Example 6 The sales and purchases for the year ended 31 December 2005 are $1,750 and $1,500. The sales and purchases for the following year ended 31 December 2006 are $2,600 and $1,400. The closing inventory for 31 December 2005 amounting to $400 was incorrectly valued at $500 and the closing inventory for 31 December 2006 was correctly valued at $300. Show the effects in the financial statements