Correcting Accounting Errors
Mastering Correction of Accounting Errors
American Institute of Professional Bookkeepers
© American Institute of Professional Bookkeepers, 2010
No accrual or deferral was recorded (or was recorded for the wrong amount)
For example, revenue was recognized before it was earned.The decimal point was put in the wrong place (for example, 1,000 should be 100)
Correcting Accounting Errors
An account was credited when it should have been debited (or vice versa)
Types of Accounting Errors Omission Accrual or Deferral
Error Classification Error Arithmetic Error Use of an Incorrect
Accounting Principle Use of an Improper
Estimate Transposition Error Slide Error Posting Error
Two digits were reversed (for example, 739 was recorded as 379)
An event was never recorded
For example, depreciation expense was computed using the wrong useful life
Incorrect addition, multiplication, etc.
An amount was posted to the wrong account within a category (e.g., the bill for rent was posted to Insurance Expense)
Correcting Accounting Errors
When Accounting Errors Are FoundAccounting errors are usually discovered during: The monthly bank reconciliation Preparation of the trial balance Reviews of end-of-period adjustments Routine internal audits Year-end audits by external auditors
Correcting Accounting Errors
The Bank ReconciliationCash is the lifeblood of a business Even profitable companies can fail
without adequate cash management Cash can easily be hidden or moved, making it
an attractive target for theft
Correcting Accounting Errors
The Bank ReconciliationOne important control on cash is the monthly bank reconciliationThe bank reconciliation accounts for the difference between the balance on the bank statement and the balance in the company general ledger Cash account(s)Therefore, to be most effective, the bank reconciliation should be done by an employee who neither has custody of nor keeps records of cash
Correcting Accounting Errors
Items on the company‘s books are not on the current bank statement Outstanding checks Deposits in transit Book errors
The Cash account balance and bank statement balance often differ because:
Company checks that have not cleared the bank
Company bank deposits not yet credited to its account
Cash v. Bank Balance Differences
Customer checks returned for insufficient funds (“bounced” checks)
Items on the current bank statement are not yet on the company’s books Bank service charges Collections of notes Nonsufficient funds
(NSF) checks Bank errors
Recent bank fees and charges
Customer loans recently repaid (with interest) directly to the bank
The Cash account balance and bank statement balance often differ because:
Cash v. Bank Balance Differences
Correcting Accounting Errors
The goal: Make these two balances equal
Bank Reconciliation: Example 1
Balance per books, 8/31 Balance per bank, 8/31
Corrected book bal., 8/31 Corrected bank bal., 8/31
XYZ CorpBank Reconciliation
August 20X9
x,xxx x,xxx
x,xxx x,xxx
Reconcile:Items on the bank statement
not (yet) recorded bythe company
Reconcile:Items on the company’s
books not on the current bank statement
Reconcile:Items on the bank statement
not (yet) recorded bythe company
Add to book balance:Collection of note xxxInterest on note xxx
Deduct:NSF check xxxBank service charge xxx
Reconcile:Items on the company’s
books not on the current bank statement
Add to bank balance:Deposits in transit xxx
Deduct:Outstanding checks xxx
Correcting Accounting Errors
Bank Reconciliation: Example 1
Balance per books, 8/31 Balance per bank, 8/31
Corrected book bal., 8/31 Corrected bank bal., 8/31
XYZ CorpBank Reconciliation
August 20X9
x,xxx x,xxx
x,xxx x,xxx
Correcting Accounting Errors
Bank Reconciliation: Example 2As of 11/30, Gym-Bo’s ledger Cash account balance is $16,150 and its bank statement balance is $33,520Two checks, totaling $9,810, are outstanding.A night deposit of $12,150 from the 30th is not on the current bank statement.The bank charged Gym-Bo’s account for a check written by another company for $160.The bank statement shows collection of a $20,000 note receivable plus $900 interest.The bank statement shows an NSF check for $1,000 and a bank service charge for the check of $30.
