Correction of Errors, Cash & Accrual, Single & Double Entry
Glen DV. De Leon, Ph.D, CPA
ERRORS
No company whether large or small is immune from errors. Errors may be intentional or unintentional. Intentional
errors are significant because of the presence of fraud or intent to deceive. These errors are made for the purpose of
concealing fraud or misappropriation, evading taxes, manipulating or window-dressing the company's financial statements.
Unintentional errors were not deliberately committed. They result from carelessness or ignorance on the part of the company's
personnel or it may result from poor internal control.
The risk of material errors may be minimized through the installation of good internal control and the application of
sound accounting procedures. Prior period adjustments, also called fundamental errors are reported in the current year as
adjustment in the beginning balance of the Retained Earnings account. Prior period statements should be restated to correct
the error when comparative statements are prepared.
Accounting Procedure:
1. If detected in the period the error occurred, correct the accounts through normal accounting cycle
adjustments.
2. If detected in subsequent period, adjust errors by making prior period adjustments directly to Retained
Earnings or restate the beginning balance of the Retained Earnings account.
3. Correct all previously presented prior period statements.
Examples of Accounting errors:
a. A change from an accounting principle that is not generally accepted to an accounting principle that is generally
accepted.
b. Mathematical mistakes
c. Mistake in the application of accounting of accounting principle
d. Oversight
e. Misuse of facts
f. Incorrect classification of expense as an asset or vice versa
g. Changes in estimates which are not prepared in good faith
TYPES OF ERRORS
1. Balance Sheet Errors
This type of error refers to improper classification of real accounts such as assets, liabilities or stockholders' equity
accounts. They have no effect on net income
2. Income Statement Errors
This type of error affects only the presentation of nominal accounts in the Income Statement. It involves the
improper classification of revenues and expenses accounts, hence, only the details of the Income Statement are misstated. A
reclassifying entry is necessary only if the error is discovered in the same year it is committed. It has no effect on the Balance
sheet and in the Income Statement. If the error is discovered in a subsequent year, no classification entry is necessary.
3. Combined Balance Sheet and Income Statement errors
This affects both the balance Sheet and the Income Statement because they result in the misstatement of net
income.
Classifications of Combined Balance Sheet and Income Statement Errors:
a. Counter Balancing Errors
Errors which if not detected are automatically offset or corrected over two periods. Restatement is
necessary even if a correcting journal entry is not required.
Effect: Net Income of two successive periods are misstated. The amount of misstatement in one period is
equal to but opposite in effect in the income of the next period.
Counterbalancing errors include the misstatements of the following accounts:
1. Inventories to include the following
a. Purchases
b. Sales
2. Prepaid expenses
3. Deferred Income
4. Accrued expense
5. Accrued Income
GUIDELINES
Books are open
1. If the error is already counterbalanced and the company is in the second year, an entry is
necessary to correct the current period and to adjust the beginning balance of the Retained
earnings.
2. If the error is not yet counterbalanced, an entry is necessary to adjust the beginning balance of
the Retained earnings and correct the current period.
Books are closed
1. If the error is already counterbalanced, no entry is necessary.
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2. If the error is not yet counterbalanced, an entry is necessary to adjust the present balance of the
Retained earnings.
b. Non Counter Balancing Errors
Errors which take longer than two periods to correct themselves. This type of error is carried over to the
subsequent accounting period until corrected or until the balance sheet item involved is removed from the
accounts by sales, retirement or other means of disposal.
GUIDELINES IN ERROR ANALYSIS
1. What accounts are affected?
2. How were these accounts affected? Was there an understatement or an overstatement?
3. What was the erroneous entry made or what was the entry omitted?
4. What is the correct entry?
5. What is the necessary adjusting or correcting entry?
PROBLEM 1: CORRECTION OF ERRORS: The following selected accounts are included in the trial balance of ARAL NA MUNA
AKO Company. on December 31, 2017:
Debit Credit
Supplies on hand P162,000
Accrued salaries payable P90,000
Interest receivable 306,000
Prepaid insurance 5,400,000
Unearned rent
Accrued interest payable 900,000
Additional information is as follows:
1. A physical count of supplies on hand on December 31, 2017 totaled P66,000.
2. The accountant failed to adjust the accrued salaries payable account. Accrued
salaries payable on December 31, 2017, totaled P264,000.
