FINANCIAL ACCOUNTING AND

REPORTING

Learning Module: Error Correction

Judith P. Piamonte
Instructor I/ Designated Accounting Staff for Tax Concerns
Partido State University

2020-2021
Learning Module: Error Correction 2020-2021

COLLEGE OF BUSINESS AND MANAGEMENT

MODULE 18 – Error Correction
Name Of Student: Week Number: 17-18
Course Code:AEC2 Name of Faculty: Judith P. Piamonte
Course Title:Financial Accounting and
Reporting

I. OBJECTIVES:

At the end of this lesson, the students should be able to:

1) Identify errors and correct erroneous financial statement

II. LESSON:

Errors may be committed at any stage in the accounting cycle. Once discovered, they
must be corrected before the preparation of the financial statements.

KINDS OF ERRORS:

1) Clerical Errors – errors that are normally detected in the performance of the accounting
procedures and are immediately corrected. Examples are arithmetical errors (error in
addition, subtraction, multiplication or division), posting to the wrong side or account,
misstating an amount (over or understated) or error of omission.

2) Statement of Financial Condition Income Errors – errors that will affect only the real
accounts (Statement of Financial Condition accounts). Examples are misstatement of
Statement of Financial Condition items, errors in the classification such current asset is
erroneously classified as non-current asset, etc.

3) Statement of Comprehensive Income Errors – errors that will affect only the nominal
accounts (Statement of Comprehensive Income accounts). Examples are misstatement
items in the Statement of Comprehensive Income, errors in the classification of expenses
such as insurance expense erroneously charged to miscellaneous expense, etc.

4) Errors affecting both Statement of financial Condition and Statement of

Comprehensive Income – errors that will affect both the Statement of Comprehensive
Income and balance sheet accounts. The effect will be an under or overstatement of
owner’s equity. Examples are failure to record depreciation of equipment, failure to
recognize accruals and deferrals, etc.

This type of error will be further classified into counterbalancing and non-counterbalancing
error.

Counterbalancing Error – is an error that will automatically correct in the next period
without the benefit of any correcting entry. Example – misstatement of inventory.
Non-counterbalancing Error – is an error that is not corrected in the period and will
require correcting entry in the period discovered.

For counterbalancing or non-counterbalancing error, the required correcting entry will

depend on whether or not the books are already in the period the error is discovered.

If the books are closed:

a) For counterbalancing error, no correcting entry is necessary.
b) For non-counterbalancing error, a correcting entry is necessary to adjust the current
balance of capital or retained earnings.

If the books are not yet closed:

a) For both the counterbalancing or non-counterbalancing error, a correcting entry is
necessary to correct the current period and to adjust the beginning balance of capital
or retained earnings.

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Learning Module: Error Correction 2020-2021

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Illustration Problem:

Solution (a):

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Learning Module: Error Correction 2020-2021

Solution (b):

Note:
If Jumbo Trading is a corporation,
corporation, instead of debiting or crediting Mario Portal Capital account, the
Retained Earnings account will be substituted.

Errors of the previous year are treated as adjustments for the current year’s beginning balance of the
capital account or the retained earnings account. If comparative statements are to be presented the
previous year’s statements should be restated to correct
correct the error.

III. ACTIVITIES:

Using any reliable reference materials that you have, practice solving problems related to Correction
of Errors.

IV. ASSESSMENT:

If you have your laptop/computer, you may use MS Excel for this part. If you cannot do it in MS Excel,
put your answers on clean sheets of paper, take photos of them, and submit your output via Google
Classroom.

PGA Trading owned by Glen Acosta reported net income as follows: Current year – P450,000;
Previous Year – P600,000. It is assumed that year-end
year end adjustments for the current year were
properly made except for the errors and misstatements for the previous year.

The audit and review of the records of PGA Trading disclosed the following errors made in the
previous year:
1) Inventory
Inven at the year-end was understated. P70,000
2) Sales on account were recorded in the current year 30,000
3) Purchases on account were recorded in the year 25,000
4) Year-end
Year accrued
crued advertising was not recorded 10,000
5) Year-end
Year end prepaid insurance was not adjusted 16,000
6) Year-end
Year end unearned rent income was omitted 12,000
7) Year-end
Year end accrued interest income was omitted 6,000
8) Year-end
Year end unused office supplies was not adjusted 5,000
9) Year-end
Year end depreciation of equipment was omitted 8,000
10) Year-end
Year end provision for impairment loss was not taken up 7,000
Required:

a) Prepare an analysis of showing the corrected net income for the previous and current year.
b) Prepare the correcting entries at year-end
year end of the current year assuming that the \
1) Books have not been closed
2) Books have been closed
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V. REFERENCES:

Ampongan, O. E., Fundamentals of accounting, part 1

Valix, C.T., Peralta,J.F., Valix, C.A.M.(2015). Financial accounting volume 1 & 2.GIC Enterprises &
Co., Inc.
Ballda, W., & Ballada, S. (2020). Accounting fundamentals (6th ed.).
Ballada, W., &Ballada, S. (2016). Basic accounting made easyeasy.
Onsay, Emmanuel A., Chavez, Rosalie V., (2019)Fundamentals
(2019)Fundamentals of Accounting for Non
Non-Accountancy
Students Instructional Material ParSU
Abner, Rina A., (2020)Financial
(2020)Financial Accounting and Reporting Students Instructional Material ParSU

Prepared by: Reviewed by: Approved:

JUDITH P. PIAMONTE ROLAN JON GO BULAO, MA RINA A. ABNER, CPA, MBA, MSA
Faculty Program Director Dean

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