Professional Documents
Culture Documents
On December 31, 2016, accrued rent expense of P50, 000 was not recorded.
Correct entry would be:
Retained earnings 50000
Rent Expense 50000
The retained earnings account is debited because the net income of 2016 was overstated.
The rent expense is credited because the accrual of 2016 necessarily was paid in 2017 and the same was debited
to rent expense, thus overstating the rent expense of 2017
The rent income is debited because the unearned income on December 31, 2016 becomes an income of 2017.
If the books for 2017 have been closed, no entry is necessary because the 2016 error is counterbalanced in 2017.
The 2016 rent income was overstated while the 2017 rent income was understated. Thus, they counterbalance
each other.
The interest income is debited because the interest accrual of 2016 necessarily was received in 2017.and the same
credited to interest income, thus overstating the 2017 interest income.
The retained earnings account is credited because the 2016 income was understated.
If the books for 2017 have been closed, no entry is necessary because the 2016 error is counterbalanced in 2017.
The 2016 interest income was understated while the 2017 interest income was overstated. Thus, they equalize
each other.
Noncounterbalancing errors
Are errors which, if not detected, are not automatically counterbalanced or corrected in the next accounting
period.
In other words, if the net income of one year is understated or overstated, the net income of subsequent year is
not affected.
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.
Illustration
On January 1, 2016, the entity purchased an equipment with useful life of 5 years for 500, 000 but the same was
debited to repair ad maintenance.
If the books for 2017 have not been closed, the entries to correct on December 31, 2017 are:
1. Equipment 500, 000
Retained earnings 500, 000
2. Depreciation (500, 00/5) 100, 000
Retained earnings 100, 000
Accumulated depreciation 200, 000
An entity reported net income for 2015 P3,000,000, 2016 P4,000,000, and 2017 P3,500,000.
1. December 31, 2015 inventory overstated 120, 000
2. December 31, 2017 inventory understated 210, 000
3. December 31, 2015 Accrued interest payable understated 40, 000
4. December 31, 2017 accrued interest payable overstated 90, 000
5. Depreciation for 2016 Understated 180, 000
6. Depreciation for 2017 overstated 30, 000