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Inventory Errors

In: Business and Management

Submitted By redscorpiolmb
Words 346
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Inventory Errors When ending inventory is overstated, profit and assets are overstated. When ending inventory is understated, profit and assets are understated. Ending inventory is the beginning inventory for the next accounting year, so if a mistake is made in determining that amount, it will affect year 1 as well as year 2. That means, then, that two year's Balance Sheets and Income Statements will be incorrect. To fix inventory errors, reverse the error as soon as it detect, record the correct accounting entries, and restate prior-period financial statements. Reverse the error and record the correct journal entries if an inventory error is detected in the same period. For example, if you incorrectly record a cash inventory purchase as $20,000 instead of $2,000, debit or increase cash and credit or decrease inventory by $18,000 ($20,000 - $2,000) each to reverse the error. “Correct a prior-period inventory error. For example, if the previous year's ending inventory was understated by $1 million, then the beginning inventory and retained earnings balances for the current year also are understated by $1 million” (Basu, 1999-2013). Debit inventory and credit retained earnings by $1 million each to reverse the prior-period error. You then need to count the inventory correctly in the current year and there should be no inventory-related errors on your financial statements for this year and going forward. Restate prior-period financial statements. The cost of goods sold and net income accounts on the income statement and the inventory and retained earnings accounts on the balance sheet may need to be changed. “Write disclosure notes describing the nature and impact of the inventory error. Write one disclosure note for the current period to describe the correction to the beginning inventory and beginning retained earnings balances. Write a second disclosure note...

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