Learning Objectives

Recognize the various types of errors that

can occur in the accounting process
understand when errors counterbalance,
and be able to correct errors when
necessary.
 Error Corrections
Errors
Errors discovered
discovered currently
currently in
in the
the
course
course of
of normal
normal accounting
accounting
procedures.
procedures.

• Math errors
• Posting to the wrong
account
• Misstating an account
• Omitting an account
from the trial balance
 Error Corrections
Errors
Errors limited
limited to
to balance
balance sheet
sheet (SFP)
(SFP)
accounts.
accounts.
• Debiting Accounts Receivable
instead of Notes Receivable
• Crediting Interest Payable instead
of Notes Payable
• Debiting an investment account
instead of Land when property was
purchased for plant expansion
 Error Corrections
Errors
Errors limited
limited to
to income
income statement
statement
accounts.
accounts.
• Debiting Office Salaries instead of
Sales Salaries
• Crediting Rent Revenue instead of
Commissions Revenue
 Error Corrections

Errors
Errors affecting
affecting both
both income
income
statement
statement accounts
accounts and
and balance
balance sheet
sheet
accounts.
accounts.

• Debiting Office Equipment instead

of Repairs Expense
• Crediting Depreciation Expense
instead of Accumulated
Depreciation
 Error Corrections

Errors
Errors affecting
affecting both
both income
income
statement
statement accounts
accounts and
and balance
balance sheet
sheet
accounts.
accounts.

• Debiting Office Equipment instead

of Repairs Expense
• Crediting Depreciation Expense
instead of Accumulated
Depreciation
 Error Corrections
Errors
Errors affecting
affecting both
both income
income statement
statement accounts
accounts
and
and balance
balance sheet
sheet accounts.
accounts.
• There are errors in net income that, when not
detected, are not automatically
counterbalanced in the following fiscal period.
• There are also errors in net income that,
when not detected, are not automatically
counterbalanced in the following fiscal period:
•Recognition of capital expenditures as expenses.
•The omission of charges for depreciation and
amortization.
 Error Corrections
• If detected in current period, before books
are closed:
– Correct the account through normal
accounting adjustment.
• If detected in subsequent period, after
books are closed:
– adjust financial records for effect of
material errors.
– make adjustment directly to Retained
Earnings.
Example of Error Corrections
(1) Understatement of Merchandise
Inventory:
Supply Masters, Inc., began operations
at the beginning of 2016. Before the
accounts are adjusted and closed for
2018, it was discovered that
merchandise inventory as of
December 31, 2016, was understated
by P10,000.

Because
Because this
this type
type of
of error
error counterbalances
counterbalances afterafter two
two
years,
years, no
no correcting
correcting entry
entry is
is required
required in
in 2018.
2018.
Example of Error Corrections

IfIf this
this error
error had
had been
been discovered
discovered in in
2017
2017 instead
instead of
of 2018,
2018, the
the following
following
entry
entry would
would have
have to
to be
be made
made to to
correct
correct the
the account
account balances.
balances.

Merchandise Inventory 10,000

Retained Earnings 10,000
Example of Error Corrections
(2) Failure to Record Merchandise
Purchases
It is discovered that purchase invoices of
December 31, 2016, for P8,500 had not
been recorded until 2017. The goods had
been included in the inventory at the end
of 2016.

Because
Because this
this type
type of
of error
error counterbalances
counterbalances afterafter
two
two years,
years, no
no correcting
correcting entry
entry is
is required
required in
in 2018.
2018.
Example of Error Corrections
IfIf this
this error
error had
had been
been discovered
discovered in in
2017
2017 instead
instead of
of 2018,
2018, the
the following
following
entry
entry would
would have
have to
to be
be made
made to to
correct
correct the
the account
account balances.
balances.

Periodic System:
Retained Earnings 8,500
Purchases 8,500
Perpetual System:
Retained Earnings 8,500
Inventory 8,500
Example of Error Corrections
(3) Failure to Record Merchandise
Sales
It is discovered that sales on account of
P18,000 for the last week of December
2017 had not been recorded until 2018.
The goods were included in the inventory at
the end of 2017. The following correcting
entry would be required in 2018.

