CITY OF MALABON UNIVERSITY
College of Accountancy
Longos, Malabon
TOPIC: ERROR CORRECTION
Types of Errors:
1. Statement of Financial Position Errors . . . improper classification of a real account.
2. Income Statement Errors . . . improper classification of a nominal account.
3. Combination of (1) and (2) . . . counterbalancing and non-counterbalancing errors.
Prior Period Errors – The entity shall correct material prior period errors retrospective in the first set of FS authorized for issue after their
discovery by restating the net income and retained earnings of prior period.
Two types of Prior Period Errors:
A. Counterbalancing Errors – errors that affect both the net income of the year when the error was committed and the immediate year
thereafter in opposite directions. Counterbalancing errors affect pertinent real accounts only in the year of the commission of error. Real
accounts subsequent to the year of error are already correctly stated. Examples of counterbalancing errors are:
a. Omission of Accrued Expenses e. Omission of Accrued Income
b. Omission of Unearned Income f. Omission of Accounts Receivable/Sales
c. Omission of Accounts Payable/Purchases g. Understatement of Ending Inventories
d. Omission of Prepaid Expenses h. Overstatement of Ending Inventories
B. Non-Counterbalancing Errors – errors that affect only the net income of the year the error was committed. The net income of the
subsequent year is already correctly stated. Non-counterbalancing errors affect pertinent real accounts in the year the error was
committed and all the subsequent years, unless adjusted.
Use the following data in answering questions 1 through 5:
Net income for Escudo Company for the years 2024 and 2025 is shown below. A scrutiny of the accounts, however, disclosed the
following information:
2024 2025
Net income after tax P 24,650 P 31,250
Inventory understatement at year-end 2,500
Typewriter purchased at year-and charged
to expense (10-year life) 4,000
Merchandise purchased on account not
recorded as liability but included
in the inventory (5,000)
Unearned rent received taken up as income (1,800)
Accrued taxes unrecorded (3,000)
1. The correct net income for 2024 is
2. The correct net income for 2025 is
3. What is the effect of the above errors to the 2025 beginning retained earnings?
4. What is the effect of the above errors to 2025 working capital?
5. What is the effect of the 2024 errors to 2025 net income?
Use the following data in answering questions 6 through 10:
Dominica Corporation reported the following amounts of net income for the years ended December 31, 2023, 2024 and 2025:
2023 P 127,000
2024 150,000
2025 128,500
You are performing the audit for the year ended December 31, 2025. During your examination, you discover the following errors:
a. As a result of errors in the physical count, ending inventories were misstated as follows:
December 31, 2024 P 14,000 overstated
December 31, 2025 23,000 understated
b. On December 31, 2025, Dominica reported as a purchase, merchandise in transit which cost P15,000. The merchandise
was shipped FOB Destination and had not arrived by December 31. The merchandise was not included in the ending
inventory.
c. Dominica records sales on the accrual basis but failed to record sales on account made near the end of each year as
follows:
2023 P 4,000
2024 5,000
2025 3,500
d. The company failed to record accrued office salaries as follows:
December 31, 2023 P 10,000
December 31, 2024 14,000
e. On March 1, 2024, a 10% stock dividend was declared and distributed. The par value of the shares amounted to P10,000
and market value was P13,000. The stock dividend was recorded as follows:
Miscellaneous expense P 13,000
Ordinary share capital P 10,000
Retained earnings 3,000
f. On July 1, 2024, Dominica acquired a three-year insurance policy. The three-year premium of P6,000 was paid on that
date, and the entire premium was recorded as insurance expense.
g. On January 1, 2025, Dominica retired bonds with a book value of P120,000 for P106,000. The gain was incorrectly
deferred and is being amortized over 10 years as a reduction of interest expense on other outstanding obligations.
6. What is the adjusted net income for the year ended December 31, 2023?
7. What is the adjusted net income for the year ended December 31, 2024?
8. What is the adjusted net income for the year ended December 31, 2025?
9. What adjusting entry should be made on December 31, 2025 to correct the error described in item B?
10. The adjusting entry on December 31, 2024 to correct the error described in item E should include a debit to
