Lesson 19

Question 1

What are some common types of errors?

Answer 1

1. A change from an accounting principle that is NOT GAAP to an accounting principle that is GAAP. Example - Change from cash to accrual.
2. Mathematical mistakes
3. Estimates were not prepare in good faith
4. Failure to accrue or defer expenses and revenues at the end of period
5. A misuse of facts. Example - Failure to use salvage value
6. Incorrect classification of a cost as an expense or asset.

Question 2

How do companies correct errors once found?

Answer 2

It is an adjustment to the beginning balance of retained earnings in the current period. Called Prior period adjustments.

Question 3

How is the failure to record depreciation expense in a given year accounted for?

Answer 3

as a prior period adjustment

Question 4

On July 1, 2020, Elberta Corp. acquired equipment at a cost of $1,020,000. It is to be depreciated on the straight-line method over a four-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Elberta’s 2020 financial statements. The oversight was discovered during the preparation of Elberta’s 2021 financial statements.

Which account will be affected by correcting the error that occurred in 2020, assuming comparative financial statements are not prepared?

Answer 4

Accumulated Depreciation