Handout # 1 Types Of Error

CORRECTION OF ERRORS
 Balance sheet errors
Error
 Income statement errors
 Mistake in gathering or processing data from which  Combined BS and IS
financial statements are made.
 Incorrect accounting estimates arising from oversight  Counterbalancing error
or misinterpretation of facts.  Non-Counterbalancing error
 Mistake in the application of accounting principles
relating to measurement, recognition classification
presentation or disclosure. Statement of financial position affects only A=L+C
1. Error discovered in the error year, the company
reclassifies the item to its proper position (BS to BS = No
Prior Period Error (Treatment) effect to NI)
According to PAS 8 par 42, “an entitiy shall correct material 2. Error in a prior year is discovered in a subsequent period
prior period error retrospectively in the first set of financial the company should restate the Statement of financial
statement authorized issue after their discovery by: position of the prior year for comparative purposes

 Restating the comparative amounts for the prior

period(s) presented in which the error occurred or
Example
 If the error occurred before the earliest prior period Land 10,000 2019 war erroneously debited to Notes
presented restating the opening balance of asset, receivable.
liability and equity for the earliest prior period
presented Client Audit Adjusting
NR 10,000 Land 10,000 Land 10,000
Cash 10,000 Cash 10,000 NR 10,000
Limitation
A prior period error shall be corrected by retrospective ( Real to Real No effect Net income)
restatement except to the extent that it is impracticable.

Example ( Statement of financial position)

Basic Correction
Melvin Company reported net income for the first two year of
Error affecting N.I Effect Relationship
operation as follows
Sales Overstated Over Direct
2018 - 5,000 2019 -6,000
CoGs Overstated Under Inverse
Expense Overstated Under Inverse
In an audit of the financial statement for the year ended
December 31,2019 the following errors are discovered (all
error were made in 2018) :
Error Inventory Effect Relationship
 Notes Receivable of 1,000 was erroneously debited to
Beginning Overstated Over Direct
accounts receivable
Purchases Overstated Over Direct
 Notes payable 1,500 was erroneously credited to accounts
Ending Overstated Under Inverse payable

 Land of 10,000 was erroneously debited to investment

Working capital property account

Capital used in day-to-day trading operations.

(CA-CL)
Requirement
Error WC Effect Relationship 1) Compute for the adjusted net income in 2018 and 2019 and
retained earning as of the years ended December 31,2018 and
CA Overstated Over Direct
2019
CL Overstated Under Inverse
2) Prepare adjusting entries assuming errors were discovered
in (2018),(2019),(2020)
Answer key

Requirement 1

Unadjusted Balances N.I 2018 2019 Statement of comprehensive income

5,000 6,000
Errors affecting only the incomestatement accounts and may
NR is Under AR Over N.E N.E included improper classification of revenues or expenses

NP is Under AP Over N.E N.E Must make a reclassification entry when it discovers the error
in the error year.
Land Under I.P Over N.E N.E
If error discovered pertain to a prior year, the company should
restate the income statement of the prior year for comparative
Unadjusted RE 2018 2019 purposes

5,000 11,000 If 2 nominal account involves an error net income and retained
earnings is unaffected.
NR is Under AR Over N.E N.E
(IS to IS = No effect in net income)
NP is Under AP Over N.E N.E
Example 1
Land Under I.P Over N.E N.E
Rent income amounting to 1,000 in 2019 was credited instead
of interest income.
Requirement Number 2 Adjusting entries
2018 : NR 1,000 2019 2020
AR 1,000
Rent income 1,000 No entry
AP 1,500
Interest income 1,000
NP 1,500

Land 10,000
Example 2
I.P 10,000
Love Company reported net income for the first two years of
2019 : Land 10,000 operation
I.P 10,000 2019 - 3,000 2020 - 4,000
2020: Land 10,000 In an audit of the financial statement for the year ended
I.P 10,000 December 31,2020 the following error are discovered:

 Interest expense of 2,000 in 2019 was erroneously debited

to rent expense
In 2019 and 2020 there are no adjusting entries for the errors
on the notes receivable and payable because they are  Office supplies expense of 2,500 in 2019 was erroneously
assumed to have been settled or received at the end of those debited to purchases
years  Rent income of 3.000 in 2019 was erroneously credited to
miscellaneous income

Requirement

1) Compute for the adjusted net income in 2019 and 2020 and
retained earning as of the year ended December 31,2019 and
2020.

