Mastering Correction of Accounting Errors American Institute of Professional Bookkeepers © American Institute of Professional Bookkeepers, 2010 Correcting Accounting Errors

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 An event was never recorded No accrual or deferral was recorded (or was recorded for the wrong amount) An amount was posted to the wrong account within a category (e.g., the bill for rent was posted to Insurance Expense) Incorrect addition, multiplication, etc. For example, revenue was recognized before it was earned. For example, depreciation expense was computed using the wrong useful life The decimal point was put in the wrong place (for example, 1,000 should be 100) Two digits were reversed (for example, 739 was recorded as 379) An account was credited when it should have been debited (or vice versa) Correcting Accounting Errors

Correcting Accounting Errors When Accounting Errors Are Found Accounting 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 Reconciliation Cash 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 Internal controls on cash are critical for every businesses Correcting Accounting Errors

The Bank Reconciliation One important control on cash is the monthly bank reconciliation The 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

Correcting Accounting Errors Cash v. Bank Balance Differences The Cash account balance and bank statement balance often differ because: Items on the company‘s books are not on the current bank statement Outstanding checks Deposits in transit Book errors Company checks that have not cleared the bank Company bank deposits not yet credited to its account Correcting Accounting Errors

Correcting Accounting Errors Cash v. Bank Balance Differences The Cash account balance and bank statement balance often differ because: 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 Customer checks returned for insufficient funds (“bounced” checks) Correcting Accounting Errors

Bank Reconciliation: Example 1 XYZ Corp Bank Reconciliation August 20X9 Balance per books, 8/31 x,xxx Balance per bank, 8/31 x,xxx Reconcile: Items on the bank statement not (yet) recorded by the company Reconcile: Items on the company’s books not on the current bank statement Corrected book bal., 8/31 x,xxx Corrected bank bal., 8/31 x,xxx The goal: Make these two balances equal Correcting Accounting Errors

Bank Reconciliation: Example 1 XYZ Corp Bank Reconciliation August 20X9 Balance per books, 8/31 x,xxx Balance per bank, 8/31 x,xxx Add to book balance: Collection of note xxx Interest on note xxx Deduct: NSF check xxx Bank service charge xxx Reconcile: Items on the bank statement not (yet) recorded by the company Add to bank balance: Deposits in transit xxx Deduct: Outstanding checks xxx Reconcile: Items on the company’s books not on the current bank statement Corrected book bal., 8/31 x,xxx Corrected bank bal., 8/31 x,xxx Correcting Accounting Errors

Bank Reconciliation: Example 2 As of 11/30, Gym-Bo’s ledger Cash account balance is $16,150 and its bank statement balance is $33,520 Two 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 Reconciliation: Example 2 Gym-Bo Bank Reconciliation November 20X9 Balance per books 11/30 16,150 Balance per bank 11/30 33,520 Add to book balance: Collection of note 20,000 Interest on note 900 Add to bank balance: Deposits in transit 12,150 Bank error 160 Deduct: NSF check 1,000 Bank service charge 30 Deduct: Outstanding checks 9,810 Corrected book bal., 11/30 36,020 Corrected bank bal., 11/30 36,020 Correcting Accounting Errors

Bank Reconciliation: Example 2 Gym-Bo Bank Reconciliation November 20X9 Balance per books 11/30 16,150 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 Add to book balance: Collection of note 20,000 Interest on note 900 Deduct: NSF check 1,000 Bank service charge 30 Corrected book bal., 11/30 36,020 Correcting Accounting Errors

Bank Reconciliation: Example 2 Gym-Bo Bank Reconciliation November 20X9 Balance per books 11/30 16,150 Add to book balance: Collection of note 20,000 Interest on note 900 Cash 20,900 Notes Rec. 20,000 Interest Revenue 900 Accts Rec. 1,000 Cash 1,000 Deduct: NSF check 1,000 Bank service charge 30 Misc. Expense 30 Cash 30 Corrected book bal., 11/30 36,020 Correcting Accounting Errors