Bank
Bank
Bank
Book
Book
Correcting Accounting Errors
Bank error 160
Deduct:NSF check 1,000Bank service charge 30
Bank Reconciliation: Example 2
Balance per books 11/30 Balance per bank 11/30
Corrected book bal., 11/30 Corrected bank bal., 11/30
Gym-BoBank Reconciliation
November 20X9
16,150 33,520
36,020 36,020
Add to book balance:Collection of note 20,000Interest on note 900
Deduct:Outstanding checks 9,810
Add to bank balance:Deposits in transit 12,150
Correcting Accounting Errors
Deduct:NSF check 1,000Bank service charge 30
Bank Reconciliation: Example 2
Balance per books 11/30
Corrected book bal., 11/30
Gym-BoBank Reconciliation
November 20X9
16,150
36,020
Add to book balance:Collection of note 20,000Interest on note 900
Book items to be reconciled require journal entries to adjust the current Cash account balance of $16,150 to the reconciled balance of $36,020
Correcting Accounting Errors
Deduct:NSF check 1,000Bank service charge 30
Bank Reconciliation: Example 2
Balance per books 11/30
Corrected book bal., 11/30
Gym-BoBank Reconciliation
November 20X9
16,150
36,020
Add to book balance:Collection of note 20,000Interest on note 900
Cash 20,900Notes Rec. 20,000Interest Revenue 900
Accts Rec. 1,000Cash 1,000
Misc. Expense 30Cash 30
Correcting Accounting Errors
To find errors in the unadjusted trial balance, follow these steps:1. Check that all account balances have been correctly transferred to the trial balance•Scan account balances to see if they are in the correct column (Dr v. Cr)•Make sure that every account with a balance was transferred to the trial balance•Verify that the balance listed in the debit or credit column matches the one in the account
Finding Errors in a Trial Balance
Correcting Accounting Errors
Account Dr CrCash 577Prepaid Assets 48Accounts Receivable 699Accounts Payable 702 Salaries Payable 254R. Smith Capital 566Sales 4,001Cost of Goods Sold 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 200Tax Expense 552
Example
Accounts Payable is a
liability account
(normal credit balance)
Correcting Accounting Errors
To find errors in the unadjusted trial balance, follow these steps:1. Check that all account balances were correctly transferred2. Total the debits and credits. If the totals are not equal, take these steps:
a. Check for a doubling error
Finding Errors in a Trial Balance
Correcting Accounting Errors
Account Dr CrCash 577Prepaid Assets 48Accounts Receivable 699Accounts Payable 702 Salaries Payable 254R. Smith Capital 566Sales 4,001Cost of Good Sold 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 200Tax Expense 552Total
Example
4,8216,225
Calculate the difference
between the two totals and
divide by 2
= 1,404 / 2 = 702
Look for this amount in the trial balance
Correcting Accounting Errors
Account Dr CrCash 577Prepaid Assets 48Accounts Receivable 699Accounts Payable 702 Salaries Payable 254R. Smith Capital 566Sales 4,001Cost of Sales 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 200Tax Expense 552Total
Example
4,8216,2255,5235,523
After the correction is made, the totals should be equal
Correcting Accounting Errors
Finding Errors in a Trial BalanceTo find errors in the unadjusted trial balance, follow these steps:1. Check that all account balances were correctly transferred2. Total the debits and credits. If the totals are not equal, take these steps:
a. Check for a doubling errorb. Check for a slide or transposition error
Correcting Accounting Errors
ExampleAccount Dr CrCash 577Prepaid Assets 48Accounts Receivable 7,990Accounts Payable 702 Salaries Payable 354R. Smith Capital 566Sales 4,011Cost of Goods Sold 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 210Tax Expense 552
12,824 5,633
Calculate the difference
between the two totals and
divide by 9
= 7,191 / 9 = 799
Look for the same total with an extra 0 at the end
Correcting Accounting Errors
ExampleAccount Dr CrCash 577Prepaid Assets 48Accounts Receivable 799Accounts Payable 702 Salaries Payable 354R. Smith Capital 566Sales 4,011Cost of Goods Sold 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 210Tax Expense 552
12,824 5,6335,633
After correcting the error, make sure the totals are now equal
Correcting Accounting Errors
Transposition ErrorsA transposition error occurs when two digits have been reversed. For example: 123 is recorded as 213 7,912 is recoded as 9,712 476 is recorded as 467
Correcting Accounting Errors
ExampleAccount Dr CrCash 757Prepaid Assets 48Accounts Receivable 699Accounts Payable 702 Salaries Payable 254R. Smith Capital 566Sales 4,011Cost of Goods Sold 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 210Tax Expense 552
5,713 5,533
Calculate the difference
between the totals and divide by 9
= 180 / 9 = 20
When the difference
between the totals is
divisible by 9, there may be a transposition
error
Correcting Accounting Errors
Transposition ErrorsTo find an amount that has been
transposed: Find the difference between total debits and
total credits and add 1 to the first digit Example: You find a difference between the totals of
