Chapter 15

ERROR CORRECTION
Introduction
Ang error ay maaaring mag-arise through recognition, measurement, presentation or
disclosure ng elements ng financial statements.
Ang potential current period errors nan a-discover in that period ay corrected bago pa
man i-authorized ang financial statemets. However, may mga materil errors nahindi agad
nadidiscover hanggang sa subsequent period, and these priod period errors ay corrected
in the comparative information presented sa financial statements for that subsequent
period.

Prior period error

Ang prior period errors ay omissions from and misstatements sa financial statements ng
isang entity for one or more periods arising mula sa misuse ng reliable information na:
a. available kung kalian ang financial statements for these periods ay 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:
a. effects of mathematical mistakes
b. mistakes in applying accounting policies
c. oversights or misinterpretation of facts

Treatment of prior period errors

PAS 8 provides na dapat a i-correct ng entity ang material prior period errors
retrospectively sa first set ng financial statements authorized for issue after ng discovery
by:
a. Restating the current amounts for the prior period presented in which the error
occurred.
b. Restating the opening balance ng assets, liabilities, and equity for the earliest
prior period presented kung that error ay na-occurred before the earliest period
presented.
In other words, the prior period error ay dapat na i-correct by retrospective restatement.
meaning, kung ang comparative statements ang presented, ang prior year statements
are restated to correct the error.
Ang correction ng prior period error ay excluded mula sa profit or loss for the period
kung saan na-discover ang error but ito ay adjustment sa beginning balance ng retained
earnings of the earliest period presented.

Type of errors
Errors are classified ino three, namely:
a. Statement of financial positon errors
b. Income statement errors
c. Combined statement of financial positon and income statement errors

Statement of financial position errors

Ang financial statements errors ay nakakaapekto sa statement of financial position or
rela accounts only, meaning, improper classification ng asset, liability at capital account.
In such case, an entry is simply made to reclassify the account balances.

Illustration
a. Notes receivable is debited instead of accounts receivable
Reclassifying entry:
Accounts receivable xx
Notes receivable xx
b. Accounts payable is credited instead of notes payable

Reclassifying entry:

Accounts payable xx
Notes payable xx

Income statement errors

Income statement errors affect the income statement or nominal accounts only, meaning,
improper classification of revenue and expense accounts.
These errors ay walang effect sa statement of financial statements and on net income.
Thus, reclassifying entry is necessary onlu kung ang error ay na- discovered in the same
year na na-commit ang error.
Otherwise, kung ang error ay na-discovered in a subsequent year, no reclassifying entry
is necessary because the nominal accounts for the current year ay correctly stated,
Illustration
For instance, the following errors are committed in 2015 and discovered in 2015 in the
same year.
a. Purchases account is debited instead of office supplies

Reclassifying entry:

Office supplies xx
Purchases xx

b. Rent income is credited instead of interest income

Reclassifying entry:

Rent income xx
Interest income xx

Combined statement of financial position and income statement

errors

The errors affect both the statement of financial position and income statement because
they result in a misstatement of net income.
For instance, kung ang accrued salaries payable ay na- overlooked, the effects are:
a. Salaries expense is understated (income statement error)
b. Liability is understated (statement of financial position error)
c. Net income is overstated (income statement error)
d. Retained earnings account is overstated (statement of financial position error)
Comined statement of financial position and income statement errors are classified into
two, namely:
a. Counterbalancing errors
b. Noncounterbalancing errors
Counterbalancing errors

Ang counterbalancing error ay errors which, if not detected, are automatically

counterbalanced or corrected in the next accounting period.
In other words, these errors ay io-offset or corrected over two periods or these errors
correct themselves over two periods.
Effects of these errors:
1. Income statements for two successive periods are incorrect
2. Statement of financial position at the end of the first period ay incorrect
3. Statement of financial position at the end of the second period ay correct
Counterbalancing errors ay normally include ang misstatement ng mga sumusunod:
1. Inventory, including purchases and sales
2. Prepaid expense
3. Accrued expense
4. Deferred income
5. Accrued income

o Overstatement of ending inventory

o Understatement of ending inventory
o Understatement of purchases
o Overstatement of purchases and ending inventory
o Understatement of sales
o Overstatement of sales and understatement of ending inventory
o Failure to record prepaid expense
o Failure to record accrued expense
o Failure to record deferred income
o Failure to record accrued income

Noncounterbalancing errors
Ang counterbalancing error ay errors which, if not detected, are not automatically
counterbalanced or corrected in the next accounting period.
In other words, kung ang net income of one year ay understated or overstated, ang net
income ng subsequent year ay hindi affected. The effects of these errors are
1. Ang income statement for the period kung saan na-commit ang error ay incorrect
pero ang succeeding income statement ay hindi affected.
 2. Ang statement of financial position of the year of error and succeeding statement
of financial position are incorrect hanggang sa ito ay ma-correct.
3. Ang best example ng noncounterbalancing error ay ang misstatement ng
depreciation.

Illustration
On January 1, 2015, the entity purchased an equipment with useful lifeof 5years for
P500,000 but the same was debited to repair and maintenance.
Kung ang books for 2016 ay hindi pa nako-close, then ang entries para itama ang errors
on December 31, 2016 are:

1. Equipment 500,000
Retained earnings 500,000
2. Depreciation (500,000/5) 100,000
Retained earnings 100,000
Accumulated depreciation 200,000
Kung ang books for 2016 ay closed na, the entries to correct the error on December 32,
2016 are:

1. Equipment 500,000
Retained earnings 500,000
2. Retained earnings 200,000
Accumulated depreciation 200,000