How to Account for Accounting Errors Explained
How do you account for and correct accounting errors? Professor Farhat explains how to handle accounting errors in financial reporting, from defining what counts as an error to correcting one with a full example. This financial accounting tutorial covers the categories of errors, the retrospective restatement of prior financial statements, prior period adjustments to beginning retained earnings, and the journal entry to correct a depreciation error with its tax effect. Ideal for CPA candidates studying FAR and college students in an intermediate accounting course.
Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students.
Video Timeline & Key Concepts:
0:00 — Introduction
0:08 — What counts as an accounting error
2:03 — Common categories of errors
3:11 — Correcting errors retrospectively
4:35 — Prior period adjustments to beginning retained earnings
6:23 — Worked example correcting a depreciation error
Frequently Asked Questions:
What is considered an accounting error?
An accounting error includes mathematical mistakes, misapplication of facts, use of a non-GAAP method, or an estimate not made in good faith. Errors are distinct from legitimate changes in accounting estimate.
How are material accounting errors corrected?
Material errors are corrected retrospectively. Prior period financial statements are restated as if the error had never occurred, so the statements remain comparable across periods.
What is a prior period adjustment?
A prior period adjustment records the cumulative effect of an error from earlier periods as an adjustment to the beginning balance of retained earnings in the earliest period presented, net of tax.
What are common categories of accounting errors?
Common errors involve revenue and expense recognition, improper classification such as capitalizing an item that should be expensed, equity accounting mistakes, and inventory costing errors.
How does correcting an error affect deferred taxes?
Correcting an error often changes taxable income timing, so the correcting entry usually includes a deferred tax effect alongside the adjustment to the asset or liability and retained earnings.
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