180. The first digit is 1. Add 1 and you get 2.
Find account balances with that difference between the first and second digits Example: Look for account balances where the
difference between the first and second digits is 2
Correcting Accounting Errors
Transposition Errors: ExampleAccount Dr CrCash 757Prepaid Assets 48Accounts Receivable 699Accounts Payable 702 Salaries Payable 254R. Smith Capital 566Sales 4,011Cost of Goods Sold 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 210Tax Expense 552
5,713 5,533
To the first digit of the difference add 1 1 + 1 = 2
Now look for a difference of this amount between the first and second digits
= 180
Correcting Accounting Errors
Transposition Errors: ExampleAccount Dr CrCash 577Prepaid Assets 48Accounts Receivable 699Accounts Payable 702 Salaries Payable 254R. Smith Capital 566Sales 4,011Cost of Goods Sold 1,287 Salaries Expense 1,179Rent Expense 637Utilities Expense 344Interest Expense 210Tax Expense 552
5,713 5,5335,533
After the error is corrected, make sure the totals balance
Correcting Accounting Errors
Finding Errors in a Trial BalanceTo find errors in the unadjusted trial balance, follow these steps:1.Check that all account balances have been correctly transferred to the trial balance2.Total debits and credits—if not equal, look for a doubling, slide or transposition error.3. Examine journal entries and postings
a. Verify that JEs were posted correctly to the ledger accounts
b. Review JEs for obvious errors—you may need to examine source documents
Correcting Accounting Errors
Accrual ErrorsRecall from Mastering Adjusting Entries that an accrual is an expense incurred or revenue earned before cash flowsAt the end of the period, an adjusting entry is recorded to accrue revenues (and receivables)—and expenses (and payables)
The adjusting entry to accrue revenue is:____ Receivable
____ Revenue
The adjusting entry to accrue expenses is:____ Expense
____ Payable
Correcting Accounting Errors
Accrual ErrorsAccrual errors fall into three categories:1. Failure to record the adjusting entry2. Accruing too much3. Accruing too littleIf the error is found before the books are
closed for the year, it can be corrected with a simple journal entry
Correcting Accounting Errors
Accrued Revenue ErrorsReview: The adjusting entry to accrue revenue is:
____ Receivable xxx ____ Revenue xxx
Error:Failure to record the adjusting entry
Correction:Record the adjusting entry
____ Receivable xxx ____ Revenue xxx
Correcting Accounting Errors
Accrued Revenue ErrorsReview: The adjusting entry to accrue revenue is:
____ Receivable xxx____ Revenue xxx
Error:Too much revenue was accrued
Record an adjusting entry with the accounts reversed. The amount must reduce the revenue account to the correct balance.
Correction:
____ Receivable xxx ____ Revenue xxx
Correcting Accounting Errors
Too little revenue was accrued
Accrued Revenue ErrorsReview: The adjusting entry to accrue revenue is:
____ Receivable xxx ____ Revenue xxx
Record an adjusting entry that increases the revenue account to the correct balance
Error:
Correction:
____ Receivable xxx ____ Revenue xxx
Correcting Accounting Errors
Accrued Revenue ErrorsExampleAdviceCo is doing a $30,000 consulting job and will be paid upon completion. At year end, 30% of the job has been completed.
The year-end AJE should be:Accts. Receivable
Consulting Rev. 9,000
9,000
If no AJE was recorded, the correction is simply to record it:
Accts. Receivable Consulting Rev. (a) failed to record an AJE
Correct the error if AdviceCo:9,000
9,000
Correcting Accounting Errors
Accrued Revenue Errors
The year-end AJE should be:Accts. Receivable
Consulting Rev. 9,000
9,000
But AdviceCo recorded:Accts. Receivable
Consulting Rev.
(b) accrued 40% (instead of 30%) of $30,000
(a) failed to record an AJECorrect the error if AdviceCo:
12,00012,000
Accts. Receivable Consulting Rev.
3,0003,000
The correcting journal entry is:
ExampleAdviceCo is doing a $30,000 consulting job and will be paid upon completion. At year end, 30% of the job has been completed.
Correcting Accounting Errors
Accrued Revenue Errors
The year-end AJE should be:Accts. Receivable
Consulting Rev. 9,000
9,000
But AdviceCo recorded:Accts. Receivable
Consulting Rev.