3. The interest receivable account was also left unadjusted at December 31, 2017.
Accrued interest receivable on December 31, 2017, amounted to P261,000.
4. The unexpired portions of the insurance policies totaled P3,900,000 as of December 31, 2017.
5. A total of P1,680,000 was received on January 1, 2017, for the rent of a building for both 2017 and 2018.
The total amount received was recognized as revenue in 2017.
6. The correct amount of depreciation for the year was P3,000,000 but was erroneously recorded as P300,000.
7. Prior years’ depreciation was understated by P432,000.
Prepare the necessary adjusting journal entries on December 31, 2017. Assume that the books have not been closed.
PROBLEM 2: CORRECTION OF ERRORS: TAMA NA MUNA ANG PARTY PARTY COMPANY’s December 31, year-end financial
statement contained the following errors:
December 31, 2016 December 31, 2017
Ending inventory P120,000 understated P108,000 overstated
Depreciation expense 24,000 understated -
An insurance premium of P90,000 was prepaid in 2016 covering the years 2016, 2017 and 2018. The same was charged to
expense in full in 2016. In addition, on December 31, 2017, fully depreciated machinery was sold for P192, 000 cash, but the
sale was not recorded until 2018. There were no other errors during 2016, 2017, and 2018 and no corrections have been made
for any of the errors. Ignore income tax considerations.
2016 NI (O) U 2017 NI (O) U 2017 RE (O) U 12/31/17 WC 12/31/18 WC
(O)U (O) U
EI 12/31/2016 -
EI 12/31/2017 -
DEP 2016 -
INSURANCE 2016 -
FULL DEP MACH.. -
-
QUESTIONS:
Based on the above and the result of your audit, answer the following:
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1. What is the total effect of the errors on the 2016 net income?
a. understated by 84,000 c. overstated by 201,500
b. understated by 156,000 d. no effect
2. What is the total effect of the errors on the 2017 net income?
a. overstated by 36,000 c. overstated by 66,000
b. overstated by 258,000 d. understated by 54,000
3. What is the total effect of the errors on the company’s working capital at December 31, 2017?
a. understated by 108,000 c. overstated by 84,000
b. understated by 114,000 d. no effect
4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2017?
a. understated by 60,000 c. overstated by 132,000
b. understated by 90,000 d. no effect
5. What is the total effect of the errors on the company’s working capital at December 31, 2018?
a. overstated by 78,000 c. understated by 192,000
b. understated by 114,000 d. no effect
CASH AND ACCRUAL BASIS
CASH BASIS EXPENSE
2020 2021 2022
INCURRED INCURRED INCURRED
Accrued expense beg. Prepaid expense end
PAID
ACCRUAL BASIS EXPENSE
2020 2021 2022
PAID PAID PAID
Prepaid expense beg Accrued expense end
INCURRED
CASH BASIS EXPENSE XXXX
ADD Prepaid expense beg xxxx
Accrued expense end xxxx
LESS
Prepaid expense end (xxxx)
Accrued expense beg (xxxx)
ACCRUAL BASIS EXPENSE XXXX
CASH BASIS INCOME
2020 2021 2022
EARNED EARNED EARNED
Accrued income beg Unearned income end
COLLECTED
ACCRUAL BASIS INCOME
2020 2021 2022
COLLECTED COLLECTED COLLECTED
Unearned income beg Accrued income end
EARNED
CASH BASIS INCOME XXXX
ADD Unearned income beg xxxx
Accrued income end xxxx
LESS Unearned income end (xxxx)
Accrued income beg (xxxx)
ACCRUAL BASIS INCOME XXXX
Cash basis Accrual basis
Cash sales 0 Cash sales 0
Add Collection of credit sales 450,000 Add SOA 500,000
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Sales cash basis 450,000 Sales accrual basis 500,000
ACCOUNTS RECEIVABLE
