Please provide an appropriate procedure for error corrections in a business. What steps would you take? What evidence would you keep and why? Ensure you differentiate between errors found before and after BAS lodgement 

 

Despite best efforts, occasionally an error is made on the financial statement. Most often, the error is in the recognition, measurement, presentation, or disclosure of an item in financial statements. These errors are usually caused by mathematical mistakes, mistakes in applying generally accepted accounting principles, or the oversight of facts existing when the financial statements were prepared.

An error correction is the correction of an error in previously issued financial statement; it is not an accounting change.

---- How to Correct an Error

In order to properly correct an error, it is necessary to retrospectively restate the prior period financial statements. In order to restate the financials the company must:

Reflect the cumulative effect of the error on periods prior to those presented in the carrying amounts of assets and liabilities as of the beginning of the first period presented; and

Make an offsetting adjustment to the opening balance of retained earnings for that period; and

Adjust the financial statements for each prior period presented, to reflect the error correction.

If the financial statements are only presented for a single period, then reflect the adjustment in the opening balance of retained earnings.

Step-by-step explanation

Correcting a mistake made on an earlier BAS is different to making an adjustment.

• An error or mistake relates to an amount that was incorrect at the time of lodgment.
• An adjustment relates to a reported sale or purchase that was correct at the time of lodgment, but something occurred later that changed the amount of reported GST.

When you become aware of the need for an adjustment, you generally report it in the activity statement for your current reporting period.

Examples of when to make an adjustment:

• If the price of a sale or purchase changes
• If goods are returned and the sale is cancelled.