Finding Errors in a Trial Balance 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 Correcting Accounting Errors

Correcting Accounting Errors Example Account Dr Cr Cash 577 Accounts Payable is a liability account (normal credit balance) Prepaid Assets 48 Accounts Receivable 699 Accounts Payable 702 Salaries Payable 254 R. Smith Capital 566 Sales 4,001 Cost of Goods Sold 1,287 Salaries Expense 1,179 Rent Expense 637 Utilities Expense 344 Interest Expense 200 Tax Expense 552 Correcting Accounting Errors

Finding Errors in a Trial Balance To find errors in the unadjusted trial balance, follow these steps: 1. Check that all account balances were correctly transferred 2. Total the debits and credits. If the totals are not equal, take these steps: a. Check for a doubling error Correcting Accounting Errors

Correcting Accounting Errors Example Account Dr Cr Cash 577 Prepaid Assets 48 Accounts Receivable 699 Look for this amount in the trial balance Accounts Payable 702 Salaries Payable 254 R. Smith Capital 566 Sales 4,001 Cost of Good Sold 1,287 Salaries Expense 1,179 Rent Expense 637 Utilities Expense 344 Interest Expense 200 Calculate the difference between the two totals and divide by 2 Tax Expense 552 Total 6,225 4,821 = 1,404 / 2 = 702 Correcting Accounting Errors

Correcting Accounting Errors Example Account Dr Cr Cash 577 Prepaid Assets 48 Accounts Receivable 699 Accounts Payable 702 Salaries Payable 254 R. Smith Capital 566 Sales 4,001 Cost of Sales 1,287 Salaries Expense 1,179 After the correction is made, the totals should be equal Rent Expense 637 Utilities Expense 344 Interest Expense 200 Tax Expense 552 Total 6,225 4,821 5,523 5,523 Correcting Accounting Errors

Finding Errors in a Trial Balance To find errors in the unadjusted trial balance, follow these steps: 1. Check that all account balances were correctly transferred 2. Total the debits and credits. If the totals are not equal, take these steps: a. Check for a doubling error b. Check for a slide or transposition error Correcting Accounting Errors

Correcting Accounting Errors Example Account Dr Cr Look for the same total with an extra 0 at the end Cash 577 Prepaid Assets 48 Accounts Receivable 7,990 Accounts Payable 702 Salaries Payable 354 R. Smith Capital 566 Sales 4,011 Cost of Goods Sold 1,287 Salaries Expense 1,179 Rent Expense 637 Utilities Expense 344 Interest Expense 210 Calculate the difference between the two totals and divide by 9 Tax Expense 552 12,824 5,633 = 7,191 / 9 = 799 Correcting Accounting Errors

Correcting Accounting Errors Example Account Dr Cr Cash 577 Prepaid Assets 48 Accounts Receivable 799 Accounts Payable 702 Salaries Payable 354 R. Smith Capital 566 Sales 4,011 Cost of Goods Sold 1,287 Salaries Expense 1,179 After correcting the error, make sure the totals are now equal Rent Expense 637 Utilities Expense 344 Interest Expense 210 Tax Expense 552 12,824 5,633 5,633 Correcting Accounting Errors

Correcting Accounting Errors Transposition Errors A 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

Correcting Accounting Errors Example Account Dr Cr Cash 757 Prepaid Assets 48 Accounts Receivable 699 Accounts Payable 702 Salaries Payable 254 When the difference between the totals is divisible by 9, there may be a transposition error R. Smith Capital 566 Sales 4,011 Cost of Goods Sold 1,287 Salaries Expense 1,179 Rent Expense 637 Utilities Expense 344 Interest Expense 210 Calculate the difference between the totals and divide by 9 Tax Expense 552 / 9 = 20 5,713 5,533 = 180 Correcting Accounting Errors

