FINANCIAL

ACCOUNTING AND
REPORTING

ERROR CORRECTION
• Errors can arise in respect of the recognition, measurement, presentation
or disclosure of elements of financial statements.
• Potential current period errors discovered in that period are corrected
before the financial statements are authorized for issue.
• However, material errors are sometimes not discovered until a
subsequent period, and these prior period errors are corrected in the
comparative information presented in the financial statements for that
subsequent period.
PRIOR PERIOD ERRORS
• Prior period errors are omissions and misstatements in the entity’s financial statements
for one or more periods arising from a failure to use or misuse of reliable information
that:

a. Was available when financial statements for these periods were authorized for issue.

b. Could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
• Prior period errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretation of facts, and fraud.
TREATMENT OF PRIOR PERIOD ERRORS

• An entity shall correct material 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.
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.

• In other words, a prior period error shall be corrected by retrospective restatement, meaning, if
comparative statements are presented, the prior year statements are restated to correct the error.

• 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 period presented.
• Errors that are commonly committed in preparing the financial statements include (1)
computational errors, (2) misapplication of accounting policies, (3) over and under
recording of transactions, (4) transposition and transplacement errors, and (5)
omissions. These errors will affect the financial statements in one of the following ways:
⮚ Income statement errors are errors that are confined in the income statement only
because it is an error between two income statement accounts. However, since the
double entry system of recording transactions is used, the errors in the two income
statement accounts will offset and the net income will be correctly stated while the
financial position shall not be affected.
⮚ Balance sheet errors on the other hand similar to income statement errors is an error
between two balance sheet accounts and therefore will also offset and the financial
position will remain to be correctly stated and the net income shall not be affected.

⮚ It is the combination of the two errors an error on an income statement account and
balance sheet account which shall be discussed thoroughly in the following narrative.
BALANCE SHEET AND INCOME STATEMENT ERRORS MISSTATE BOTH THE FINANCIAL
POSITION AND THE NET INCOME. ACTUALLY THESE ERRORS ARE SIMPLY ERRORS IN RECORDING THE
ADJUSTING ENTRIES AND ARE CLASSIFIED UNDER TWO CATEGORIES:

1. Counterbalancing Errors
• Misstate net income and the financial position in the current year.
However, the balance sheet error shall carryover the next accounting
period and misstates the net income in the next period in the opposite
manner.
• These errors will be offset or corrected over two periods or these errors
correct themselves over two periods.
EFFECTS OF COUNTERBALANCING ERRORS

• the income statements for two successive periods are incorrect.

• The statement of financial position at the end of the first period is
incorrect.
• The statement of financial position at the end of the second period is
correct.
COUNTERBALANCING ERRORS NORMALLY INCLUDE THE
MISSTATEMENT OF THE FOLLOWING:

✔Inventory, including purchases and sales

✔Prepaid expense
✔Accrued expense
✔Deferred income

✔Accrued income
2. NONCOUNTERBALANCING ERRORS

• Misstate net income and the financial position in the current year. However, the balance
sheet error does not carry over the next accounting period, therefore the net income in
the following period will be correctly stated. Consequently, the affected asset or liability
and retained earnings balance shall remain misstated until the error is discovered and
corrected.
• In other words, if the net income of one year is understated or overstated, the net
income of subsequent year is not affected.
EFFECTS OF NONCOUNTERBALANCING ERRORS

• the income statement of the period in which the error is committed is

incorrect but the succeeding income statement is not affected.
• The statement of financial position of the year of error and succeeding
statement of financial position are incorrect until the error is corrected.
• The best example of a noncounterbalancing error is the misstatement of
depreciation.