FINANCIAL ACCOUNTING REVIEWERCHAPTER 15 ERROR CORRECTIONCan arise:1. Recognition2. Measurement3. Presentation4. Disclosure of elements of Financial StatementsThese are corrected before the FS are authorized for issue.Materials errors - It is NOT discovered until subsequent period, and these PPE are corrected in the comparative info. Presented in the FS for that subsequent period.Prior Period Errors - omissions and misstatements in the entitys FS for 1 or more periods arising from failure to use / misuse reliable info that:a. Was available when FS where authorized for issueb. Could reasonably be expected to have been obtained in preparation and presentation of FS.Include: 1. Mathematical mistakes2. Applying accounting policies3. Oversights or misinterpretation4. FraudTreatment of prior period error Correct material PPE retrospectively in the 1st set of FS authorized after their discovery by:a) Restating the comparative amountsb) Restating opening balance of A.L.E. for earliest prior period if error occurred before earliest period presented.Types of Errors1. Statement of Financial Position errors2. Income statement errors3. Combined Statement of Financial Position errors and Income statement errors

Statement of Financial Position Errors Affect real accounts only, the improper classification of an asset, liability and capital account. An entity simply made to reclassify the account balance.Income Statement Errors Affect nominal accounts only, the improper classification of revenue and expense account. NO EFFECT on Financial position and Net income.Reclassifying Entry discovered in the same year it is committed.No Reclassifying Entry discovered in subsequent year.Combined Statement of Financial Position errors and Income statement errors Affect BOTH the SFP and IS because it result in misstatement of NET INCOME.Classified as:a. Counterbalancing errors b. Non-counterbalancing errorsCounterbalancing errors If not detected it automatically counterbalance / corrected in the next accounting period. Errors correct themselves over 2 periods.Effect of counterbalancing errors1. Income statement is incorrect for 2 successive periods2. SFP at the end of 1st period is INCORRECT3. SFP at the end of 2nd period is CORRECTCounterbalance errors include: Misstatementsa. Inventory purchases and salesb. Prepaid expensec. Accrued expensed. Deferred incomee. Accrued income

Non-counterbalancing errors If not detected it does NOT automatically corrected in next accounting period. If NET INCOME of one year is under/overstated, Net income of subsequent year is NOT affected.Effects of Non-counterbalancing errors:1. IS of the period w/c error committed is incorrect but succeeding Income statement is NOT affected.2. SFP of the year of error and succeeding SFP are INCORRECT until error is corrected.Example is misstatement of depreciation

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