Chapter 15

ERROR CORRECTION

Prior period error

- Prior period errors are omission and misstatements in the entitys financial
statements for one or more periods arising from a failure to use or misuse of reliable
information
- It include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretation of facts, and fraud.

Treatment of prior period erros

- An entity shall correct material prior period errors retrospectively in the first set of
financial statements authorized for issue after their discovery.

Type of errors

a. Statement of financial position errors

b. Income statement errors
c. Combined statement of financial position and income statement errors

Statement of financial position errors

- Statement of financial position errors affect the statement of financial position or real
accounts only, meaning, the improper classification of an asset, liability and capital
accounts

Income statement errors

- Income statement errors affect the income statement or nominal accounts only,
meaning, the improper classification of revenue and expense accounts

Combined statements of financial position and income statement errors

- These errors affect both statement of financial position and income statement
because they result in a misstatement of net income

Two classification of combined statements of financial position and income

statement errors:

a. Counterbalancing errors

- Are errors which, if not detected, are automatically counterbalanced or corrected in

the next accounting period

Effects of counterbalancing errors

1. The income statements for two successive periods are incorrect

2. The statement of financial position at the end of the first period is incorrect
3. The statement of financial position at the end of the second period is correct
b. Noncounterbalancing errors

- Are errors which, if not detected, are not automatically counterbalanced or correct in
the next accounting period

Effects of noncounterbalancing errors

1. The income statement of the period in which the error is committed is incorrect but
the succeeding income statement is not affected.
2. The statement of financial position of the year of error and succeeding statement
of financial position are incorrect until the error is corrected.