2) Prepare adjusting entries assuming error were discovered in

(2019),(2020),(2021)
Answer key Combined statement of financial position and income
statement errors ( mas mahirap na)
Requirement 1
 Errors affecing both BS and IS can be classified as
Unadjusted balance N.I 2019 2020
1. Counter balancing errors
3,000 4,000
2. Non-counterbalancing errors
1)Int exp under, N.I Over
Counterbalancing errors - are error that will offset or be
Rent Over, N.I under N.E N.E
corrected over two accounting periods
2)Sup.Exp under, N.I Over
Samples of omission
Purchases over, N.I Under N.E N.E
1) Deferred expense (expense method)
3) Rent.I under, N.I Under
Note ( na expense na lahat pero dapat may asset pa)
Misc. I over, N.I Over N.E N.E
2) Deferred income (Revenue method)

Note ( Na revenue lahat pero dapat may Unearned pa)

Requirement 2
3) Accrued expense
2019 Int exp 2.000
Note ( Dapat mag accrue hnd nag record)
Rent exp 2,000
4) Accrued revenues
Office sup exp 2,500
Note ( Dapat mag accrue hnd nag record)
Purchases 2,500
Overstatement and understatement of the following
Misc exp 3,000
5) Sales not recorded in the first year and subsequently
Rent inc 3,000 recorded the following year ( or vice versa)
2020 No adjusting entry 6) Purchase not recorded in the first year and subsequently
recorded the following year (or vice versa)
2021 No adjusting entry
7) Error affecting ending inventory and beginning inventory

In 2020 and 2021, adjusting entry for the error because the
effect of the error will offset when closed to the retained
earnings
Example 1 Combined and counter balancing error
Melvin pogi company reported net income for a two-year
period as follow:

2019- 120,000 2020 - 180,000

In an audit of the financial statment for the year ended

December 31,2019 the following errors are discovered

1) The company paid one-year insurance premium of 18,000

effective may 1,2019. the entire amount was debited to
expense account and no adjustment was made at the end of
2019

2) The company leased a portion of its building for 24,000. the

term of the lease is one year ending june 1, 2020. Collection of
rent was credited to rent revenue account. At the end of 2019,
no entry was made to make up the unearned portion of the
amount collected

3) Accrued salaries expense of 12,000 was not recorded at the

end of 2019.

4) Accrued interest receivable of 15,000 was not recorded at

the end of 2019.
Requirement: Answer key

1 Compute for the adjusted netincome in 2019 and 2020 and Requirement 1
retained earning as of the years ended December 31,2019 and
Unadjusted Bal. N.I RE
2020.
Year 19 20 19 20
2 Give the effect of the error in the 2019 Working capital
120k 180k
3 prepare adjusting entries assuming errors were discovered in
1)Ins.exp-O, N.I-U 6k (6k) 6k
(2019),(2020),(2021)
2)Rev -O, N.I -O (10k) 10k (10)

3)Sal exp -U, N.I-O (12K) 12K (12k)

4)Int.inc-U, N.I-U 15k (15k) 15k

Adjusted 119k 181k 119k 300k

Requirement 2 Working capital 2019

1) Int.exp over P.insurance -U, WC U 6000

2) Rev over Unearned Rev - U,WC O (10000)

3) Sal exp -U , Sal pay - U , WC O (12000)

