Question
An error overstating ending inventory by $5,000 in Year 1 is never corrected. Assuming no other errors, by the END of Year 2 (with Year 2 itself correctly counted), cumulative retained earnings will be:
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors
A prior-period error is corrected retrospectively: restate the comparatives and adjust the opening balance of retained earnings, rather than running the correction through the current year's profit. Establish first whether the error is prior-period or current-period, because that decides everything that follows.
Common mistakes
- Putting a prior-period correction through current profit or loss instead of opening retained earnings.
- Correcting only one side of a two-sided error, or correcting an error that has already counterbalanced itself.
- Confusing an error with a change in estimate — estimates are adjusted prospectively and are never restated.
Further readingIAS 8: policies vs estimates vs errors