CORRECTION OF ERRORS

Prior period errors

are omissions from or misstatements in an entity's financial statements for one or more periods
arising from a failure to use, or misuse of, reliable information that was available and could be
obtained and taken into account in preparing those statements.

From IAS 8 Paragraph 42:

Correction of material prior period errors retrospectively in the first set of financial statements
authorized for issue after their discovery by:
• restating the comparative amount for the prior period(s) presented in which the error
occurred; or
• if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest period presented.

Common errors in the course of normal accounting procedures

• Math errors
• Posting to the wrong account
• Misstating an account
• Omitting an account from the trial balance
• Non-GAAP
• Incorrect accounting method

Classification of Errors
• Intentional or unintentional
• Material or immaterial
• Revealed or not by a trial balance
• Affects one period or several periods
• Affects SFP accounts only, IS accounts only or both
• Counterbalancing or non-counterbalancing

Error Corrections

Errors limited to statement of financial position accounts:

• Debiting Accounts Receivable instead of Notes Receivable
• Crediting Interest Payable instead of Notes Payable
• Debiting an Investment Property account instead of Land when property was purchased for
plant expansion
Errors limited to income statement accounts:
• Debiting Office Salaries instead of Sales Salaries
• Crediting Rent Revenue instead of Commissions Revenue

Errors affecting both income statement accounts and SFP accounts:

• Debiting Office Equipment instead of Repairs Expense
• Crediting Depreciation Expense instead of Accumulated Depreciation

There are errors in net income that are not detected, such as misstatement of inventories, that are
automatically counterbalanced in the following fiscal period.

And then, there are 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

If detected in the 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.

Inventory Errors
ERROR: Period 1 Inventory undervalued

EFFECTS ON THE BALANCE AT THE END OF:

Year 1 Year 2
Cost of sales overstated understated
Net income understated overstated
Retained earnings understated no effect
Inventory, end understated no effect

DKNY, Inc., began operations at the beginning of 2017. Before the accounts are adjusted and
closed for 2019, it was discovered that merchandise inventory as of December 31, 2017, was
understated by P3,000.
2019 Because this type of error counterbalances after two years, no
correcting entry is required
If the error discovered in Merchandise Inventory 3,000
2018 Retained Earnings 3,000
Error on Purchases
ERROR: Period 1 Purchase on account recorded in Period 2

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Purchases understated overstated
Cost of Sales understated overstated
Net income overstated understated
Retained earnings overstated no effect
Accounts Payable understated no effect

It is discovered that purchase invoices of December 31, 2017, for P1,500 had not been recorded
until 2018. The goods had been included in the inventory at the end of 2017.
2019 Because this type of error counterbalances after two years, no
correcting entry is required
If the error discovered in Retained Earnings 1,500
2018 Purchases/ Inventory 1,500
Purchase (if periodic system), Inventory (if perpetual system)

Error on Sales
ERROR: Period 1 Sale on account erroneously recorded in Period 2

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Sales understated overstated
Net income understated overstated
Retained earnings understated no effect
Accounts receivable understated no effect

It is discovered that sales on account of P20,500 for the last week of December 2018 had not been
recorded until 2019. The following correcting entry would be required in 2019.
Sales 20,500
Retained Earnings 20,500
Error on Accrual of Expense
ERROR: Accrued expense end of period 1 was not recorded (assuming paid on next period)

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Expenses understated overstated
Net income overstated understated
Retained earnings overstated no effect
Accrued Expenses understated no effect

Accrued sales salaries of P7,000 as of December 31, 2017, were overlooked in adjusting the
accounts. Sales Salaries is debited for salary payments.
2019 Because this type of error counterbalances after two years, no
correcting entry is required
If the error discovered in Retained Earnings 7,000
2018 Sales Salaries Expense 7,000

Error on prepaid expense (expense method)

ERROR: Prepaid expense as of the end of period 1 was not recorded

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Expenses overstated understated
Net income understated overstated
Retained earnings understated no effect
Prepaid Expenses understated no effect

It is discovered that the Miscellaneous Expense for 2017 of P4,500 that should have been deferred
in adjusting the accounts on December 31, 2017.
2019 Because this type of error counterbalances after two years, no
correcting entry is required
If the error discovered in Miscellaneous Expense 4,500
2018 Retained Earnings 4,500
Error on prepaid expense (asset method)
ERROR: Expired portion of the prepaid expense at the end of period 1 was not recorded

