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Counterbalancing errors, correcting errors

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What are some examples of counterbalancing errors? What are some examples of non-counterbalancing errors? What are the differences between counterbalancing and non-counterbalancing errors? How are each handled? Does it matter if the books are closed? Why or why not?

Why do accountants make errors? What types of errors can occur? Why is it necessary to correct them? What are the ramifications of not correcting errors?

What is a change in accounting principle? How do you determine if a change in principle should be reported retroactively, currently, or prospectively? How do these changes affect the financial statements?

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What are some examples of counterbalancing errors?
1. Paying the January rent on December 31 and expensing it in December. Now there are 13 months of rent in last year but there will only be 11 in this year. Yes, they counterbalance, but both years are incorrect with respect to total rent expense.
2. Paying December wages in January without accruing them in December. Last year's wage expense will be short the December payroll but this year will be overstated by one payroll. They counterbalance but both years are wrong.
3. In coding a bank loan payment, the interest portion was forgotten. It will be expensed in the next accounting period but both periods will be wrong.

What are some examples of non-counterbalancing errors?
1. Miscoding expenses such as charging the January advertising to salary expense.
2. Miscoding expenses to a direct cost instead of an indirect cost which will affect the cost of goods sold and gross margin.
3. Making an error in a depreciation calculation.

What are the differences between counterbalancing and non-counterbalancing errors?
Counterbalancing errors will correct themselves by the end of the second year and then will have no effect going forward, but non-counterbalancing errors will continue to be wrong, but only for the year of the error.

How are each handled?
There are a variety of ways that errors are handled for both types:
1. The accounting staff may ...

Solution Summary

The 934 word solution answers all the questions with numerous examples to help with understanding.

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