Sales 18,000
Retained Earnings 18,000
Example of Error Corrections

(4) Failure to Record Accrued Expense

Accrued sales salaries of P4,500 as of
December 31, 2016, were overlooked
in adjusting the accounts. Sales
Salaries is debited for salary
payments.

Because
Because this
this type
type of
of error
error counterbalances
counterbalances
after
after two
two years,
years, nono correcting
correcting entry
entry is
is required
required
in
in 2018.
2018.
Example of Error Corrections

IfIf this
this error
error had
had been
been discovered
discovered in in
2017
2017 instead
instead of
of 2018,
2018, the
the following
following
entry
entry would
would have
have to
to be
be made
made to to
correct
correct the
the account
account balances.
balances.

Retained Earnings 4,500

Sales Salaries 4,500
Example of Error Corrections

(5) Failure to Record Prepaid Expense

It is discovered that Miscellaneous
General Expense for 2016 included
taxes of P2,750 that should have been
deferred in adjusting the accounts on
December 31, 2016.

Because
Because this
this type
type of
of error
error counterbalances
counterbalances
after
after two
two years,
years, nono correcting
correcting entry
entry is
is required
required
in
in 2018.
2018.
Example of Error Corrections

IfIf this
this error
error had
had been
been discovered
discovered in in
2017
2017 instead
instead of
of 2018,
2018, the
the following
following
entry
entry would
would have
have to
to be
be made
made to to
correct
correct the
the account
account balances.
balances.

Miscellaneous General Expense 2,750

Retained Earnings 2,750
Example of Error Corrections

(6) Failure to Record Accrued Revenue

Accrued interest on notes receivable of P150
was overlooked in adjusting the accounts
on December 31, 2016. The revenue was
recognized when the interest was collected
in 2017.

Because
Because this
this type
type of
of error
error counterbalances
counterbalances
after
after two
two years,
years, nono correcting
correcting entry
entry is
is required
required
in
in 2018.
2018.
Example of Error Corrections

IfIf this
this error
error had
had been
been discovered
discovered in in
2017
2017 instead
instead of
of 2018,
2018, the
the following
following
entry
entry would
would have
have to
to be
be made
made to to
correct
correct the
the account
account balances.
balances.

Interest Revenue 150

Retained Earnings 150
Example of Error Corrections
(7) Failure to Record Unearned
Revenue
Fees of P225 received in advance for
miscellaneous services as of December
31, 2017, were overlooked in adjusting
the accounts. Miscellaneous
Revenue had been credited when fees
were received. The correcting entry in
2017 is:

Retained Earnings 225

Miscellaneous Revenue 225
Example of Error Corrections
(8) Failure to Record Depreciation
Delivery equipment was acquired at the
beginning of 2016 at a cost of P60,000.
The equipment has an estimated five-
year life. Its depreciation of P12,000
was overlooked at the end of 2016 and
2017.

Misstatements
Misstatements arising
arising from
from the
the failure
failure to
to
record
record depreciation
depreciation are
are not
not
counterbalanced
counterbalanced inin the
the succeeding
succeeding year.
year.
Example of Error Corrections
When
When thethe omission
omission is
is recognized,
recognized, Retained
Retained
Earnings
Earnings must
must be
be decreased
decreased byby the
the net
net
income
income overstatements
overstatements and and Accumulated
Accumulated
Depreciation—Delivery
Depreciation—Delivery Equipment
Equipment mustmust
be
be increased.
increased. The
The 2018
2018 correcting
correcting entry
entry is:
is:

Retained Earnings 24,000

Accumulated Depreciation—
Delivery Equipment 24,000
P12,000
P12,000 perper
year
year xx 22
Example of Error Corrections
(9) Incorrectly Capitalizing an
Expenditure Operating expenses of P20,000
were paid in cash at the beginning of 2016.
The payment was incorrectly debited to
Equipment. The “equipment” was assumed
to have a five-year life and no residual value;
thus, depreciation of P4,000 was recognized
at the end of 2016 and 2017. The required
correcting entry is:

Retained Earnings 12,000

Accumulated Depreciation—
Equipment 8,000
Equipment 20,000
Required Disclosure for Error
Restatements
• If comparative statements
are provided, apply
correction retroactively to
prior years.
• Restate beginning balance
of Retained Earnings for
first period presented if
error extends beyond.
• Disclose and explain error
correction in notes.