Correcting Accounting Errors Transposition Errors To 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: Example Account Dr Cr To the first digit of the difference add 1 Cash 757 Prepaid Assets 48 Accounts Receivable 699 1 + 1 = 2 Now look for a difference of this amount between the first and second digits Accounts Payable 702 Salaries Payable 254 R. Smith Capital 566 Sales 4,011 Cost of Goods Sold 1,287 Salaries Expense 1,179 Rent Expense 637 Utilities Expense 344 Interest Expense 210 Tax Expense 552 5,713 5,533 = 180 Correcting Accounting Errors

Transposition Errors: Example Account Dr Cr Cash 577 Prepaid Assets 48 Accounts Receivable 699 Accounts Payable 702 Salaries Payable 254 R. Smith Capital 566 Sales 4,011 Cost of Goods Sold 1,287 Salaries Expense 1,179 After the error is corrected, make sure the totals balance Rent Expense 637 Utilities Expense 344 Interest Expense 210 Tax Expense 552 5,713 5,533 5,533 Correcting Accounting Errors

Finding Errors in a Trial Balance To find errors in the unadjusted trial balance, follow these steps: Check that all account balances have been correctly transferred to the trial balance Total debits and credits—if not equal, look for a doubling, slide or transposition error. 3. Examine journal entries and postings Verify that JEs were posted correctly to the ledger accounts Review JEs for obvious errors—you may need to examine source documents Correcting Accounting Errors

Correcting Accounting Errors Accrual Errors Recall from Mastering Adjusting Entries that an accrual is an expense incurred or revenue earned before cash flows At 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: The adjusting entry to accrue expenses is: ____ Receivable ____ Expense ____ Payable ____ Revenue Correcting Accounting Errors

Correcting Accounting Errors Accrual Errors Accrual errors fall into three categories: Failure to record the adjusting entry Accruing too much Accruing too little If 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 Errors Review: 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 Errors Review: The adjusting entry to accrue revenue is: ____ Receivable xxx ____ Revenue xxx Error: Too much revenue was accrued Correction: Record an adjusting entry with the accounts reversed. The amount must reduce the revenue account to the correct balance. ____ Revenue xxx ____ Receivable xxx Correcting Accounting Errors

Accrued Revenue Errors Review: The adjusting entry to accrue revenue is: ____ Receivable xxx ____ Revenue xxx Error: Too little revenue was accrued Correction: Record an adjusting entry that increases the revenue account to the correct balance ____ Receivable xxx ____ Revenue xxx Correcting Accounting Errors

Accrued Revenue Errors Example AdviceCo 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 9,000 Consulting Rev. 9,000 If no AJE was recorded, the correction is simply to record it: Correct the error if AdviceCo: Accts. Receivable 9,000 (a) failed to record an AJE Consulting Rev. 9,000 Correcting Accounting Errors

Accrued Revenue Errors Example AdviceCo 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 9,000 Consulting Rev. 9,000 But AdviceCo recorded: Accts. Receivable 12,000 Correct the error if AdviceCo: Consulting Rev. 12,000 (a) failed to record an AJE The correcting journal entry is: (b) accrued 40% (instead of 30%) of $30,000 Consulting Rev. 3,000 Accts. Receivable 3,000 Correcting Accounting Errors

Accrued Revenue Errors Example AdviceCo 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 9,000 Consulting Rev. 9,000 But AdviceCo recorded: Accts. Receivable 6,000 Consulting Rev. Correct the error if AdviceCo: 6,000 (a) failed to record an AJE The correcting journal entry is: (b) accrued 40% (instead of 30%) of $30,000 Accts. Receivable 3,000 Consulting Rev. 3,000 (c) accrued 20% (instead of 30%) $30,000 Correcting Accounting Errors

