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Error Correction

The document discusses error correction in financial statements (FS), highlighting the distinction between current and prior period errors, and the appropriate treatment for each. Prior period errors must be corrected retrospectively, affecting retained earnings, while errors in the statement of financial position and income statement require reclassification based on the timing of their discovery. It also categorizes errors into counterbalancing and noncounterbalancing errors, explaining their implications on net income and financial position over time.

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13 views3 pages

Error Correction

The document discusses error correction in financial statements (FS), highlighting the distinction between current and prior period errors, and the appropriate treatment for each. Prior period errors must be corrected retrospectively, affecting retained earnings, while errors in the statement of financial position and income statement require reclassification based on the timing of their discovery. It also categorizes errors into counterbalancing and noncounterbalancing errors, explaining their implications on net income and financial position over time.

Uploaded by

justinenakpil09
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Error correction

Errors can arise in respect of the recognition, measurement,


presentation or disclosure of elements of FS

Potential current period errors are corrected before the authorization of


issue of the FS

But some errors are found at the subsequent period (after the issuance
of FS from prior period). That is corrected in the comparative
information presented in FS for the current period

Prior period errors


Errors from previous one or more periods arising from a failure to use or
misuse reliable information that:

 was available when the FS is already authorized or

 could be reasonably taken into account in preparation and


presentation of those FS (automatic assumption to taken account for
pero di pala)

Could also include, mathematical mistake, mistake in applying


accounting policy, oversight or misinterpretation of facts, and fraud

Treatment of prior period errors


Shall be corrected retrospectively (past to present period).

Any adjustment will change the beginning retained earning balance of


the earliest period

Errors in Statement of Financial Position


Arise from erroneous classification of real accounts only, Asset, Liability
and Equity.

Simply make an entry that will reclassify an account to its rightful


classification. For instance, if may preference share that is erroneously
classified as ordinary share, simply debit ordinary share and credit
preference share.
Errors in Income Statement
Similar to Errors in balance sheet except it pertains to nominal accounts
only.

Reclassification is necessary only if the mistake is discovered in the same


year. However, if it is discovered in the subsequent year, no reclassifying
entry needed since nominal account lang naman siya and it does not
affect the current year’s balances in nominal account.

Combined errors in statement of financial position and income


statement

This type of error affects the net income and financial position. For
example;

When accrued salaries payable is overlooked, it could;


 Salaries expense understated or overstated
 Liability understated or overstated
 Net income overstated or understated
 Retained earnings (if corpo) overstated or understated

This combined error is classified as counterbalancing errors and


noncounterbalancing errors

Counterbalancing errors
These are overlooked errors that will counterbalanced or correct itself
after 2 periods.

Effects are;
 Income statement is incorrect for 2 successive periods
 Financial position is incorrect for first period, but correct itself at the
end of second period

Examples are:
 Inventories (includes sale and purchases)
 Prepaid/accrued expenses
 Deferred/accrued income
Noncounterbalancing errors
These are overlooked errors that will counterbalanced or correct does
not itself after 2 periods.

Example of this is misstatement of depreciation

It is important to note if the books is closed or not, since dun mo


malalaman kung gagamit ka ba ng retained earnings na account for
adjusting or not.

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