BEG BAL 150,000
SOA 500,000 COLLECTION OF CREDIT SALES 450,000
DISHONORED NR 10,000 W-OFF 15,000
RECOVERY OF AR (WORTHLESS) 5,000 SRA 3,000
SD 2,000
END BAL 195,000
Cash basis Accrual basis
Cash Purchases 0 Cash Purchases 0
Add Payment of POA 350,000 Add POA xxxx
Purchases cash basis 350,000 Purchases accrual basis xxxx
ACCOUNTS PAYABLE
BEG. BAL 75,000
Payment of POA 350,000 POA 400,000
PRA 2,000
PD 1,000
END. BAL 122,000
PROBLEM: CASH TO ACCRUAL: The income statement of KUNG HINDI KO ITITIGIL Corporation for 2017 included the following
items:
Interest income P2, 521,200
Salaries expense 1,980,000
Insurance expense 332,640
The following balances have been excerpted from KUNG HINDI KO ITITIGIL Corporation’s balance sheets:
1/1/2017 12/31/2017
Accrued interest receivable P198,000 P240,240
Accrued salaries payable 110,880 234,960
Prepaid insurance 39,600 29,040
Questions:
Based on the above and the result of your audit, determine the following:
1. The cash received for interest during 2017 was
a. P2,563,440 c. P2,521,200
b. P2,478,960 d. P2,280,960
2. The cash paid for salaries during 2017 was
a. P2,214,960 c. P1,869,120
b. P1,855,920 d. P2,104,080
3. The cash paid for insurance premiums during 2017 was
a. P322,080 c. P343,200
c. P293,040 d. P303,600
PROBLEM 9: CASH TO ACCRUAL: SIGURADO UULIT AKO Company paid or collected during 2017 the following items:
Insurance premiums paid P 554,400
Interest collected 1,112,400
Salaries paid 4,867,200
The following balances have been excerpted from SIGURADO UULIT AKO Company’s balance sheets:
1/1/2017 12/31/2017
Prepaid insurance P 54,000 P 43,200
Interest receivable 104,400 133,200
Salaries payable 381,600 442,800
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Questions:
Based on the above and the result of your audit, determine the following:
1. The insurance expense on the income statement for 2017 was
a. 565,200 c. 651,600
b. 543,600 d. 457,200
2. The interest income on the income statement for 2017 was
a. 729,000 c. 1,141,200
b. 1,083,600 d. 874,800
3. The salary expense on the income statement for 2017 was
a. 4,806,000 c. 1,620,000
b. 5,691,600 d. 4,928,400
PROBLEM 10: SINGLE ENTRY: We were given the following information which were obtained from the single-entry records of
HINDI NAGBIBIRO SI DOC G Company :
January 1 June 30
Interest receivable P 14,400 P 11,520
Accounts receivable 648,000 1,267,200
Notes receivable 216,000 172,800
Merchandise inventory 547,200 144,000
Store and office equipment (net) 468,000 432,000
Prepaid operating expenses 36,000 31,680
Interest payable 4,320 7,200
Accounts payable 504,000 360,000
Notes payable 144,000 172,800
Accrued operating expenses 38,880 72,000
An analysis of the cashbook shows the following:
Balance, January 1 P216,000
Receipts:
Interest income P 28,800
Accounts receivable 518,400
Notes receivable 216,000
Investment by HINDI NAGBIBIRO SI DOC G 86,400 849,600
P1,065,600
Disbursements:
Interest expense P 21,600
Accounts payable 748,800
Notes payable 115,200
Operating expenses 244,800 1,130,400
Balance, June 30-bank overdraft (P64,800)
QUESTIONS:
Based on the above and the result of your audit, determine the following for the six months ended June 30,2015:
1. Sales
a. P1,310,400 c. P158,400
b. P1,137,600 d. P1,396,800
2. Purchases
a. P691,200 c. P979,200
b. P604,800 d. P748,800
3. Operating expenses, excluding depreciation
a. P273,600 c. P282,240
b. P207,360 d. P277,920
4. Net loss
a. P 5,760 c. P 182,880
b. P158,400 d. P1,465,920
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