CORRECTION OF ERRORS – IAS 8

Prior period errors are omissions from and misstatements in the entity’s Illustrative Examples:
financial statements for one or more periods arising from a failure to use or Statement of financial position error
misuse of reliable information that: You note the following transaction made by the accountant of Careless Co. for
a. Was available when financial statements for these periods were the year:
authorized for issue. • Debited notes receivable account amounting to P15,000 on February 20, a
b. Could reasonably be expected to have been obtained and take into sale on account from a customer. No promissory note was received from
account in the preparation and presentation of those financial statements. the said transaction.
Example of prior period error: • During the year, the company purchased an office supplies amounting to
• Mathematical mistakes P9,600. The accountant debited the office supplies amounting to P6,900.
• Oversights or misinterpretation of facts • On December, the company purchased a land amounting to P1.5 M. The
• Mistake in applying accounting policies entity debited Land and credited Cash from that transaction. The
• Fraud company’s intention is to sell the land in the future, expecting to sell in a
TYPES OF ERROR higher price.
A. Statement of financial position errors • Related to the land purchased in December, it was purchased by
Accounts Affected: Real Accounts only (B/S Accounts) acquiring a loan from a bank amounting to 1M. There was no journal
Improper classification of Asset, Liability and Capital Account entry recognizing the loan acquired by the company.
Correction: Reclassify the account balances • The company made purchases from its supplier amounting to P250,000.
B. Income statement errors The company made a promissory note for the 1/3 of the purchased
Accounts Affected: Nominal Accounts only (I/S Accounts) inventory. No entry was made for the promissory note.
Improper classification of Revenue and Expenses Requirements: Prepare the necessary adjusting entry to correct the errors
Correction: Reclassify the account if the error is discovered in the same made by the company.
year it is committed but if the discovery of error is in subsequent
year, no need to reclassify accounts because the nominal accounts
for the current year are correctly stated
C. Combined statement of financial position and income statement errors
Accounts Affected: Both Real and Nominal Accounts
Result in a misstatement of net income
Correction: It depends whether the error is counter balancing or non-
counterbalancing
Example: If accrued salaries payable is overlooked, the effects are;
a. Salaries expense is understated (income statement error) Income statement error
b. Liability is understated (statement of financial position error) P1: The company prepared the income statement for the year ended:
c. Net income is overstated (income statement error) Sales 1,500,000
d. Retained earnings account is overstated (statement of financial Cost of sales 780,000
position error) Gross Profit 720,000
2 TYPES OF MIXED ERRORS Operating Expenses 430,000
1. Counterbalancing errors Profit 290,000
Effect of Error: • A credit sale from a customer in November amounting to P87,600 was
1. The income statements for two successive periods are entered as P86,700.
incorrect. • Interest expense was included as part of the operating expenses as part
2. The statement of financial position at the end of the first of the Rent expense.
period is incorrect. • Amortization of the used advertisement was charged as part of the office
3. The statement of financial position at the end of the supplies used amounting to P12,000.
second period is correct. Requirement: What amount should be reported as profit for the year?
Effect in Subsequent Years:
If not detected, they are automatically counter balanced or
corrected in the next accounting period.
NOTE: The following are commonly included the list of counterbalancing errors:
✓ Inventory, including purchases and sales
✓ Prepaid expenses
✓ Deferred income P2: Since its establishment three years ago, Mikasa Aekerman Corporation has
✓ Accrued income failed to acknowledge accruals and deferrals.
✓ Accrued expense The following are the accruals and deferrals as the end of 2022 and 2023:
2. Non counterbalancing error 2022 2023
Effect of Error: Prepaid expenses P45,000 P50,000
1. The income statement of the period in which the error is Accrued wages 60,000 75,000
committed is incorrect but the succeeding income statement Rent revenue collected in advance 80,000 90,000
is not affected. Interest receivable 55,000 71,000
2. The statement of financial position of the year of the error and Requirement: What is the net effect of the above errors in 2023 net income?
succeeding statements of financial position are incorrect
until the error is corrected.
Effect in Subsequent Years:
They are not automatically counterbalance or corrected.

Compiled and edited by: J. P., CPA

Mixed error
P1: During the year 2020, Eren Yeager Company determined that its ending
inventory was misstated by the following amounts: P3: AOT Company showed the following errors in their account during
2018 P120,000 understated December 31, 2021:
2019 150,000 overstated • Dividends of P100,000 had been declared but was not recorded on
The company used the periodic system to establish the year-end quantities December 10, 2021.
that are converted to peso amounts using FIFO method. • Buildings and equipment maintenance for P480,000 had been debited to
Requirement: How much would Eren’s accumulated earnings and losses be on expense at the end of April 2020. It had an estimated life of 8 years.
January 1, 2020, be affected by these errors, disregard the income taxes? • The company failed to record sales commissions payable amounting to
P10,500 and P19,000 at the end of 2020 and 2021 respectively.
• Supplies on hand amounting to P6,000 and P15,000 were not recognized
at the end of 2020 and 2021 respectively.
• Physical inventory count on December 31, 2020 excluded a product
costing P38,000 that had been temporarily stored in a public warehouse.
The company uses a periodic inventory system.
• A competitor filed a patent infringement in 2020 against Evangeline. The
competitor is claiming P440,000 worth of damages. Evangeline's legal
counsel has indicated that an unfavorable verdict is probable and a
reasonable estimate of the court's award to the competitor is P250,000.
The company did not disclose the situation in their financial statement.
P2: In the course of your examination of the December 31, 2023, financial • A trademark was acquired at the beginning of 2019 for P100,000. No
statements of PARADIS ISLAND COMPANY, you discovered certain errors that amortization has been recorded ever since. The company's policy is to
had occurred during 2022 and 2023. No errors were corrected during 2022. The amortize all intangibles with a definite life for a maximum of 20 years. At
errors are summarized below: the time of acquisition, the trademark was estimated to have a definite
1. Beginning merchandise inventory (January 1, 2022) was understated by life of 20 years.
P259,200. Requirements:
2. Merchandise costing P72,000 was sold for P120,000 to Naval Company on 1. What is the net effect if the errors in the 2020 net income?
December 28, 2022, but the sale was recorded in 2023. The merchandise 2. What is the net effect of the errors in the 2021 net income?
was shipped FOB shipping point and was not included in the ending 3. What is the effect of the error in the 2021 retained earnings?
inventory. Paradis Island uses a periodic inventory system.
3. A two-year fire insurance policy was purchased on May 1, 2022, for
P172,800. The whole amount was charged to Prepaid Insurance. No
adjusting entry was prepared in 2022 and 2023.
4. A one-year note receivable of P288,000 was held by Paradis Island
beginning October 1, 2022. Payment of the 10% note and accrued interest
was received upon maturity. No adjusting entry was made on December
31, 2022.
5. Equipment with a 10-year life was purchased on January 1, 2022, for
P1,176,000. No depreciation expense was recorded during 2022 or 2023.
Assume that the equipment has no residual value and that Paradis Island
uses the straight-line method for recording depreciation.
Requirement: Prepare journal entries to correct each of the errors described
above. Assume that the nominal accounts for 2018 have not yet been closed
into the income summary account.

Compiled and edited by: J. P., CPA