Reply to Judgement Case_6_5_ Week 5 DB3.pdf

Running Head: Reply to Judgement Case 9-10

Reply to Judgement Case 6-5

(Group Discussion Board Forum #4 Reply)

Freddy Chay

Professor Sullivan-Intermediate Accounting I

(ACCT-301-B03)

Liberty University

July 9th, 2018

Running Head: Reply to Judgement Case 9-10

Despite the self-correcting feature, errors should not be ignored because if the errors are

not discovered in the following year, it is discovered after the following year. The financial

statements are re-stated. To correct the previous year figures of cost of goods sold and net

income. Although no correcting journal entry and adjustment in current year is needed because

error has self-corrected.

The steps required in Accounting for the error correction, 1st step, Financial Statements

for previous years are restated retrospectively. 2nd step, A Journal Entry is made correcting any

incorrect account balance. The 3rd step, If Retained Earnings requires adjustment for correction,

statement of shareholder’s Equity is adjusted as prior period adjustment. The 4th and last step, A

Disclosure Note is provided describing the nature and impact of the error and correction on the

income.

Mistakes due to errors in arithmetic, poor estimates, or carelessness usually require

adjusting, corrective entries. Very often these entries do require a debit/credit to the beginning-

of-period Retained Earnings. Such entries are called “prior period adjustments” (Putra, L. 2008).

Some errors affect only the balance sheet. Such errors require a correcting entry to reclassify

these items under their proper account titles. If comparative balance sheets are prepared that

include the year in which the error was made, the balance sheet for that year should be restated to

reflect the correlation. (Putra, L. 200.)

An understatement of inventory means decreasing Cost of Goods Sold on the Income

Statement, which increases Net Income. On the Balance Sheet, inventory value is increased, and

Retained Earnings decreased. If there is an overstatement of inventory, Cost of Goods Sold

increase the dollar amount, which produces a lower net income. On the Balance Sheet, ending

Running Head: Reply to Judgement Case 9-10

inventory is reduced to reflect lower-ending inventory, and decrease Retained Earnings by Dollar

change to Net Income. (Saint-Leger, R. n.d)

Running Head: Reply to Judgement Case 9-10

Reference

Putra, L. D. (2008, July). Journal Entry for Correction of Errors And Counterbalancing.

Retrieved from http://accounting-financial-tax.com/2008/07/journal-entry-for-correction-of-

errors-and-counterbalancing/

Saint-Leger, R. (n.d.). How to Fix Inventory Errors in Financial Statements. Retrieved from

http://smallbusiness.chron.com/fix-inventory-errors-financial-statements-44155.html

Spiceland, J. D., Sepe, J., Nelson, M., & Thomas, W. (2018). Intermediate accounting (9th ed.).

Boston, MA: McGraw-Hill Custom.