CORRECTION OF ERRORS

ERRORS are misapplication of accounting policies, mathematical mistakes, oversights, or

misinterpretations of facts and fraud. Material errors are those that cause FS to be misstated while
intentional errors are fraud.

Types of errors according to period of occurrence

a. Current period errors are errors of current period that were discovered either the current
period or after the current period but before FS were authorized for issue. Corrected simply
by correcting entries.

When books are still open, closing entries have not been made so nominal accounts can
still be used in correcting entries. When books are closed, closing entries have already
been made so nominal accounts cannot be used.
b. Prior period errors are errors in one or more prior periods that were only discovered either
during the current period or after the current period but before FS were authorized for issue.
Corrected by retrospective restatement.

Prior period errors are corrected by adjusting the beginning balance of retained earnings
for the earliest period presented. Its effect is excluded from profit or loss in which the
error is discovered.
Retrospective Restatement means:
• restating the comparative amounts for the prior period(s) presented in which the
error occurred; or
• if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities, and equity for the earliest prior period presented.

Retrospective Restatement Retrospective Application

• correcting a prior period error as if the • applying a new accounting policy
error has never occurred. as if the new policy had always
been applied.
Note: Just like retrospective application, retrospective restatement shall be made as far
back as practicable. If it is impracticable to determine the cumulative effect of a prior
period error at the beginning of the current period, the entity is allowed to correct the
error prospectively from the earliest date practicable.

Most common errors affecting FS

a. Errors affecting Income Statement – corrected through reclassification entry.

b. Errors affecting Statement of Financial Position- corrected through reclassification entry.
c. Errors affecting both IS and SFP
c.1. Counterbalancing Errors
c.2. Non-counterbalancing Errors
Counterbalancing Errors are errors which, if remained uncorrected, are automatically corrected or offset
in the next accounting period. Their effect on the FS automatically reverses/counterbalance in the next
accounting period.

Effect of counterbalancing error Year 1 Year 2 Year 3

on year-end
Profit or Loss Overstatement Understatement None
SFP Erroneous None None

Examples of Counterbalancing Errors

• Inventory
• Sales
• Purchases
• Deferred Expense (Prepayments)- Expense Method
• Deferred Income- Income Method
• Accruals for income and expenses

Non-counterbalancing Errors are errors which, if remains uncorrected, are not automatically offset in
the next accounting period. Generally, a non-counterbalancing error affects the profit or loss only in the
period the error was committed.

Effect of counterbalancing error Year 1 Year 2 Year 3

on year-end
Profit or Loss Overstatement None None
SFP Erroneous Erroneous Erroneous

Examples of Non-counterbalancing Errors

• Deferred Expense (Prepayments)- Asset Method
• Deferred Income- Liability Method
• Misstatement in Depreciation
• Erroneous capitalization of cost that should be expensed outright
• Non-capitalization of capitalizable cost
• Error in recording proceeds of sale as income
4) Prepayments or Unearned items 5) Accruals for income and expenses
Relationships between accounts

In a periodic inventory system, the following relationship between accounts can provide guidance in
determining the effects of counterbalancing errors on profit or loss:

Ending Inventory : Profit Direct Relationship

Ending Inventory : COGS Indirect Relationship

Beginning Inventory & Purchases : COGS Direct Relationship

Beginning Inventory & Purchases : Profit Indirect Relationship

Asset-related account : Profit Direct Relationship

Liability-related account : Profit Indirect Relationship