EFFECTS ON THE BALANCE AT THE END OF PERIOD 1

(Assuming expense account was properly recognized on period 2)
Period 1 Period 2
Expenses understated no effect
Net income overstated no effect
Retained earnings overstated overstated
Prepaid Expenses overstated overstated

Sander Co. paid three-month advanced rent for the period of Nov. 1, 2017 to Jan. 31, 2018,
P30,000. The payment was debited to Prepaid Rent. The expired portion of the rent was not
adjusted on Dec. 31, 2017. The error was not discovered until 2019.

Because this type of error does not counterbalance after two years, correcting entry is required
upon discovery of the error.
Retained Earnings (30,000 x 2 months/3) 20,000
Prepaid Rent 20,000

Error on Accrual of Income

ERROR: Period 1 Accrued revenue was not recorded
(Since short-term collectible, it will be collected in the following year and recognize revenue)

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Revenues understated overstated
Net income understated overstated
Retained earnings understated no effect
Accrued Revenues understated no effect

Accrued interest on notes receivable of P2,300 was overlooked in adjusting the accounts on
December 31, 2017. The revenue was recognized when the interest was collected in 2018
2019 Because this type of error counterbalances after two years, no
correcting entry is required
If the error discovered in Interest Income 2,300
2018 Retained Earnings 2,300
Error on Unearned Income (Income Method)
ERROR: Period 1 Unearned Income was not recorded
(Assumption is Unearned income in period 1 will be earned in the following year)

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Revenues overstated understated
Net income overstated understated
Retained earnings overstated no effect
Unearned Income understated no effect

Fees of P9,200 received in advance for miscellaneous services as of December 31, 2018, were
overlooked in adjusting the accounts. Miscellaneous Revenue had been credited when fees were
received. The correcting entry in 2019 is:
Retained Earnings 9,200
Miscellaneous Revenue 9,200

Error on Unearned Income (Liability Method)

ERROR: Period 1 Earned Income was not recorded
(Assumption is there was a proper recognition of income in period 2)

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Revenues understated no effect
Net income understated no effect
Retained earnings understated understated
Unearned Income overstated overstated

Sander Co. collected four-month advanced subscription for the period of Nov. 1, 2017 to Feb. 28,
2018, P40,000. The payment was credited to Unearned Subscription Income. The earned portion
of the subscription was not adjusted on Dec. 31, 2017. The error was not discovered until 2019.

Because this type of error does not counterbalance after two years, correcting entry is required
upon discovery of the error.
Unearned Subscription Income 20,000
Retained Earnings 20,000
Error on Depreciation
ERROR: Period 1 Depreciation was not recorded

EFFECTS ON THE BALANCE AT THE END OF

Period 1 Period 2
Depreciation expense understated no effect
Net income overstated no effect
Retained earnings overstated overstated
Accumulated Depreciation understated understated

Delivery equipment was acquired at the beginning of 2018 at a cost of P48,000. The equipment
has an estimated five-year life. Its depreciation of P9,600 was overlooked at the end of 2018 and
2019.

Misstatements arising from the failure to record depreciation are not counterbalanced in the
succeeding year. When the omission is recognized, Retained Earnings must be decreased by the
net income overstatements and Accumulated Depreciation-Delivery Equipment must be increased.
The 2019 correcting entry is

Retained Earnings (9,600 x 2) 19,200

Accumulated Depreciation-Delivery Equipment 19,200

Operating expenses of P20,000 were paid in cash at the beginning of 2018. 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 2018 and 2019. The
required correcting entry is:
Retained Earnings 12,000
Accumulated Depreciation- Equipment 8,000
Equipment 20,000

Disclosures:
1. Nature of prior period error;
2. For each prior period presented, to the extent practicable, the amount of the correction:
• for each FS line item affected; and
• if PAS 33 applies the entity, for basic and diluted earnings per share:
3. The amount of the correction at the beg. of the earliest prior period presented; and
4. If retrospective restatement is impracticable, an explanation and description of how the
error has been corrected.

Financial statements of subsequent periods need not repeat these disclosures.