During 2014, the accountant discovered that the physical inventory at the end of 2013 had been understated by $33,000. Instead of correcting the error, however, the accountant assumed that the error would balance out (correct itself) in 2014.
Are there any flaws in the accountant’s assumption? Explain.
Answer:
When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $33,000.
Failure to correct the error for 2013 and purposely misstating the inventory and the cost of merchandise sold in 2014 would cause the income statements for the two years to not be comparable. The balance sheet at the end of 2014 would be correct, however, since the 2013 inventory error reverses itself in 2014.