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Correction of Errors Cash and Accrual
Correction of Errors Cash and Accrual
Correction of Errors Cash and Accrual
ERRORS
No company whether large or small is immune from errors. Errors may be intentional or unintentional. Intentional
errors are significant because of the presence of fraud or intent to deceive. These errors are made for the purpose of
concealing fraud or misappropriation, evading taxes, manipulating or window-dressing the company's financial statements.
Unintentional errors were not deliberately committed. They result from carelessness or ignorance on the part of the company's
personnel or it may result from poor internal control.
The risk of material errors may be minimized through the installation of good internal control and the application of
sound accounting procedures. Prior period adjustments, also called fundamental errors are reported in the current year as
adjustment in the beginning balance of the Retained Earnings account. Prior period statements should be restated to correct
the error when comparative statements are prepared.
Accounting Procedure:
1. If detected in the period the error occurred, correct the accounts through normal accounting cycle
adjustments.
2. If detected in subsequent period, adjust errors by making prior period adjustments directly to Retained
Earnings or restate the beginning balance of the Retained Earnings account.
3. Correct all previously presented prior period statements.
TYPES OF ERRORS
1. Balance Sheet Errors
This type of error refers to improper classification of real accounts such as assets, liabilities or stockholders' equity
accounts. They have no effect on net income
2. Income Statement Errors
This type of error affects only the presentation of nominal accounts in the Income Statement. It involves the
improper classification of revenues and expenses accounts, hence, only the details of the Income Statement are misstated. A
reclassifying entry is necessary only if the error is discovered in the same year it is committed. It has no effect on the Balance
sheet and in the Income Statement. If the error is discovered in a subsequent year, no classification entry is necessary.
3. Combined Balance Sheet and Income Statement errors
This affects both the balance Sheet and the Income Statement because they result in the misstatement of net
income.
GUIDELINES
Books are open
1. If the error is already counterbalanced and the company is in the second year, an entry is
necessary to correct the current period and to adjust the beginning balance of the Retained
earnings.
2. If the error is not yet counterbalanced, an entry is necessary to adjust the beginning balance of
the Retained earnings and correct the current period.
Books are closed
1. If the error is already counterbalanced, no entry is necessary.
DMCFI 1
2. If the error is not yet counterbalanced, an entry is necessary to adjust the present balance of the
Retained earnings.
PROBLEM 1: CORRECTION OF ERRORS: The following selected accounts are included in the trial balance of ARAL NA MUNA
AKO Company. on December 31, 2017:
Debit Credit
Supplies on hand P162,000
Accrued salaries payable P90,000
Interest receivable 306,000
Prepaid insurance 5,400,000
Unearned rent
Accrued interest payable 900,000
Prepare the necessary adjusting journal entries on December 31, 2017. Assume that the books have not been closed.
PROBLEM 2: CORRECTION OF ERRORS: TAMA NA MUNA ANG PARTY PARTY COMPANY’s December 31, year-end financial
statement contained the following errors:
An insurance premium of P90,000 was prepaid in 2016 covering the years 2016, 2017 and 2018. The same was charged to
expense in full in 2016. In addition, on December 31, 2017, fully depreciated machinery was sold for P192, 000 cash, but the
sale was not recorded until 2018. There were no other errors during 2016, 2017, and 2018 and no corrections have been made
for any of the errors. Ignore income tax considerations.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
DMCFI 2
1. What is the total effect of the errors on the 2016 net income?
a. understated by 84,000 c. overstated by 201,500
b. understated by 156,000 d. no effect
2. What is the total effect of the errors on the 2017 net income?
a. overstated by 36,000 c. overstated by 66,000
b. overstated by 258,000 d. understated by 54,000
3. What is the total effect of the errors on the company’s working capital at December 31, 2017?
a. understated by 108,000 c. overstated by 84,000
b. understated by 114,000 d. no effect
4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2017?
a. understated by 60,000 c. overstated by 132,000
b. understated by 90,000 d. no effect
5. What is the total effect of the errors on the company’s working capital at December 31, 2018?
a. overstated by 78,000 c. understated by 192,000
b. understated by 114,000 d. no effect
DMCFI 3
Sales cash basis 450,000 Sales accrual basis 500,000
ACCOUNTS RECEIVABLE
BEG BAL 150,000
SOA 500,000 COLLECTION OF CREDIT SALES 450,000
DISHONORED NR 10,000 W-OFF 15,000
RECOVERY OF AR (WORTHLESS) 5,000 SRA 3,000
SD 2,000
END BAL 195,000
ACCOUNTS PAYABLE
BEG. BAL 75,000
Payment of POA 350,000 POA 400,000
PRA 2,000
PD 1,000
END. BAL 122,000
PROBLEM: CASH TO ACCRUAL: The income statement of KUNG HINDI KO ITITIGIL Corporation for 2017 included the following
items:
The following balances have been excerpted from KUNG HINDI KO ITITIGIL Corporation’s balance sheets:
1/1/2017 12/31/2017
Accrued interest receivable P198,000 P240,240
Accrued salaries payable 110,880 234,960
Prepaid insurance 39,600 29,040
Questions:
Based on the above and the result of your audit, determine the following:
PROBLEM 9: CASH TO ACCRUAL: SIGURADO UULIT AKO Company paid or collected during 2017 the following items:
The following balances have been excerpted from SIGURADO UULIT AKO Company’s balance sheets:
1/1/2017 12/31/2017
Prepaid insurance P 54,000 P 43,200
Interest receivable 104,400 133,200
Salaries payable 381,600 442,800
DMCFI 4
Questions:
Based on the above and the result of your audit, determine the following:
PROBLEM 10: SINGLE ENTRY: We were given the following information which were obtained from the single-entry records of
HINDI NAGBIBIRO SI DOC G Company :
January 1 June 30
QUESTIONS:
Based on the above and the result of your audit, determine the following for the six months ended June 30,2015:
1. Sales
a. P1,310,400 c. P158,400
b. P1,137,600 d. P1,396,800
2. Purchases
a. P691,200 c. P979,200
b. P604,800 d. P748,800
4. Net loss
a. P 5,760 c. P 182,880
b. P158,400 d. P1,465,920
DMCFI 5