BANGAYAN, MELODY D. Dr. Lyssander Rodan C.

Dela Cruz
ACCTG 024- ACTCY31S1 December 2, 2020

DISCUSSION
Correction of Error and Cash

1. Complete the table below to show the basic concepts of error and its relationship to
different accounts:

Effect in Net Income Relationship

Understatement of Sale Understatement Direct
Overstatement of Cost of Sale Understatement Indirect (inverse)
Understatement of Expenses Overstatement Indirect (inverse)
Effect in Cost of Sale Relationship
Overstatement of Beginning
Overstatement Direct
Inventory
Understatement of Net
Understatement Direct
Purchases
Overstatement of Ending
Understatement Indirect (inverse)
Inventory

2. How do we treat correction of prior period error?

 An entity shall correct prior period errors retrospectively in the first set of financial
statements authorized for issue after their discovery by:

A. Restating the comparative amounts for the prior period presented in which
the error occurred (retrospective restatement).

B. Restating the opening balances of assets, liabilities, and equity for the
earliest prior period presented if the error occurred before the earliest period
presented.
 The correction of a prior period error is excluded from profit or loss for the period
in which the error is discovered, but it is an adjustment of the beginning balance of
retained earnings of the earliest prior period presented.

3. Differentiate the effects of a balance sheet error as against an income statement error in
the net income.

 Statement of balance sheet errors affect the statement of balance sheet, or real
accounts only, meaning, the improper classification of an asset, liability, and capital
account.

 While income statement errors affect the income statement or nominal accounts
only, meaning, the improper classification of revenue and expense accounts. These
errors have no effect on the statement of financial position and on net income.

4. When will a counter balancing error have an auto correct effect on the retained earnings?

 These errors, if not detected, are automatically counterbalanced or corrected in

the next accounting period. These errors correct themselves over two periods.

EFFECTS
1. Income Statement for two successive periods incorrect
2. Balance Sheet end of first period is incorrect
3. Balance Sheet end of second period is correct

5. When an investment is be reported as a cash equivalent?

 When it has a short maturity period of 90 days or less

6. In the audit of petty cash fund, for unexpended employees’ contributions, unclaimed
salary and cash collections of accounts receivable or sales, they should be included in
the accounted only when it is intact or the enveloped is still closed on the cash count
date. However, they are included as part of cash accountabilities whether intact or not.
Explain.
  Unexpended employees’ contributions, unclaimed salary and cash collections
of accounts receivable or sales are excluded in the accounted because the
assumption is they are already included in coins and bills in the petty cash box
(opened envelope, already mixed in) so these will be excluded but whether or
not open the envelope these items always be included as part of cash
accountabilities because there is a fact the custodian have the envelope
containing those petty cash items, having their responsibility with it so it always
included as part of cash accountabilities

7. Discuss, identify and mention the effect of the book reconciling items in a bank
reconciliation.

 Credit memos - have the effect of increasing the bank balance. They are items
credited by the bank to the account of the depositor but not yet recorded by
the depositor as cash receipts. A typical example of a credit memo is a note
collected by the bank in favor of the depositor and credited to the account of
the depositor.

 Debit memos - have the effect of decreasing the bank balance. They refer to
items paid by bank which are charged or debited by the bank to the account
of the depositor but not yet recorded by the depositor as cash disbursements.
Typical examples are, NSF or no sufficient fund checks, technically defective
checks and Bank services charges

8. Discuss, identify and mention the effect of the bank reconciling items in a bank
reconciliation.

 Cash receipts are recorded as an increase of cash in the company’s accounting

records when they are received. These cash receipts are deposited by the
company into its bank. The bank records an increase in cash only when these
amounts are actually deposited with the bank. Not all cash receipts recorded
by the company may have been recorded by the bank when the bank
statement is prepared. There may be outstanding deposits (also called
deposits in transit). Outstanding deposits cause the bank statement cash
balance to be understated. Therefore, outstanding deposits are a reconciling
 item that must be added to the unreconciled bank balance on the bank
reconciliation.

 On the date that a cheque is prepared by a company, it is recorded as a

reduction of cash in a company’s general ledger. A bank statement will not
record a cash reduction until a cheque clears the bank. Outstanding cheques
mean that the bank statement balance is overstated. Therefore, outstanding
cheques are a reconciling item that must be subtracted from the unreconciled
bank balance on the bank reconciliation

9. What is the accounting treatment for a cash shortage and overage?

 When replenishing the petty cash fund, you may have overages or shortages.

1. If there are shortages, you will record it like an expense when you replenish
the fund. A debit to cash over and short is made for the shortage and a
credit to cash is made.
2. If there is an overage, record it when you replenish the fund. A credit to cash
over and short account is made for the overage, and a debit to cash.

10. In a petty cash fund audit, what are what we called as impurities?

 These impurities are:

 Bills, coins and customer's check from the cashier's collection (these are part of
general cash account)
 Checks issued by the client in payment of a utility bills (as these should have
been delivered to the payees)
 Checks issued to the client in payment of personal advances (as these should
have been in general cash).