Accrued Expense Errors Review: 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 Errors Review: The adjusting entry to accrue an expense is: ____ Expense xxx ____ Payable xxx Error: Too much expense was accrued Correction: Record an adjusting entry that reduces the expense account to the correct balance ____ Payable xxx ____ Expense xxx Correcting Accounting Errors

Accrued Expense Errors Review: The adjusting entry to accrue an expense is: ____ Expense xxx ____ Payable xxx Error: Too little expense was accrued Correction: Record an adjusting entry that increases the expense account to the correct balance ____ Expense xxx ____ Payable xxx Correcting Accounting Errors

Accrued Expense Errors Example ClarkCo 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. 2,500 Interest Payable 2,500 If ClarkCo failed to record an AJE, the correction is simply to record it: Correct the error if ClarkCo: (a) failed to record an AJE Interest Exp. 2,500 Interest Payable 2,500 Correcting Accounting Errors

Accrued Expense Errors Example ClarkCo 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. 2,500 Interest Payable 2,500 But ClarkCo recorded the following entry: Correct the error if ClarkCo: Interest Exp. 3,000 Interest Payable 3,000 (a) failed to record an AJE (b) accrued 6 (instead of 5) months’ interest Therefore, the correcting entry is: Interest Payable 500 Interest Exp. 500 Correcting Accounting Errors

Accrued Expense Errors Example ClarkCo 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. 2,500 Interest Payable 2,500 But ClarkCo recorded the following entry: Correct the error if ClarkCo: Interest Exp. 1,500 Interest Payable 1,500 (a) failed to record an AJE (b) accrued 6 (instead of 5) months’ interest Therefore, the correcting entry is: Interest Exp. 1,000 (c) accrued 3 (instead of 5) months’ interest Interest Payable 1,000 Correcting Accounting Errors

Deferred Expense Errors Recall 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. xxx Expense xxx or Cash xxx Cash xxx Expense xxx Prepaid Exp. xxx or Prepaid Exp. xxx Expense xxx Correcting Accounting Errors

Deferred Expense Errors Review: If the prepayment was recorded as an asset (prepaid expense), the adjusting entry is: Expense xxx Prepaid Exp. xxx Error: Failure to record the adjusting entry Correction: Record the adjusting entry Expense xxx Prepaid Exp. xxx Correcting Accounting Errors

Deferred Expense Errors Review: If the prepayment was recorded as an asset (prepaid expense), the adjusting entry is: Expense xxx Prepaid Exp. xxx Error: Too much expense was recognized Correction: Record an adjusting entry with the accounts reversed. The amount must reduce the expense account to the correct balance. Prepaid Exp. xxx Expense xxx Correcting Accounting Errors

Deferred Expense Errors Review: If the prepayment was recorded as an asset (prepaid expense), the adjusting entry is: Expense xxx Prepaid Exp. xxx Error: Too little expense was recognized Correction: Record an adjusting entry that increases the expense account to the correct balance Expense xxx Prepaid Exp. xxx Correcting Accounting Errors

Deferred Expense Errors Example On May 1, TruckCo prepays $2,400 for 2 years’ insurance and debits Prepaid Insurance. The year-end AJE should be: Insurance Expense 800 Prepaid Insurance 800 Correct the error if TruckCo: If no AJE was recorded, the correction is simply to record it: (a) failed to record an AJE. Insurance Expense 800 Prepaid Insurance 800 Correcting Accounting Errors

Deferred Expense Errors Example On May 1, TruckCo prepays $2,400 for 2 years’ insurance and debits Prepaid Insurance. The year-end AJE should be: Insurance Expense 800 Prepaid Insurance 800 Correct the error if TruckCo: But TruckCo recorded: (a) failed to record an AJE Insurance Expense 500 Prepaid Insurance 500 (b) recognized $500 of insurance expense The correcting journal entry is: Insurance Expense 300 Prepaid Insurance 300 Correcting Accounting Errors

