Assignment #1 : Prior Perriod Error
I. What is a píioí peíiod eííoí?
Píioí peíiod eííoís aíe omissions fíom, and misstatements in, an entity's financial
statements foí one oí moíe píioí peíiods aíising fíom a failuíe
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Assignment #1 : Prior Perriod Error
I. What is a píioí peíiod eííoí?
Píioí peíiod eííoís aíe omissions fíom, and misstatements in, an entity's financial
statements foí one oí moíe píioí peíiods aíising fíom a failuíe to use, oí misuse of, íeliable
infoímation that was available and could íeasonably be expected to have been obtained
and taken into account in píepaíing those statements. Such eííoís íesult fíom
mathematical mistakes, mistakes in applying accounting policies, oveísights oí
misinteípíetations of facts, and fíaud.
II.Explain bíiefly the accounting tíeatment of píioí peíiod eííoí.
Prior Period Errors must be corrected Retrospectively after the discovery by; (a.) Restate the comparative
amounts of prior periods and (b) Restate the assets, liabilities, and equity for errors occurring before the
earliest prior periods. Retrospective application means that the correction affects only prior period
comparative figures. Current period amounts are unaffected.
Therefore, comparative amounts of each prior period presented which contain errors are restated. If
however, an error relates to a reporting period that is before the earliest prior period presented, then the
opening balances of assets, liabilities, and equity of the earliest prior period presented must be restated.
Limitations:
a. If impracticable to determine period-specific effects of error restate the opening balance of assets,
liabilities, and equity.
b. If Impracticable to determine cumulative effects of error at the beginning of the current period restate
the comparative information to correct prospectively from the earliest date practicable.
III. Explain the types of errors. Describes each.
1. Balance sheet or Statement of Financial position errors
This error affects only the balanced sheet accounts (asset, liabilities, equity).
Discovery Error
@Error Year @Subsequent Year
Reclassify the item to proper position Restate the SFP of prior year for comparative
purposes2. Income statement errors
Affects only the Income Statement accounts (Revenues and Expenses)
Discovery of error
@ Error year @ Subsequent year
Reclassification entry Restate the Income Statement of prior year for
comparative purposes
3. Combined Statement of Financial Positions and Income statement errors
Affects both SFP and income Statement that can be classified as:
A. Counterbalancing errors
Offsets or corrected for over 2 accounting periods Ex.
Omissions of:
1. Deferred expense or prepayments (Expense Method)
2. Deferred Income or Precollections (Revenue Method)
3. Accrued Expenses
4. Accrued Revenues
Over/Understatements of:
1. Sales (not recorded in 1st year but recorded in 2d year)
2. Purchases (not recorded in 1st year but recorded in 2nd year)
3. Inventory Errors
B. Non-counterbalancing errors
Do not offset in the next accounting periods and needs correcting entries if books are closed.
Ex. 1. Prepayments (Asset Method)
2. Precollection (Liability Method)
3. Error in recording Depreciation
4. Improper capitalization of expense
5. Improper expensing of capital expenditures
6. Recording sale of asset (e.g PPE) as other incomeIV. Problems
CHAPTER 6-1 Income Statement and SFP Errors
You discovered the following errors in connection with your examination of the financial statements of the
Jessica Corporation:
1.) Rent income of P 25,000 in 2017 was erroneously credited to miscellaneous income. 2.)
Accounts payable of P 28,000 in 2017 was erroneously credited to note payable.
The following data were extracted from the financial statements of Jessica Corporation:
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