[eiz77]

Hi! I'm having some trouble with my accounting work so hopefully someone here can help! Thanks in advance!

Basically, I'm very unsure about the effect of errors in income statement when it comes to the second year.

The question I have basically is that expense account has been understated in 2008. What is the effect on 2008 & 2009's Net Income, Assets, Liabilities and OE accounts.

For 2008, I do now that NI, A, OE are all overstated. With no effect to the L account.

However, does this effect continue for 2009? Or will the opposite effect happen?
Meaning, NI, A, OE accounts all become understated instead of overstated.

Thanks for the help!

[morgaine300]

The question doesn't give enough information. If an expense is understated, you can only conclude that net income is overstated and therefore equity overstated. But there is no information about what the other side of that entry would have been - i.e. did the understatement of expense affect an asset or a liability? Either could have happened. So where is the conclusion that assets are overstated and that liabilities weren't affected?

The only way to know what happens in the next year is making the assumption that the problem gets fixed in the next year, and/or by knowing what this error was. (As a very general sort of rule, income statement accounts will go the opposite direction, and balance sheet accounts will work themselves out.)

I have a feeling you are referring to some very specific type of error causing the expense understatement, and thinking that we happen to know what that is when you've presented it out of context.

[eiz77]

Whoops sorry. Its depreciation expense understated which thus affects accumulated depreciation and asset instead of liability is the one affected.

The question stated that we assume that no correction is made to fix the error in the next year.

[eiz77]

Just to elaborate, in case I'm asking the question too unclearly, question is written

"Depreciation expense for 2008 was not recorded"

[morgaine300]

Yes, that overstates assets then. If the error is not corrected the next year the assets will remain overstated, since accumulated depreciation, well, accumulates. So that number would remain missing. But it would be a sort of "accumulated" overstatement and wouldn't have to balance out with anything else in future years.

If there is no entry made that would correct this, then it wouldn't affect the income statement at all in the next year.