Question

The company miscounted its inventory at the end of the year. The correct amount of inventory was $100,000. The error was not discovered until the following May when the books for the preceding year were already closed. Make the correcting entry necessary the following May, assuming that the incorrectly reported amount of inventory at the end of the preceding year was (1) $75,000 and (2) $110,000. Ignore income taxes.

Answer 1

The above error is a counter balancing error. Whenever Inventory is Overstated ($110,000) or Understated ($75,000) the Retained earnings will be Overstated or Understated to that extent. If the books are not closed then an adjusting journal entries can be passed to Retained Earning and Inventory and correct the errors. However, if the Books are Closed, which is in this case, no correction entry is needed as retained earnings has self-corrected via the counterbalancing action of closing (closing inventory balance of last year is opening inventory balance of current year).

Hence, no Journal entries are required in the above case