Most accounting-related errors are detected and corrected in the current period.

Question

Most accounting-related errors are detected and corrected in the current period. Of those that go undetected, some will fix themselves over two periods, while other errors may remain undetected for years. What is difference between those errors that will counterbalance and those that carry over from period to period? Identify these differences considering such issues as whether the accounts involved are balance sheet and/ or income statement accounts, whether they are current and/ or noncurrent accounts, and whether they involve revenue or expense accounts. Finally, provide a systematic method for analyzing an error to determine if it counterbalances or if a journal entry is necessary to correct the books.

Explanation / Answer

Errors that are counter balanced will have no effect on the debit and credit side of the financial statements as these errors set off each other affect on statments. However the errors that are carried forward from previous years will have under / over stated debit balance or credit balance and the financial statements will not tie to have the same result. This is an Audit issue and during audit, accounts bearing such errors can go unaudited and will result in unaudited financial statements.

Such errors needs to be corrected in order to have financial statements audited (Which is an important requirment for all the companies). For the same purpose, audit entries are required to be passed to show the correct balance.

To do this, it is important to have the error identified, the accounts that are not reconciling, also need to understant the issues behind the error, and adjustment etries are required to be passed basis the nature of the account (Asset A/c, Revenue A/c or Expense A/c)

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