(c) accrued 20% (instead of 30%) $30,000
(b) accrued 40% (instead of 30%) of $30,000
(a) failed to record an AJECorrect the error if AdviceCo:
6,0006,000
The correcting journal entry is:Accts. Receivable
Consulting Rev. 3,000
3,000
ExampleAdviceCo is doing a $30,000 consulting job and will be paid upon completion. At year end, 30% of the job has been completed.
Correcting Accounting Errors
Accrued Expense ErrorsReview: The adjusting entry to accrue an expense is:
____ Expense xxx____ Payable xxx
Error:Failure to record the adjusting entry
Correction:Record the adjusting entry
____ Expense xxx____ Payable xxx
Correcting Accounting Errors
Accrued Expense ErrorsReview: The adjusting entry to accrue an expense is:
____ Expense xxx ____ Payable xxx
Error:Too much expense was accrued
Record an adjusting entry that reduces the expense account to the correct balance
Correction:
____ Expense xxx____ Payable xxx
Correcting Accounting Errors
Too little expense was accrued
Accrued Expense ErrorsReview: The adjusting entry to accrue an expense is:
____ Expense xxx ____ Payable xxx
Record an adjusting entry that increases the expense account to the correct balance
Error:
Correction:
____ Expense xxx____ Payable xxx
Correcting Accounting Errors
Accrued Expense ErrorsExampleClarkCo takes a $50,000 loan at an annual interest rate of 12%. Interest is paid twice a year on 2/1 and 8/1. The last payment was on 8/1 this year.
The year-end AJE should be:Interest Exp.
Interest Payable 2,500
2,500
If ClarkCo failed to record an AJE, the correction is simply to record it:
(a) failed to record an AJECorrect the error if ClarkCo:
Interest Exp. Interest Payable
2,5002,500
Correcting Accounting Errors
Interest Payable
Accrued Expense Errors
The year-end AJE should be:
But ClarkCo recorded the following entry:
Therefore, the correcting entry is:
Interest Exp. Interest Payable
2,5002,500
Interest Exp. Interest Payable
3,0003,000
Interest Exp. 500
500
(b) accrued 6 (instead of 5) months’ interest
(a) failed to record an AJE
ExampleClarkCo takes a $50,000 loan at an annual interest rate of 12%. Interest is paid twice a year on 2/1 and 8/1. The last payment was on 8/1 this year.
Correct the error if ClarkCo:
Correcting Accounting Errors
Accrued Expense Errors
The year-end AJE should be:
But ClarkCo recorded the following entry:
Therefore, the correcting entry is:
Interest Exp. Interest Payable
2,5002,500
Interest Exp. Interest Payable
1,5001,500
Interest Exp. Interest Payable
1,0001,000(c) accrued 3 (instead of 5)
months’ interest
(b) accrued 6 (instead of 5) months’ interest
(a) failed to record an AJE
ExampleClarkCo takes a $50,000 loan at an annual interest rate of 12%. Interest is paid twice a year on 2/1 and 8/1. The last payment was on 8/1 this year.
Correct the error if ClarkCo:
Correcting Accounting Errors
Deferred Expense ErrorsRecall from Mastering Adjusting Entries that a deferred expense is a prepaid expense.The original entry may have an included an asset account—or an expense account:
Thus, the adjusting entry was either:
Prepaid Exp. xxxCash
xxx
Expense xxxCash xxx
Expense xxxPrepaid Exp. xxx
Prepaid Exp. xxxExpense xxx
Correcting Accounting Errors
Deferred Expense ErrorsReview: If the prepayment was recorded as an asset (prepaid expense), the adjusting entry is:
Error:Failure to record the adjusting entry
Correction:Record the adjusting entry
Expense xxxPrepaid Exp. xxx
Expense xxxPrepaid Exp. xxx
Correcting Accounting Errors
Deferred Expense ErrorsReview: If the prepayment was recorded as an asset (prepaid expense), the adjusting entry is:
Too much expense was recognized
Record an adjusting entry with the accounts reversed. The amount must reduce the expense account to the correct balance.
Error:
Correction:
Expense xxxPrepaid Exp. xxx
Prepaid Exp. xxxExpense xxx
Correcting Accounting Errors
Too little expense was recognized
Deferred Expense ErrorsReview: If the prepayment was recorded as an asset (prepaid expense), the adjusting entry is:
Record an adjusting entry that increases the expense account to the correct balance
Error:
Correction:
Expense xxxPrepaid Exp. xxx
Expense xxxPrepaid Exp. xxx
Correcting Accounting Errors
Deferred Expense Errors
The year-end AJE should be:Insurance Expense
Prepaid Insurance800
800
If no AJE was recorded, the correction is simply to record it:Insurance Expense
Prepaid Insurance800
800
ExampleOn May 1, TruckCo prepays $2,400 for 2 years’ insurance and debits Prepaid Insurance.