4) Int income -U, Rent receive - U, WC U 15000

Effect in working capital is over 1000

Requirement 3

2019

Prepaid ins (18k*4/12) 6000

Insurance expense 6000

Rent rev (24k*5/12) 10000

Unearned rent 10000

Salaries Exp 12000

Accrued int payable 12000

Interest receivable 15000

Interest income 15000

2020

Insurance Expense (18,000*4/12) 6000

Retained Earnings 6000

Retained Earnings 10000

Rent revenue(24000*5/12) 10000

Retained Earnings 12000

Salaries Expense 12000

Interest Income 15000

Retained Earnings 15000

2021 - No adjusting entries

 Answer key

Non-Counterbalancing Errors Requirement 1

1) Prepayments under the asset method N.I R.E

2) Precollection under the liability method 19 20 19 20

3) Error recording depreciation Unadjusted bal. 6M 8M 6M 14M

4) Improper capitalization of expense 1)Ins.Exp, N.I-O (180k) (60K) (180k) (60k)

5) Improper expensing of capital expenditure 2)Rev- U, N.I - U 320k 160k 320k 480k

6) Error in recording of proceeds of sales of an asset as other 3)Dep.-U, N.I-O (12k) (12k) (12K)
income
4)Dep-O,N.I-U 14k 14k

5)BD exp-U, N.I-O 11k 11 11k

Example
6,117,000 8,114,000 6117000 14,231,000
Lisa company reported net income for a two-year period as
follows:
Requirement 2
2020- 6,000,000 2020 - 8,000,000
Effect in working capital
In an audit of the statement for the year ended December
31,2019 the following error are discovered 1) Ins exp-U,prepaid ins-O WC over (180,000)
1) The company paid one-year insurance premium of 240,000 2) Rev-U,Unearned rev- Over,WC under 320,000
effective april 1,2019 . The entire amount was debited to asset
account and no adjustment at the end of 2019 3) Dep-U, Accum Dep-U WC No effect

2) The company leased a portion of its building for 480,000. 4) Same with number 3
The term of the lease is one year ending april 30,2020 . 5) Bad exp -U, Allowance -U Wc over (11,000)
Collection of rent was credited to unearned rent revenue
account. At the end of 2014, No entry was made to take up the Effect of working capital understated 129,000
earned portion of the amount collected

3) Depreciation Expense in 2019 was understated by 12,000 Requirement 3

4) Depreciation expense in 2020 was overstated by 14,000 2019
5) Bad debts expense of 11,000 was not recorded in 2019.4.26 Insurance.exp 180,000

Prepaid,ins 180,000
Requirement Unearned rev 320,000
1) Compute for the adjusted net income in 2019 and 2020 and Rent.rev 320,000
retained earnings end December 31,2019 and 2020
Depreciation.Exp 12,000
2) Give the effect of the error in the 2019 working capital
Accumulated. Dep 12,000
3) Prepare adjusting entries assuming errors were discovered
in (2019), (2020), (2021) Bad debt Expense 11,000

Allowanec for Doubtful Accounts 11,000

2020

Retained earnings 180,000

Insurance.Exp 60,000(240*3/12)

Prepaid Ins. 240,000

Retained earnings 180,000

Prepaid ins. 180,000

Unearned.R 160,000

Rent. R 160,000
Unearned.Rent 320,000

Retained earnings 320,000

Retained earnings 12,000

Accumulated Dep 12,000

Accumulated.Dep 14,000

Depreciation.exp 14,000

Retained earnings 11,000

Allowance for Doubtful Accounts 11,000

2021

Retained earnings 240,000

Prepaid Insurance 240,000

Unearned Rent revenue 480,000

Retained earnings 480,000

Retained earnings 12,000

Accumulated Depreciation 12,000

Accumulated Depreciation 14,000

Retained earnings 14,000

Retained earnings 11,000

Allowance for doubtful accounts 11,000