PAMANTASAN NG LUNGSOD NG VALENZUELA

FINANCIAL ACCOUNTING AND REPORTING III

LECTURE: ERROR CORRECTION

Prior period errors are omissions 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 accounts in the preparation and presentation
of those financial statements.

Treatment for prior period errors.

An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized
for issue after their discovery.

Types of errors.
1. Statement of financial position errors – are errors that affect the statement of financial position or real accounts only,
meaning, improper classification of an asset, liability and capital account.

2. Income statement errors – are errors that affect the income statement or nominal accounts only, meaning, the
improper classification of revenue and expense account.

3. Combined statement of financial position and income statement errors – are errors that affect both the financial
statement of financial position and income statement because they result in a misstatement of net income.

 Counterbalancing errors – are errors which, if not detected, are automatically counterbalanced or corrected in the
next accounting period.
This error normally include the misstatement of the:
a. Inventory, including purchases and sales.
b. Prepaid expenses
c. Accrued expenses
d. Deferred income
e. Accrued income

 Noncounterbalancing errors – are errors which, if not detected, are not automatically counterbalanced or corrected
in the next accounting period.
This error normally include the misstatement of the:
a. Depreciation
b. Amortization

ILLUSTRATION 01:
An entity reported net income for 2014 P3,000,000, 2015 P4,000,000, and 2016 P3,500,000. The following errors were
discovered at the end of 2016:
1. December 31, 2014 inventory, overstated P 120,000
2. December 31, 2016 inventory, understated 210,000
3. December 31, 2014 accrued interest payable, understated 40,000
4. December 31, 2016 accrued interest payable, overstated 90,000
5. Depreciation for 2015, understated 180,000
6. Depreciation for 2016, overstated 30,000

Required: Compute for the adjusted net income and the under/overstatement in retained earnings and working capital on
2014, 2015 and 2016.

ACCTG6: Lecture 15 jvacpa Page 1 of 2

ILLUSTRATION 02:
An entity reported net income for 2014 P1,500,000, 2015 P2,000,000 and 2016 P2,800,000. An audit disclosed the
following:
a. Accounts receivable instead of notes receivable was debited in 2016 P 20,000
b. Purchases account was debited in 2016 instead of office supplies 5,000
c. The physical inventory on December 31, 2014 was overstated 10,000
d. The physical inventory on December 31, 2015 was understated 15,000
e. Advances to supplier were recorded as purchases but the merchandise was received in
subsequent year:
2014 30,000
2015 40,000
f. Advances from customers recorded as sales but the goods were delivered in the following
year:
2014 25,000
2015 50,000
g. Insurance premium for three years paid in 2014 was charged entirely to expense in 2014 15,000
h. Salaries accrued not recorded:
2014 30,000
2015 60,000
i. Rent for two years received in 2015 was entirely credited to income 10,000
j. Unrecorded accrued interest receivable:
2015 10,000
2016 25,000
k. Improvements on building had been charged to expense on January 1, 2015. Improvements
have a life of 5 years. 100,000
l. On January 1, 2015, an equipment costing P40,000 was sold for P20,000. At the date of sale,
the equipment had an accumulated depreciation of P25,000. The cash received was recorded as
other income in 2015.

ACCTG6: Lecture 15 jvacpa Page 2 of 2