Deferred Expense Errors Example On May 1, TruckCo prepays $2,400 for 2 years’ insurance and debits Prepaid Insurance. The year-end AJE should be: Insurance Expense 800 Prepaid Insurance 800 Correct the error if TruckCo: But TruckCo recorded: (a) failed to record an AJE Insurance Expense 1,000 Prepaid Insurance 1,000 (b) recognized $500 of insurance expense The correcting journal entry is: (c) recognized $1,000 insurance expense Prepaid Insurance 200 Insurance Expense 200 Correcting Accounting Errors

Deferred Expense Errors Review: If the prepayment was recorded as an expense, the adjusting entry is: Prepaid Exp. xxx Expense xxx Error: Failure to record the AJE Correction: Record the AJE: Prepaid Exp. xxx Expense xxx Correcting Accounting Errors

Deferred Expense Errors Review: If the prepayment was recorded as an expense, the adjusting entry is: Prepaid Exp. xxx Expense xxx Error: Too much expense recognized (too little deferred) Correction: Record an adjusting entry that reduces the expense account to the correct balance Prepaid Exp. xxx Expense xxx Correcting Accounting Errors

Deferred Expense Errors Review: If the prepayment was recorded as an expense, the adjusting entry is: Prepaid Exp. xxx Expense xxx Error: Too little expense recognized (too much deferred) Correction: Record an adjusting entry with the accounts reversed. The amount must increase the expense account to the correct balance. Expense xxx Prepaid Exp. xxx Correcting Accounting Errors

Deferred Expense Errors Example Xylis Entertainment prepaid $3,600 for 6 months’ rent on November 1 and debited Rent Expense. The year-end AJE should be: Prepaid Rent 2,400 Rent Expense 2,400 Correct the error if Xylis: If Xylis failed to record an AJE, the correction is simply to record it: (a) failed to record an AJE Prepaid Rent 2,400 Rent Expense 2,400 Correcting Accounting Errors

Deferred Expense Errors Example Xylis Entertainment prepaid $3,600 for 6 months’ rent on November 1 and debited Rent Expense. The year-end AJE should be: Prepaid Rent 2,400 Rent Expense 2,400 Correct the error if Xylis: But Xylis recorded: (a) failed to record an AJE Prepaid Rent 3,000 (b) deferred $3,000 of rent expense Rent Expense 3,000 The correcting journal entry is: Rent Expense 600 Prepaid Rent 600 Correcting Accounting Errors

Deferred Expense Errors Example Xylis Entertainment prepaid $3,600 for 6 months’ rent on November 1 and debited Rent Expense. The year-end AJE should be: Prepaid Rent 2,400 Rent Expense 2,400 Correct the error if Xylis: But Xylis recorded: (a) failed to record an AJE Prepaid Rent 1,800 (b) deferred $3,000 of rent expense Rent Expense 1,800 (c) deferred $1,800 of rent expense The correcting journal entry is: Prepaid Rent 600 Rent Expense 600 Correcting Accounting Errors

Deferred Revenue Errors Review: If the advance payment was recorded as a liability (unearned revenue), the adjusting entry is: Unearned Revenue xxx Revenue xxx Error: Failure to record the AJE Correction: Record the AJE Unearned Revenue xxx Revenue xxx Correcting Accounting Errors

Deferred Revenue Errors Review: If the advance payment was recorded as a liability (unearned revenue), the adjusting entry is: Unearned Revenue xxx Revenue xxx Error: Too much revenue recognized Correction: Record an adjusting entry with the accounts reversed. The amount must reduce the revenue account to the correct balance. Revenue xxx Unearned Revenue xxx Correcting Accounting Errors

Deferred Revenue Errors Review: If the advance payment was recorded as a liability (unearned revenue), the adjusting entry is: Unearned Revenue xxx Revenue xxx Error: Too little revenue recognized Correction: Record an adjusting entry that increases the revenue account to the correct balance Unearned Revenue xxx Revenue xxx Correcting Accounting Errors