(a) failed to record an AJE.
Correct the error if TruckCo:
Correcting Accounting Errors
Deferred Expense Errors
The year-end AJE should be:Insurance Expense
Prepaid Insurance800
800
But TruckCo recorded:
(b) recognized $500 of insurance expense
(a) failed to record an AJE Insurance Expense Prepaid Insurance
500500
The correcting journal entry is:
Insurance Expense Prepaid Insurance
300300
Correct the error if TruckCo:
ExampleOn May 1, TruckCo prepays $2,400 for 2 years’ insurance and debits Prepaid Insurance.
Correcting Accounting Errors
Deferred Expense Errors
The year-end AJE should be:Insurance Expense
Prepaid Insurance800
800
(c) recognized $1,000 insurance expense
(b) recognized $500 of insurance expense
(a) failed to record an AJE Insurance Expense Prepaid Insurance
1,0001,000
Insurance Expense Prepaid Insurance 200
200
But TruckCo recorded:
The correcting journal entry is:
ExampleOn May 1, TruckCo prepays $2,400 for 2 years’ insurance and debits Prepaid Insurance.
Correct the error if TruckCo:
Correcting Accounting Errors
Deferred Expense ErrorsReview: If the prepayment was recorded as an expense, the adjusting entry is:
Error:Failure to record the AJE
Correction:Record the AJE:
Expense xxxPrepaid Exp. xxx
Expense xxxPrepaid Exp. xxx
Correcting Accounting Errors
Too much expense recognized (too little deferred)
Deferred Expense Errors
Record an adjusting entry that reduces the expense account to the correct balance
Error:
Correction:
Expense xxxPrepaid Exp. xxx
Review: If the prepayment was recorded as an expense, the adjusting entry is:
Expense xxxPrepaid Exp. xxx
Correcting Accounting Errors
Deferred Expense ErrorsReview: If the prepayment was recorded as an expense, the adjusting entry is:
Record an adjusting entry with the accounts reversed. The amount must increase the expense account to the correct balance.
Error:
Correction:
Too little expense recognized (too much deferred)
Prepaid Exp. xxxExpense xxx
Expense xxxPrepaid Exp. xxx
Correcting Accounting Errors
Deferred Expense ErrorsExampleXylis Entertainment prepaid $3,600 for 6 months’ rent on November 1 and debited Rent Expense.
The year-end AJE should be:
Rent Expense Prepaid Rent
2,400
If Xylis failed to record an AJE, the correction is simply to record it:
(a) failed to record an AJE
Correct the error if Xylis:
Rent Expense Prepaid Rent 2,400
2,400
2,400
Correcting Accounting Errors
Deferred Expense Errors
The year-end AJE should be:
But Xylis recorded:
(b) deferred $3,000 of rent expense
(a) failed to record an AJE
Correct the error if Xylis:
3,0003,000
The correcting journal entry is:
Rent Expense Prepaid Rent
600600
Rent Expense Prepaid Rent
2,400
Rent Expense Prepaid Rent
ExampleXylis Entertainment prepaid $3,600 for 6 months’ rent on November 1 and debited Rent Expense.
2,400
Correcting Accounting Errors
Deferred Expense Errors
The year-end AJE should be:
But Xylis recorded:
(c) deferred $1,800 of rent expense
(b) deferred $3,000 of rent expense
(a) failed to record an AJE1,800
1,800
Rent Expense Prepaid Rent 600
600
Rent Expense Prepaid Rent 2,400
Rent Expense Prepaid Rent
Correct the error if Xylis:
The correcting journal entry is:
ExampleXylis Entertainment prepaid $3,600 for 6 months’ rent on November 1 and debited Rent Expense. 2,400
Correcting Accounting Errors
Deferred Revenue ErrorsReview: If the advance payment was recorded as a liability (unearned revenue), the adjusting entry is:
Error:Failure to record the AJE
Correction:Record the AJE
Unearned Revenue xxxRevenue xxx
Unearned Revenue xxxRevenue xxx
Correcting Accounting Errors
Deferred Revenue Errors
Too much revenue recognized
Record an adjusting entry with the accounts reversed. The amount must reduce the revenue account to the correct balance.
