Your Ask Joey ™ Answer

Accounting for Error Corrections

Errors are not considered to be accounting changes. These corrections could be made due to mathematical or mechanical errors when preparing the financial statements, or mistakes that have been made when determining and applying U.S. GAAP. Furthermore, if a company makes a change that is considered to be going from GAAP to Non-GAAP, it will be considered an error, not a change in accounting principle. 

There are two scenarios that you should be aware of on the CPA Exam:

If comparative financial statements are presented, the company should simply correct the prior period financial statement error (e.g. if the company realizes an error from Year 1 in Year 2, they should simply correct the Year 1 financial statements). 

If comparative financial statements are not presented with the existing error due to the error occurring too far in the past to present, the company should then adjust the beginning retained earnings account for the earliest period that is being presented.

Universal CPA Review breaks this down further in its video lecture. This can be seen in the YouTube video below.

Back To All Questions

You might also be interested in...

  • Discontinued Operations on the FAR CPA Exam

    Overview of Discontinued Operations In financial reporting, discontinued operations refer to a component of a company’s core business or product line that have been divested or shut down. Discontinued operations will be reported (net of tax) separately from continuing operations on the income statement. The reason that discontinued operations are reported separately is so that...

  • Equity Method Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on the equity method, please click the link below to download the Excel workbook: Equity Method Lecture Example

  • How Hard is the CPA Exam?

    So you’re thinking about taking the CPA exam? Whether you have a dream of becoming a tax advisor, feel as though you need public accounting experience, or just want to solidify your business acumen, the CPA license is one of the most prestigious and well respected licenses in the business world. The exam itself is...