
xxx
Unearned Revenue
xxx
Error:
Too little revenue recognized (too much
deferred)
Correction:
increase the revenue account to the
Unearned Revenuexxx
correct balance.
Revenue
xxx

Example
On Sept. 1, LeaseCo
received $6,000 in
advance for a 12-month
equipment rental and
credited Revenue.
LeaseCo:

Revenue
4,000
Unearned
4,00
Revenue
0
If LeaseCo failed to record
an AJE, the correction is
simply to record it:
Revenue
Unearned
Revenue
4,000
4,00
0

Example
On Sept. 1, LeaseCo
received $6,000 in
credited Revenue.
LeaseCo:
(b) deferred $4,500 of
revenue

Revenue
4,000
Unearned
4,00
Revenue
0
But LeaseCo recorded:
Revenue
4,500
Unearned
4,500
Revenue
is:
500
Unearned
Revenue
Revenue
500

Example
On Sept. 1, LeaseCo
received $6,000 in
credited Revenue.
LeaseCo:
(b) deferred $3,600 of
(c) revenue
deferred $1,800 of
revenue

Revenue
4,000
Unearned
4,00
Revenue
0
But LeaseCo recorded:
Revenue
1,500
Unearned Rev.
1,500
is:
Revenue
2,500
Unearned Rev.
2,500

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Mastering Correction of

American Institute of Professional Bookkeepers, 2010

Correcting Accounting Errors

Types of Accounting Errors

An event was never

Correcting Accounting Errors

When Accounting Errors Are

Correcting Accounting Errors

The Bank Reconciliation

Correcting Accounting Errors

The Bank Reconciliation

Correcting Accounting Errors

Cash v. Bank Balance

The Cash account balance and bank

Company checks that

Cash v. Bank Balance

The Cash account balance and bank

Balance per bank, 8/31

The goal: Make these two balances equal

Add to book balance:

Balance per bank, 8/31

Correcting Accounting Errors

Correcting Accounting Errors

Balance per books 11/3016,150 Balance per bank 11/30 33,520

Add to bank balance:

Corrected book bal., 11/30

Correcting Accounting Errors

Corrected book bal., 11/30

Correcting Accounting Errors

Corrected book bal., 11/30

Correcting Accounting Errors

Finding Errors in a Trial

Correcting Accounting Errors

Correcting Accounting Errors

Finding Errors in a Trial

To find errors in the unadjusted trial

Correcting Accounting Errors

Look for this

Correcting Accounting Errors

Finding Errors in a Trial Balance

Correcting Accounting Errors

Correcting Accounting Errors

Correcting Accounting Errors

Find account balances with that difference

Correcting Accounting Errors

Finding Errors in a Trial

Correcting Accounting Errors

accrue expenses is:

Correcting Accounting Errors

If the error is found before the books

Correcting Accounting Errors

Accrued Revenue Errors

Correcting Accounting Errors

Accrued Revenue Errors

Correcting Accounting Errors

Accrued Revenue Errors

Correcting Accounting Errors

Accrued Revenue Errors

Correcting Accounting Errors

Accrued Revenue Errors

Accts. Receivable 12,000

Correcting Accounting Errors

Accrued Revenue Errors