Types of Errors Notes
1. Balance Sheet (BS) Error or Statement oof Financial Position error
2. Income Statement (IS) Errors
3. Combined BS and IS Errors
a. Counterbalancing
b. Non-counterbalancing
Balance Sheet (BS) Error or Statement oof Financial Position error
only affects the presentation of asset, liability, or stockholder account.
If discovered CY, the company reclassifies item to proper account.
If PY error is discovered in following year, the company just reclassifies item to proper account and restates statement of financial position of PY for comparative purposes.
Basic concept
Error discovered in CY Error discovered in FY
CY FY CY FY FY
net income X X X X X
RE after closing X X X X X
total assets/liability/equity X X X X X
O - Overstated
U - understated In summary, errors are corrected by transferring amounts
X - No effect from one asset to another, from one liability to another, or
from one equity account to another.
Example of errors:
Note payable erroneously credited to accounts payable.
Land erroneously debited to investment property.
Note receivable erroneously debited to accounts receivable.
Income Statement (IS) Errors
only affects IS accounts and may include improper classification of revenues or expenses
If discovered CY, the company reclassifies item to proper account.
If PY error is discovered in following year, the company restates income statement of PY for comparative purposes. NO NEED for adjusting entries since both are nominal accounts and are closed in
RE.
Basic concept
Error discovered in CY Error discovered in FY
CY FY CY FY FY
net income X X X X X
RE after closing X X X X X
total assets/liability/equity X X X X X
O - Overstated
U - understated In summary, errors are corrected by transferring amounts
X - No effect from oneincome to another, or from one expense account
to another.
Example of errors:
Rent income erroneously credited to miscellaneous income
Supplies expense erroneously debited to purchases.
Rent expense erroneously debited to Interest expens.
Combined BS and IS Errors - Counterbalancing
errors that will offset or be corrected over two accounting periods.
Example of errors:
Omissions of:
Deferred expense or prepaid expenses under the expense method Expense method - the entire payment for a prepaid
Deferred income or precollection under the revenue method method expense is initially recorded as an expense when the
Accrued expenses payment is made, rather than as an asset
Accrued revenues
Revenue method - the entire receipt for a precollection is
Overstatement or understatement of: initially recorded as revenue when the receipt is made,
Sales not recorded in first year, and subsequently recorded in following year rather than as liability
Sales recorded in first year but should be for the following year
Purchases not recorded in first year, and subsequently recorded in following year
Purchases recorded in first year but should be for the following year
Error affecting inventory
Basic concept
Omission of deferred Expense
Company paid for 1 year Insurance premium of Php. 12,000 effective April 1, 2023. Under expense method and no adjustment at Yearend.
Effect of error 2023 2024 2025
Insurance expense O U X
Insurance premium U X X
Net Income U O X
RE after closing U X X
Asset at YE U X X
Entry Made Should be entry Adjusting entry Year 2
01/04/2023 Insurance Expense 12,000.00
Cash 12,000.00
31/12/2023 No Entry Prepaid Insurance 3,000.00
Insurance Expense 3,000.00
Year 2024 No Entry RE 3,000.00
Insurance Expense 3,000.00
Omission of deferred income
Company leased a building for Php. 12,000 effective April 1, 2023. Under revenue method and no adjustment at Yearend. For Adjusting entry: Isipin nyo lang kung ano yung dapat
sanang adjusting entry sya at yearend ng 2023. Retain yung
expense or income account and if debit or credit sya, then
Effect of error 2023 2024 2025 yung asset or liability account gawin nyo lang RE
rent revenue O U X
Unearned Rent Revenue U X X
Net Income O U X
RE after closing O X X
Liability at YE U X X
Entry Made Should be entry Adjusting entry Year 2
01/04/2023 Cash 12,000.00
rent revenue 12,000.00
31/12/2023 No Entry rent revenue 3,000.00
Unearned Rent Revenue 3,000.00
Year 2024 rent revenue 3,000.00
RE 3,000.00
Non-recording of Accrued Expenses
Accrued Salaries expense of Php. 4,000 are not recorded at YE2023.
Effect of error 2023 2024 2025
Salaries Expense U O X
Salaries Payable U X X
Net Income O U X
RE after closing O X X
Liability at YE U X X
Entry Made Should be entry Adjusting entry Year 2
31/12/2023 No Entry Salaries Expense 4,000.00
Salaries Payable 4,000.00
Year 2024 Salaries Expense 4,000.00 Salaries Payable 4,000.00 RE 4,000.00
Cash 4,000.00 Cash 4,000.00 Salaries Expense 4,000.00
Non-recording of Accrued Income
Accrued Rent revenue of Php. 4,000 are not recorded at YE2023.
For Adjusting entry: Si cash side magiging account for
Effect of error 2023 2024 2025 adjustment, then yung affected the asset or liability na
Rent Revenue U O X should be magiging RE
Rent receivable U X X
Net Income U O X
RE after closing U X X
Asset at YE U X X
Entry Made Should be entry Adjusting entry Year 2
31/12/2023 No Entry Rent receivable 4,000.00
Rent Revenue 4,000.00
Year 2024 Cash 4,000.00 Cash 4,000.00 Rent Revenue 4,000.00
Rent Revenue 4,000.00 Rent receivable 4,000.00 RE 4,000.00
