ERROR CORRECTION

PRIOR PERIOD ERRORS

 Omissions from and misstatements in the entity’s

financial statements for one or more periods arising from
a failure to use or misuse of reliable information that:
A. Was available when financial statements for these
periods were authorized for issue.
B. Could reasonably be expected to have been obtained
and taken into account in the presentation and
presentation of those financial statements.
 Result of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretation of
facts, and fraud.
TREATMENT OF PRIOR PERIOD ERRORS

 Retrospectively in the first set of financial

statements authorized for issue after their
discovery.
 Retrospective restatement
 Adjustment of the beginning balance of
retained earnings of the earliest period
presented.
TYPES OF ERRORS

1. Statement of financial position errors

2. Income statement errors
3. Combined statement of financial position
and income statement errors
Statement of Financial Position

 Affect real accounts

only.
Illustration:
- reclassify the Notes receivable is
account balances debited instead of
accounts receivable.

Accounts Receivable xx
Notes Receivable xx
Income Statement

 Affects nominal • Reclassify

accounts only Illustration:
Same year
During 2020, the entry debited
purchases instead of office
supplies
• No
In 2020:
Subsequen
• Reclassifying reclassify
Same year entry Office tsupplies
year xx
Purchases xx
In 2021:
Subsequen • No NO RECLASSIFYING ENTRY
t year reclassifying
Combined statement of financial position
and income statement errors

 Affects both the statement of financial

position and income statement due to
misstatement of net income.
 Classification: Counterbalancing errors and
noncounterbalancing errors
Counterbalancing errors

Are those which if not detected are

automatically counterbalanced or
corrected in the next accounting period.
Counterbalancing errors

Effects:
 The income statement for
two successive periods are
incorrect.
 -The statement of Financial
Position at the end of the
first period is incorrect.
 The statement of financial
position at the end of the
second period is correct.
Includes:
Inventory including
purchases and sales
 Prepaid expenses
-Accrued expense
Deferred income
 Accrued income
Understatement of purchases

The entity failed to record a merchandise

purchased in 2019. The same was recorded
in 2020. The physical inventory on Dec. 31,
2019 was correctly stared.
If the books for 2020 have not been
closed, the entry to correct the error on Dec.
31, 2020 is:
Retained Earnings 50,000
Purchases 50,000
Overstatement of purchases and
ending inventory

The entity recorded on Dec. 31, 2019 P50,000 of

purchases in transit of which the entity had no title. The
same merchandise was included in the inventory of Dec.
31, 2019
If the books for 2020 have not been closed, the
entries to correct the error on Dec. 31, 2020 are:
1. Purchases 50,000
Retained Earnings 50,000
2. Retained Earnings 50,000
Inventory, Jan. 1, 2020 50,000
Understatement of sales

The entity failed to record sales of P50,000 in

2019. The same was recorded in 2020.
The physical inventory was correctly stated on
Dec. 31, 2019
If the books for 2020 have not been closed, the
entry to correct the error on Dec. 31, 2020 is:
Sales 50,000
Retained earnings 50,000
Overstatement of sales
Understatement of ending inventory

The entity recorded on Dec. 31, 2019 P 50,000 of

sales in transit and to which the customer had no title.
The cost of the merchandise was P30,000 and the
same was excluded from the Dec. 31, 2019 inventory.
If the books for 2020 have not been closed, the
entries to correct the error on Dec. 31,2020 are:
1. Retained earnings 50,000
Sales 50,000
2. Inventory, Jan. 1, 2020 30,000
Retained Earnings 30,000
Failure to record prepaid
expense

On Jan. 1, 2019, the entity purchased an insurance for two

years for P50,000
The payment was debited to an expense and no adjustment
was made on Dec. 1,2019 for the prepaid insurance.
If the book for 2020 have not been closed, the entry to
correct the error on Dec. 31, 2020 is

Insurance 25,000
Retained earnings 25,000
Failure to record accrued expense

On Dec. 31,2019, accrued rent

expense of P50,000 was not recorded.
If the books for 2020 have not been
closed, the entry to correct the error on
Dec. 31,2020 is:
Retained earnings 50,000
Rent Expense 50,000
Failure to record a deferred income

On Jan. 1, 2019, the entity received rent for

two years in the amount of P50,000. The same
was credited to rent income and no adjustment
was made on Dec. 31, 2019.
If the books for 2020 have not been closed, the
entry to correct the error on Dec. 31, 2020 is.
Retained earnings 50,000
Rent Income 50,000
Failure to record accrued income

On Dec. 31, 2019, accrued interest

receivable of P50,000 was not recorded. If the
books for 2020 have not been closed, the entry
to correct the error on Dec. 31, 2020 is :
Interest Income 50,000
Retained earnings 50,000
Noncounterbalancing errors

Are errors which, if not detected, are

not automatically counterbalanced or
corrected in the next accounting
period.
Noncounterbalancing errors

Effects Example
 The income statement of the  Misstatement of
period in which the error is depreciation
committed is incorrect but
the succeeding income
statement is not affected.
 -The statement of financial
position of the year of error
and succeeding statement of
financial position are
incorrect until the error is
corrected.
Illustration
On January 1, 2019, the entity purchased an equipment with
useful life of 5 years for P500,000 but the same was
debited to repair and maintenance.
If the books for 2020 have not been closed, the entries to
correct the error on December 31,2020 are:

1. Equipment 500,000
Retained earnings 500,000
2. Depreciation ( 500,000/5) 100,000
Retained earnings 100,000
Accumulated depreciation 200,000

If the books for 2020 have been closed:

1. Equipment 500,000
Retained earnings 500,000
2. Retained earnings 200,000
Accumulated depreciation 200,000