Deferred Revenue Errors Example On Sept. 1, AlarmCo received $480 in advance for 24 months’ alarm monitoring and credited Unearned Revenue. The year-end AJE should be: Unearned Revenue 80 Revenue 80 Correct the error if AlarmCo: If AlarmCo failed to record an AJE, the correction is simply to record it: (a) failed to record an AJE Unearned Revenue 80 Revenue 80 Correcting Accounting Errors

Deferred Revenue Errors Example On Sept. 1, AlarmCo received $480 in advance for 24 months’ alarm monitoring and credited Unearned Revenue. The year-end AJE should be: Unearned Revenue 80 Revenue 80 Correct the error if AlarmCo: But AlarmCo recorded: (a) failed to record an AJE Unearned Revenue 60 (b) recognized $60 of revenue Revenue 60 The correcting journal entry is: Unearned Revenue 20 Revenue 20 Correcting Accounting Errors

Deferred Revenue Errors Example On Sept. 1, AlarmCo received $480 in advance for 24 months’ alarm monitoring and credited Unearned Revenue. The year-end AJE should be: Unearned Revenue 80 Revenue 80 Correct the error if AlarmCo: But AlarmCo recorded: (a) failed to record an AJE Unearned Revenue 120 (b) recognized $60 of revenue Revenue 120 (c) recognized $120 of revenue The correcting journal entry is: Revenue 40 Unearned Revenue 40 Correcting Accounting Errors

Deferred Revenue Errors Review: If the advance payment was recorded as revenue, the adjusting entry is: Revenue xxx Unearned Revenue xxx Error: Failure to record the AJE Correction: Record the AJE Revenue xxx Unearned Revenue xxx Correcting Accounting Errors

Deferred Revenue Errors Review: If the advance payment was recorded as revenue, the adjusting entry is: Revenue xxx Unearned Revenue xxx Error: Too much revenue recognized Correction: Record an adjusting entry that reduces the revenue account to the correct balance Revenue xxx Unearned Revenue xxx Correcting Accounting Errors

Deferred Revenue Errors Review: If the advance payment was recorded as revenue, the adjusting entry is: Revenue xxx Unearned Revenue xxx Error: Too little revenue recognized (too much deferred) Correction: Record an adjusting entry with the accounts reversed. The amount must increase the revenue account to the correct balance. Unearned Revenue xxx Revenue xxx Correcting Accounting Errors

Deferred Revenue Errors Example On Sept. 1, LeaseCo received $6,000 in advance for a 12-month equipment rental and credited Revenue. The year-end AJE should be: Revenue 4,000 Unearned Revenue 4,000 Correct the error if LeaseCo: If LeaseCo failed to record an AJE, the correction is simply to record it: (a) failed to record an AJE Revenue 4,000 Unearned Revenue 4,000 Correcting Accounting Errors

Deferred Revenue Errors Example On Sept. 1, LeaseCo received $6,000 in advance for a 12-month equipment rental and credited Revenue. The year-end AJE should be: Revenue 4,000 Unearned Revenue 4,000 Correct the error if LeaseCo: But LeaseCo recorded: (a) failed to record an AJE Revenue 4,500 (b) deferred $4,500 of revenue Unearned Revenue 4,500 The correcting journal entry is: Unearned Revenue 500 Revenue 500 Correcting Accounting Errors

Deferred Revenue Errors Example On Sept. 1, LeaseCo received $6,000 in advance for a 12-month equipment rental and credited Revenue. The year-end AJE should be: Revenue 4,000 Unearned Revenue 4,000 Correct the error if LeaseCo: But LeaseCo recorded: (a) failed to record an AJE Revenue 1,500 (b) deferred $3,600 of revenue Unearned Rev. 1,500 (c) deferred $1,800 of revenue The correcting journal entry is: Revenue 2,500 Unearned Rev. 2,500 Correcting Accounting Errors