Error:
Correction:
Review: If the advance payment was recorded as a liability (unearned revenue), the adjusting entry is:
Unearned Revenue xxxRevenue xxx
Revenue xxxUnearned Revenue xxx
Correcting Accounting Errors
Too little revenue recognized
Deferred Revenue Errors
Record an adjusting entry that increases the revenue account to the correct balance
Error:
Correction:
Review: If the advance payment was recorded as a liability (unearned revenue), the adjusting entry is:
Unearned Revenue xxxRevenue xxx
Unearned Revenue xxxRevenue xxx
Correcting Accounting Errors
Deferred Revenue ErrorsExampleOn Sept. 1, AlarmCo received $480 in advance for 24 months’ alarm monitoring and credited Unearned Revenue.
The year-end AJE should be:Unearned Revenue
Revenue80
80
If AlarmCo failed to record an AJE, the correction is simply to record it:
(a) failed to record an AJE
Correct the error if AlarmCo:
Unearned RevenueRevenue
8080
Correcting Accounting Errors
Deferred Revenue Errors
But AlarmCo recorded:
Unearned RevenueRevenue
6060
The correcting journal entry is:Unearned Revenue
Revenue20
20
The year-end AJE should be:Unearned Revenue
Revenue80
80
(b) recognized $60 of revenue(a) failed to record an AJE
Correct the error if AlarmCo:
ExampleOn Sept. 1, AlarmCo received $480 in advance for 24 months’ alarm monitoring and credited Unearned Revenue.
Correcting Accounting Errors
Deferred Revenue Errors
But AlarmCo recorded:
Unearned RevenueRevenue
120120
The correcting journal entry is:
Unearned RevenueRevenue 40
40
The year-end AJE should be:Unearned Revenue
Revenue80
80
(c) recognized $120 of revenue(b) recognized $60 of revenue(a) failed to record an AJE
Correct the error if AlarmCo:
ExampleOn Sept. 1, AlarmCo received $480 in advance for 24 months’ alarm monitoring and credited Unearned Revenue.
Correcting Accounting Errors
Deferred Revenue ErrorsReview: If the advance payment was recorded as revenue, the adjusting entry is:
Error:Failure to record the AJE
Correction:Record the AJE
Revenue xxxUnearned Revenue xxx
Revenue xxxUnearned Revenue xxx
Correcting Accounting Errors
Too much revenue recognized
Deferred Revenue Errors
Record an adjusting entry that reduces the revenue account to the correct balance
Error:
Correction:
Revenue xxxUnearned Revenue xxx
Review: If the advance payment was recorded as revenue, the adjusting entry is:
Revenue xxxUnearned Revenue xxx
Correcting Accounting Errors
Deferred Revenue Errors
Too little revenue recognized (too much deferred)
Record an adjusting entry with the accounts reversed. The amount must increase the revenue account to the correct balance.
Error:
Correction:
Review: If the advance payment was recorded as revenue, the adjusting entry is:
Revenue xxxUnearned Revenue xxx
Unearned Revenue xxxRevenue xxx
Correcting Accounting Errors
Deferred Revenue ErrorsExampleOn Sept. 1, LeaseCo received $6,000 in advance for a 12-month equipment rental and credited Revenue.
The year-end AJE should be:Revenue
Unearned Revenue
4,0004,000
If LeaseCo failed to record an AJE, the correction is simply to record it:
(a) failed to record an AJE
Correct the error if LeaseCo:
RevenueUnearned Revenue
4,0004,000
Correcting Accounting Errors
Deferred Revenue Errors
But LeaseCo recorded:
RevenueUnearned Revenue
4,5004,500
The correcting journal entry is:
RevenueUnearned Revenue 500
500
The year-end AJE should be:Revenue
Unearned Revenue
4,0004,000
(b) deferred $4,500 of revenue(a) failed to record an AJE
Correct the error if LeaseCo:
ExampleOn Sept. 1, LeaseCo received $6,000 in advance for a 12-month equipment rental and credited Revenue.
Correcting Accounting Errors
Deferred Revenue Errors
RevenueUnearned Rev.
1,5001,500
RevenueUnearned Rev.
2,5002,500
The year-end AJE should be:Revenue
Unearned Revenue
4,0004,000
(a) failed to record an AJE
(c) deferred $1,800 of revenue(b) deferred $3,600 of revenue
But LeaseCo recorded:
The correcting journal entry is:
Correct the error if LeaseCo:
ExampleOn Sept. 1, LeaseCo received $6,000 in advance for a 12-month equipment rental and credited Revenue.