USA Error Correction


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Hello there,

In November we discovered that we recorded our October prepaid rent to Rent Revenue. We already closed our November book.
Are we allowed to restate (correct) the error in November financial statement; Dr Retained Earning and Cr Rent Revenue or do we have to wait until we close our FY book?

Thank you all for your help.
 
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kirby

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For a small business, the answer depends on were the Oct financials sent out to many users. If the Oct financials never were distributed, then you can fix in Oct. But if the financials were sent outside the acctg dept, there would be confusion if you fixed it in Oct (thus creating differing "realities" of the Oct results) so best to leave Oct as is and fix in a subsequent month.
And if you fix in Oct, open the Oct books fully so the expense affects Oct income and NOT by a direct entry to Retained Earnings.
 
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For a small business, the answer depends on were the Oct financials sent out to many users. If the Oct financials never were distributed, then you can fix in Oct. But if the financials were sent outside the acctg dept, there would be confusion if you fixed it in Oct (thus creating differing "realities" of the Oct results) so best to leave Oct as is and fix in a subsequent month.
And if you fix in Oct, open the Oct books fully so the expense affects Oct income and NOT by a direct entry to Retained Earnings.
Good morning,

How are you? I hope you are all well. I found another similar error for our different sales division. We overstated our Retain Earnings by quite a bit. This time I need to make an error correction in December and I can no longer open the October book. What is your recommendation as to how to correct the Retain Earnings, Revenue, Balance Sheet, and Income Tax on the statutory and consolidated book?

Thank you,
Justine
 
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kirby

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Always post a correction to an open month so it affects income and retained earnings. If Oct is not open, use Nov, and if Nov not open use Dec. Again, you can post to a prior month as long as the financials from that month have not been distributed or distributed to only a few and you can recall those financials from those few 100%.
 
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I am so sorry for the answer is not obvious to me and am still being confused as to how to correct the error. So in this case there is no reason for me to use Dec Retained Earnings at all to correct the error. All I needed to do is reclass the remaining 9 months to deferred revenue. Is this correct? I am just confused because I went back to my old text book. It says that we need to correct prior month error at the beginning of the Retained Earnings I am not sure how. Like using 12/1/2018 to correct prior months errors that effect Retained Earnings, Revenue, Balance Sheet and Income Tax liabilities account? Please advise. Thank you. J
 
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kirby

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Sounds like the error was that income was recognized and should have been deferred and taken to income over 9 subsequent months. If so, the entry Dr income and Cr deferred income will affect income in the acctg month the entry is posted to. That is OK and best to be recorded in the month it occurred and if you can't do so then in the next available month. So where you ask Is this correct the answer is yes.

I suspect your textbook is talking about making a prior period adjustment, which is reserved for material (huge)adjustments AFTER financials for a given YEAR have been published.That is not your case as you are making an adjustment WITHIN the accounting year, not after.
 
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