September 22, 2021

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Accounting Errors on Profit or Loss Statement Example and Answer

Accounting Errors on Profit or Loss Statement Example and Answer
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When errors are made in accounting, those mistakes may not be found until after the profit or loss statement is prepared. When this arises, there is a need to correct the profit made for that year. This is done by adjusting the report (adjusted profit) for the year the error occurred retrospectively. This complies with IAS 8 (Accounting Policy, Change in Accounting Estimates and Errors).

The International Accounting Standard (IAS8) states that when prior year errors are identified, the corrections in the financial statements are done retrospectively by

1. Restating the comparative amounts for the prior period(s) presented in which the error occurred;
2. or If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities, and equity for the earliest prior period presented.

In the first principle, if errors are discovered for a prior period say 2019 financial year. When preparing 2020 financial statements, the entity must restate the profit statement for 2019 to reflect the adjusted profit. The second principle applies if the errors that were discovered occur in 2018 or so. Then, the profit statement for January 2019 will be presented along with 2019 and 2020 financial reports for the 2020 financial year.

Rules of Correcting Errors in Profit Statement

To correct mistakes in the profit statement you will need to apply this simple rule. Add Income undercast and expense undercast. Subtract income overcast and expenses undercast.

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Steps incorrect errors that affect profit statement

Step 1:
After identifying the errors, correct them in their ledger accounts.
Step 2:
Check the trial balance if it has an equal balance on the debit and credit sides.
Step 3:
Identify if the error affects the profit statement. Some mistakes will not affect the profit statement. For example, if the amount paid to creditors was omitted from the books of account. However, errors that affect certain non-current assets will affect profit or loss reports due to depreciation.
Step 4:
Apply the rules in correcting errors in the profit statement stated in the previous subheading.

Example of Error and Profit Statement

In the book of Obi Enterprises, the following errors were discovered. However, the income statement has been presented for 2019. The net profit for that year was 25,700 Naira. You are required to restate the income statement after making the following adjustments.

A sales invoice was not entered in the sales day book. The amount is 30,000 Naira.
Discounts allowed were overstated by 6,400 Naira.
The commission received was overstated as 15,000 Naira. The correct amount is N12,500.
A revaluation surplus was wrongly estimated as 17,000 instead of 17,600
The bank statement shows an interest charge of 1,600 Naira. This has not been entered in the books of account.
Depreciation was overstated by 1,500 Naira.

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The solution to Accounting Mistakes and Income Statement

I have provided a screenshot to illustrate the solution to the above question. Remember the rule: Add income undercast and expense undercast. Subtract income overcast and expenses undercast.

Accounting Errors on Profit or Loss Statement Example and Answer

However, let me explain each of the questions one at a time.

Question One:
A sales invoice was not entered in the sales day book. The amount is 30,000 Naira.

Here, the income, sales, we’re omitted from the book of account because the sales invoice was not recorded. This is an undercast error. Therefore you should add it to the restated income statement.

Question Two:
Discounts allowed were overstated by 6,400 Naira.

The error is an overstatement. And the discount allowed is an expense. So, you add it up to the report.

Question Three:
The commission received was overstated as 15,000 Naira. The correct amount is N12,500.

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This is an income that is overstated. Following the rule, you should subtract it to get the adjusted profit after tax (PAT).

Question Four:
A revaluation surplus was wrongly estimated as 17,000 instead of 17,600.

This error does not affect the profit statement. Revaluation surplus is not posted to the income report. Therefore, it was not included in the answer.

Question Five:
The bank statement shows an interest charge of 1,600 Naira. This has not been entered in the books of account.

The interest charged we’re omitted in the books. Indicating an undercast error. So, you subtract it from the statement.

Question Six:
Depreciation was overstated by 1,500 Naira.

The depreciation charged to the P&L was undercharged. So, you correct this error by subtracting it.

Conclusion

From the foregoing, income and expenses accounting errors pass through the profit statement. These errors affect profit. When correcting errors, a simple rule is followed as I have stated above. I also solve a question that deals with P&L.

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