University:
California State University, Northridge
Course:
ACCT 350 | Intermediate Financial Accounting I
Academic year:

2024
Views:

447

Pages:

23
Author:

Lesly Gardner

Accounting Changes and Error Corrections Part 2 Error Corrections Errors discovered currently in the course of normal accounting procedures. • Math errors • Posting to the wrong account • Misstating an account • Omitting an account from the trial balance Error Corrections Errors limited to balance sheet accounts. • Debiting Accounts Receivable instead of Notes Receivable • Crediting Interest Payable instead of Notes Payable • Debiting an investment account instead of Land when property was purchased for plant expansion Error Corrections Errors limited to income statement accounts. • Debiting Office Salaries instead of Sales Salaries • Crediting Rent Revenue instead of Commissions Revenue Error Corrections Errors affecting both income statement accounts and balance sheet accounts. • Debiting Office Equipment instead of Repairs Expense • Crediting Depreciation Expense instead of Accumulated Depreciation Error Corrections Errors affecting both income statement accounts and balance sheet accounts. • Debiting Office Equipment instead of Repairs Expense • Crediting Depreciation Expense instead of Accumulated Depreciation Error Corrections Errors affecting both income statement accounts and balance sheet accounts. • There are errors in net income that, when not detected, are not automatically counterbalanced in the following fiscal period. • There are also errors in net income that, when not detected, are not automatically counterbalanced in the following fiscal period: •Recognition of capital expenditures as expenses. •The omission of charges for depreciation and amortization. Error Corrections • If detected in current period, before books are closed: – Correct the account through normal accounting adjustment. • If detected in subsequent period, after books are closed: – adjust financial records for effect of material errors. – make adjustment directly to Retained Earnings. Example of Error Corrections (1) Understatement of Merchandise Inventory: Supply Masters, Inc., began operations at the beginning of 2006. Before the accounts are adjusted and closed for 2008, it was discovered that merchandise inventory as of December 31, 2006, was understated by $1,000. Because this type of error counterbalances after two years, no correcting entry is required in 2008. Example of Error Corrections If this error had been discovered in 2007 instead of 2008, the following entry would have to be made to correct the account balances. Merchandise Inventory Retained Earnings 1,000 1,000 Example of Error Corrections (2) Failure to Record Merchandise Purchases It is discovered that purchase invoices of December 31, 2006, for $850 had not been recorded until 2007. The goods had been included in the inventory at the end of 2006. Because this type of error counterbalances after two years, no correcting entry is required in 2008. Example of Error Corrections If this error had been discovered in 2007 instead of 2008, the following entry would have to be made to correct the account balances. Periodic System: Retained Earnings Purchases 850 Perpetual System: Retained Earnings Inventory 850 850 850 Example of Error Corrections (3) Failure to Record Merchandise Sales It is discovered that sales on account of $1,800 for the last week of December 2007 had not been recorded until 2008. The goods were included in the inventory at the end of 2007. The following correcting entry would be required in 2008. Sales Retained Earnings 1,800 1,800 Example of Error Corrections (4) Failure to Record Accrued Expense Accrued sales salaries of $450 as of December 31, 2006, were overlooked in adjusting the accounts. Sales Salaries is debited for salary payments. Because this type of error counterbalances after two years, no correcting entry is required in 2008. Example of Error Corrections If this error had been discovered in 2007 instead of 2008, the following entry would have to be made to correct the account balances. Retained Earnings Sales Salaries 450 450 Example of Error Corrections (5) Failure to Record Prepaid Expense It is discovered that Miscellaneous General Expense for 2006 included taxes of $275 that should have been deferred in adjusting the accounts on December 31, 2006. Because this type of error counterbalances after two years, no correcting entry is required in 2008. Example of Error Corrections If this error had been discovered in 2007 instead of 2008, the following entry would have to be made to correct the account balances. Miscellaneous General Expense 275 Retained Earnings 275 Example of Error Corrections (6) Failure to Record Accrued Revenue Accrued interest on notes receivable of $150 was overlooked in adjusting the accounts on December 31, 2006. The revenue was recognized when the interest was collected in 2007. Because this type of error counterbalances after two years, no correcting entry is required in 2008. Example of Error Corrections If this error had been discovered in 2007 instead of 2008, the following entry would have to be made to correct the account balances. Interest Revenue Retained Earnings 150 150 Example of Error Corrections (7) Failure to Record Unearned Revenue Fees of $225 received in advance for miscellaneous services as of December 31, 2007, were overlooked in adjusting the accounts. Miscellaneous Revenue had been credited when fees were received. The correcting entry in 2007 is: Retained Earnings Miscellaneous Revenue 225 225 Example of Error Corrections (8) Failure to Record Depreciation Delivery equipment was acquired at the beginning of 2006 at a cost of $6,000. The equipment has an estimated fiveyear life. Its depreciation of $1,200 was overlooked at the end of 2006 and 2007. Misstatements arising from the failure to record depreciation are not counterbalanced in the succeeding year. Example of Error Corrections When the omission is recognized, Retained Earnings must be decreased by the net income overstatements and Accumulated Depreciation—Delivery Equipment must be increased. The 2008 correcting entry is: Retained Earnings 2,400 Accumulated Depreciation— Delivery Equipment 2,400 $1,200 per year x 2 Example of Error Corrections (9) Incorrectly Capitalizing an Expenditure Operating expenses of $2,000 were paid in cash at the beginning of 2006. The payment was incorrectly debited to Equipment. The “equipment” was assumed to have a five-year life and no residual value; thus, depreciation of $400 was recognized at the end of 2006 and 2007. The required correcting entry is: Retained Earnings Accumulated Depreciation— Equipment Equipment 1,200 800 2,000

Accounting Changes and Error Corrections, Part 2

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