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01 Correction of Errors Final 1

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264 views2 pages

01 Correction of Errors Final 1

Uploaded by

Imee Nichole Balo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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01 CORRECTION OF ERRORS

What is an Accounting Error?

Accounting errors are misstatements in the Financial Statements which are not intentionally made. This includes but not limited to
Omissions, Transposition, Incorrect application of principles, misclassification of accounts and duplicate recording.

Errors may affect one of the financial statement or the complete set of financial statement (pervasive errors). Errors can also be Counter
balancing or non-counter balancing. Adjustment of Accounting errors may affect the Net Income or Retained Earnings depending on the
year it was incurred.

Difference of Error and Fraud

Fraud refers to an intentional act by an individual to misstate the financial statements to obtain an unjust or illegal advantage while error
refers to the misstatement that are not intentionally made by individuals among management.

Counter balancing errors

Are accounting errors that offset or cancel each other out over two or more accounting periods and may affect financial statements in
one period but are automatically corrected in subsequent periods, without any intentional corrections being made.

Examples of counter balancing errors:


a. Omission of Accrued expenses;
b. Omission of Accrued revenue;
c. Omission of Deferred expenses;
d. Omission of Deferred income;
e. Sales recorded erroneously in the subsequent year and not recorded in the following year or vice versa;
f. Purchases recorded erroneously in the following year but not recorded in the subsequent year or vice versa; and
g. Error affecting ending inventory

Non-counter balancing errors

Accounting errors that do not self-correct in subsequent period that gives a continuing impact on the financial statement until corrected.
Unlike counterbalancing errors, they persist and can affect the accuracy of the financial statements and mislead the users indefinitely.

- EFFECT OF ERRORS TO NET INCOME:


1. Consider all Current Period Errors (Counter Balancing* or Non-counter balancing**)
2. Consider all Immediate Prior Year Counter Balancing Errors
3. Ignore all Prior Years’ Non-counter balancing errors
* The effect of a COUNTERBALANCING ERROR to net income of the year of incurrence and the year following
the year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Counter Balancing Error in an ASSET
(e.g. Prepayments, Accrued income, Inventory, DIRECT INDIRECT
end, AR/Sales, Advances to suppliers)
Counter Balancing Error in a LIABILITY
(e.g. Unearned income, Accrued expense, INDIRECT DIRECT
AP/Purchases, Advances from customers)
** The effect of a NON-COUNTERBALANCING ERROR in net income of the year of incurrence and the year
following the year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF SUBSEQUENT YEAR
INCURRENCE
Non-Counter Balancing Error in an ASSET DIRECT NO
EFFECT
Non-Counter Balancing Error in a INDIREC NO
LIABILITY T EFFECT
- EFFECT OF ERRORS TO RETAINED EARNINGS, END (AFTER CLOSING ENTRIES):
1. Consider all Current Period Errors (CB or NCB)
2. Ignore all Prior Year Counter Balancing Errors
3. Consider all Prior Years’ Non-counterbalancing Errors (as they affected the prior years’ net income)

Various Activity for Accounting Errors:

Problem 1:

The Audited Income statement of Luffy shows a net income of P175,000 for the year ended December 31, 2023. Adjustments were made
for the following errors:

1. December 31, 2022, inventory overstated by P22,500


2. December 31 2023, Inventory Understated by P37,500
3. A P10,000 customer’s deposit received in December 2023, was credited to sales in 2023. The goods were actually shipped in
January 2024.

What is the unadjusted net income for the year ended December 31, 2023?

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Problem 2:

The audit of the December 31, 2023, financial statements of Usop Company reveals the following:

a. Dividends declared on December 10, 2021 and 2022 had not been recorded in the books until paid.
b. Improvements in buildings and equipment of P9,600 had been charged to expense at the end of April 2020. Improvements are
estimated to have an 8-year life. The company computes depreciation to the nearest month and uses the straight-line method of
depreciation.
c. The company failed to recognized supplies on hand of P1,200 and P2,500 at the end of 2022 and 2023, respectively
d. The company had failed to record sales commissions payable of P2,100 and P1,700 at the end of 2022 and 2023 respectively.
e. The physical inventory of merchandise had been understated by P3,000 at the end of 2021, and by P4,300 at the end of 2022.
f. The merchandise in transit and to which the company had title at December 31, 2022 and 2023 was not included in the year-
end inventories. These shipments of P3,800 and P5,500 were recorded as purchases in January 2023 and 2024, respectively.

The company reported a net loss of P12,400 for the year ended December 31, 2023.

Furthermore, retained earnings account of Usop is reproduced below:


Date Particulars Debit Credit
2021
Jan 1 Balance 81,000.00
Dec 31 Net Income for the year 18,000.00
2022
Jan 10 Dividends paid 15,000.00
Mar 6 Stock sold -excess over par 32,000.00
Dec 31 Net loss for the year 11,200.00
2023
Jan 9 Dividends paid 15,000.00
Dec 31 Balance 89,800
Total 131,000.00 131,000.00

Requirement:
1. Prepare the necessary adjusting journal entries at December 31, 2023.
2. What is the corrected net income/(loss) of Usop for the year ended December 31, 2023?

Problem 3: Counter balancing error

Case 1: The company paid one-year insurance premium of P12,000 effective April 1, 2021. The entire amount was debited to expense
account and no adjustment was made at the end of 2021.

Case 2 : Accrued salaries expense of P4,000 was not recorded at the end of 2021

Case 3: The company leased a portion of its building for P12,000. The term of the lease is one year ending April 30, 2022. The collection
of rent was credited to rent revenue account. At the end of 2021, no entry was made to take up the uneared portion of the amount collected

Case 4: Sale of merchandise on account on December 29, 2021 amounting to P20,000 was not recorded until it was collected on January
2022. The merchandise was properly excluded in the ending inventory in 2021.

Case 5: On December 31, 2021, the ending inventory was overstated by P5,000

What is the effect in the following CY 2021 and 2022 balances (Indicate in the space provided whether Overstated (O), Understated (U)
or No Effect (NE):

Particulars Case 1 Case 2 Case 3 Case 4 Case 5


2021 2022 2021 2022 2021 2022 2021 2022 2021 2022
Asset
Liability
Revenue
COS/Expense
Net Income
Retained
Earnings

References:
Auditing and Assurance by Assuncion
Auditing problems by Roque
Intermediate Accounting by Valix
RESA Review School
CPAR

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