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  • Error Correction Problem 4

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    Hazel Andrea Garduque Lopez
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    This document discusses error correction in accounting. It explains that an account can be overstated or understated and the relationship errors can have on related accounts, either direct or inverse. Errors in the current year can directly or inversely affect profit and retained earnings, depending on whether the account is asset- or liability-related. Current year errors only impact working capital if they involve current assets or liabilities. Errors from the previous year are automatically reversed in the next year's profit if they counterbalanced, while non-counterbalancing errors only impact the next year's retained earnings.

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    This document discusses error correction in accounting. It explains that an account can be overstated or understated and the relationship errors can have on related accounts, either direct or inverse. Errors in the current year can directly or inversely affect profit and retained earnings, depending on whether the account is asset- or liability-related. Current year errors only impact working capital if they involve current assets or liabilities. Errors from the previous year are automatically reversed in the next year's profit if they counterbalanced, while non-counterbalancing errors only impact the next year's retained earnings.

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    10 views7 pages

    Error Correction Problem 4

    Uploaded by

    Hazel Andrea Garduque Lopez
    This document discusses error correction in accounting. It explains that an account can be overstated or understated and the relationship errors can have on related accounts, either direct or inverse. Errors in the current year can directly or inversely affect profit and retained earnings, depending on whether the account is asset- or liability-related. Current year errors only impact working capital if they involve current assets or liabilities. Errors from the previous year are automatically reversed in the next year's profit if they counterbalanced, while non-counterbalancing errors only impact the next year's retained earnings.

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    © All Rights Reserved
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    of 7

    ERROR

    CORRECTION
    (PROBLEM 4)
    A PRESENTATION ON AUDIT 2
    BY:
    JOHN MARTIN S. FLORES
    OVERSTATED OR UNDERSTATED
     An account is said to be OVERSTATED if the reported amount is more than the
    true or correct amount.
     An account is said to be UNDERSTATED if the reported amount is less than the
    true or correct amount.
    RELATIONSHIP BETWEEN
    ACCOUNTS
     An understatement or overstatement of an account may either have a direct or
    inverse relationship to another related account.
     Direct relationship means that if an account is understated, the related account is
    also understated. Or if an account is overstated, related account is also overstated.
     Inverse relationship means that if an account is understated, the related account is
    overstated. Or if an account is overstated, related account is understated.
    EFFECTS OF ERRORS IN CURRENT YEAR
    TO PROFIT AND RETAINED EARNINGS
     Asset-related accounts (prepaid assets, accrued income, etc.) have a DIRECT
    relationship to profit and retained earnings.
     Ending inventory account has a DIRECT relationship to profit and retained
    earnings.
     Liability-related accounts (accrued expenses, deferred revenue, etc.) have an
    INVERSE relationship to profit and retained earnings.
     Beginning inventory account has an INVERSE relationship to profit and retained
    earnings.
    EFFECTS OF ERRORS IN CURRENT
    YEAR TO WORKING CAPITAL
     Only CURRENT PERIOD ERRORS affect the working capital. Previous year
    errors do not affect working capital.
     Only errors concerning CURRENT ASSETS AND CURRENT LIABILITIES
    affect working capital.
     Current asset-related accounts have DIRECT relationship to working capital.
     Current liability-related accounts have INVERSE relationship to working capital.
    EFFECTS OF ERRORS IN PREVIOUS YEAR
    TO PROFIT AND RETAINED EARNINGS
     Effects of previous year’s counterbalancing errors are AUTOMATICALLY
    REVERSED in the immediately following year’s profit.
     Previous year’s non-counterbalancing errors have NO effect on the profit of the
    immediately following year.
     Only previous year’s non-counterbalancing errors affect retained earnings for the
    immediately following year.
    Reference Material: Intermediate Accounting 3
    2020 Edition by Zeus Vernon B. Millan

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