Effect of errors on the accounts It’s early in x3. You are examining the financial records of Les Gaulois Company with a view to making an (amicable) bid for the company. You discover that the company, formed in x1, has made the following errors in x1, perhaps because of its preoccupation with hostile manoeuvres by Les Romains Company.

In each case, determine the effect of the error on reported profit in x1 and x2 and on retained earnings at the end of x1 and x2, and indicate which other balance sheet accounts, if any, were in error at the end of x1 and x2. Use the following notation: U (understated); O (overstated); NE (no effect).

The solution to item 1 is given as an example (the ‘asterix’ is optional).

1 The company failed to accrue interest revenue in x1 on a loan it made to another company. It receives the interest (and the principal) in x2.

2 Employees earned salaries in x1 which the company did not record until x2 when the salaries were paid.
3 The company purchased and received goods at the end of x1 but failed to make accounting entries to record the (credit) purchase and receipt until January x2.
4 It neglected to record annual depreciation on equipment in x1. The annual depreciation charge in x2 was correctly recorded.
5 In x1 customers made payments of 2,000 in advance for Les Gaulois products. Of this, only 500 worth of goods were shipped in that year (and the balance in x2). The company reported all 2,000 as revenues of x1. (Cost of sales was correctly recorded in both years.)
6 The company purchased 1,200 of office supplies in x1 and recorded all of it as an expense of that year. A physical count of supplies revealed inventory of 700 and 100 at the end of x1 and x2 respectively. There were no purchases of supplies in x2.AppenedixLO1

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Profit Retained earnings Other balance sheet accounts x1 x2 end-x1 end-x2 end-x1 end-x2 *Interest U O U NE receivable U NE