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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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
Accts Rec. 1,000
Cash 1,000
Deduct:
NSF check 1,000
Bank service charge 30
Misc. Expense
Cash
Corrected book bal., 11/30
36,020
Correcting Accounting Errors

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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

55. 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

56. 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

57. 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

58. 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

59. 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

60. 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

61. 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

62. 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

63. 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

64. 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

65. 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

66. 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