Data entry errors towards income write-down?

USA Discussion in 'General Accountancy Discussion' started by Martin Gordinier, Mar 12, 2018.

  1. Martin Gordinier

    Martin Gordinier

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    Hello.

    My business experienced a data entry error when upgrading our ERP software that artificially increased inventory and WIP -- and thus retained earnings as well on the balance sheet. During a journal entry my accounting lead had a fat finger moment and two numbers increased relative to what we physically have on hand. Our ERP system calculates COGS based on the roll-up bill of material (BoM) cost of what shipped and so the monthly and annual income statement profit numbers were not changes by the incorrect entries. We have since issued JEs to wipe out both the artificial balance sheet increases -- and again there was no hit to the income statement. That said, ownership is curious if we can now write down the income statement accordingly due to the change in retained earnings? I do not see how we can, as there was no cash/investment made in these virtual assets and therefore there cannot be a legitimate write-down either. Read: these are not tangible assets. A simple note in the annual balance sheet statement seems sufficient. Thanks.
     
    Martin Gordinier, Mar 12, 2018
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  2. Martin Gordinier

    bklynboy VIP Member

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    How did Retained Earnings change if the error did not impact the income statement? Did the error directly hit Retained Earnings initially?

    If the latter bigger concern is what controls are lacking since you should not be able to just hit Retained Earnings and the initial transaction should have been dumped in a supense account or not permitted to the gL to begin with. That being said, if its the latter all you need to do is reverse the errors and not touch the income statement since it never came through there.
     
    bklynboy, Mar 12, 2018
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  3. Martin Gordinier

    Martin Gordinier

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    Thanks. The JEs that brought in the WIP and inventory into the ERP update were manually entered and offset against Corp Account Year Prior/retained earnings by x amount relative to what we were correctly showing on the prior month's balance sheet with the old system. Again, this was a simple typo that was missed and so there was an increase to assets (WIP and inventory) and a matching increase to RE. Our ERP system calculates COGS not by the change in inventory and WIP -- but simply by what we ship at the BoM cost (plus WIP price variances {we use average cost} and any scrap/quantity adjustments manually entered by staff). Hence, there was no change to the IS when the balance sheet swelled. If there was I could see a proportional adjustment to the IS to offset the BS change -- but that was not the case. Moreover, these virtual assets on the BS had no cash spent, no purchase orders, no WIP release or inspect associated with them. Therefore, I cannot see applying the artificial RE change against real profits/REs. Otherwise, everyone with make such typos towards a reduction in tax obligation. Cheers.
     
    Martin Gordinier, Mar 12, 2018
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  4. Martin Gordinier

    bklynboy VIP Member

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    Agree
     
    bklynboy, Mar 12, 2018
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