ERROR CORRECTION BALANCE SHEET ERRORS

Prior Period Errors are omissions and
misstatements in the entity’s financial statements
for one or more periods
TREATMENT
Case Example: (Note: For simplification, we will
ignore taxes)
In 2016, a building was purchased for cash and the
entry was:

A prior period error shall be corrected by Machine xxxx

retrospective statement, meaning, if comparative Cash xxxx
statements are presented, the prior year statements The error was discovered in 2017. The correction is:
are restated to correct the error.
Building xxxx
The correction of the prior period error is an Machine xxxx
adjustment of the beginning balance of
RETAINED ERRORS of the earliest period
presented. INCOME STATEMENT ERRORS
TYPES OF ERRORS Case Example:
1. Balance Sheet Errors In 2016, the payment of a telephone bill was debited
2. Income statement errors to Advertising Expense.
3. Combined statement of financial position
If the error is discovered this year, the correction
and income statement errors
would be:
a. Counterbalancing Errors
b. Noncounterbalancing Errors Telephone Expense xxxx
Advertising Expense xxxx
Balance Sheet Errors – affect the real accounts only
If the error is discovered after this year, no
Income statement Errors – affect the nominal correction would be needed since these accounts
accounts only have been closed.

Combined balance sheet and income statement

Errors –affect both the statement of financial
COMBINED BALANCE SHEET AND
position and income statement
INCOME STATEMENT ERRORS
Counterbalancing errors –are errors which, if not
o Overstatement of Ending Inventory
detected, are automatically, counterbalanced or
corrected in the next accounting period On December 31, 2016, the physical count was
overstated by Php50,000.
Noncounterbalancing errors - are errors which, if
not detected, are not automatically counterbalanced
or corrected in the next accounting period.