When an error is detected within the same period it was made, it can be corrected before the financial statements are issued. The process for identifying, investigating, and correcting errors within the same period involves the following steps:
Compare the balance sheet amounts with supporting documentation to identify any discrepancies.
Investigate the underlying general ledger accounts to determine the cause of the discrepancy. This could be due to an invalid entry, a missing adjusting entry, or a general ledger account being included in the wrong line item on the balance sheet.
Common issues to check for include:
If assets exceed liabilities plus equity, possible errors might include:
Corporate Tax Liabilities: These are amounts owed to tax authorities based on the company’s taxable income. Missing entries for corporate tax liabilities can result in an understatement of the company’s liabilities and a distorted view of its financial health. Proper recording ensures that the company’s tax obligations are accurately reflected and that financial statements comply with tax regulations.
Payroll Liabilities: These include wages, salaries, bonuses, and related payroll taxes that are owed to employees but have not yet been paid. Missing payroll liabilities can lead to inaccurate expense reporting and financial statements. It is crucial to record these liabilities to reflect the company’s true financial obligations and to ensure employees are compensated appropriately.
GST Liabilities: Goods and Services Tax (GST) liabilities represent the amount of GST collected from customers that needs to be remitted to tax authorities. Failing to record GST liabilities can result in understated liabilities and potential issues with tax compliance. Accurate reporting of GST liabilities ensures that the company remains compliant with tax laws and avoids penalties.
Credit Card Liabilities: These represent amounts owed to credit card companies for purchases made using company credit cards. Missing entries for credit card liabilities can lead to an understatement of current liabilities and inaccurate financial statements. Proper recording ensures that all outstanding credit card balances are reflected, helping to maintain accurate accounts payable and avoid potential issues with creditors.
Vendor Liabilities: These include amounts owed to suppliers and service providers for goods and services received but not yet paid for. Missing entries for vendor liabilities can result in an incomplete picture of the company’s financial obligations and affect cash flow management. Accurate recording of these liabilities is crucial for financial accuracy, maintaining good vendor relationships, and ensuring timely payments.
Recording as 'Due to Shareholders/Owners': This designation accurately reflects the company’s obligation to repay the funds provided by its owners. It ensures that the company’s liabilities are complete and accurately reported.
If assets are less than liabilities plus equity, possible errors might include:
Missing entries for purchases of equipment, vehicles, or furniture.
Prepaid expenses: These are payments made for expenses that will benefit future periods. Examples include insurance premiums or rent paid in advance. While these expenses are initially recorded as assets, they need to be gradually expensed over the periods they cover. Neglecting to properly amortize prepaid expenses can lead to understated expenses and inflated profits in the current period. Ensure that prepaid expenses are systematically recognized in the income statement over their useful life.
Missing reporting of accounts or tax receivable: This issue refers to the failure to record or report amounts that are owed to the company, such as accounts receivable or tax refunds expected from government authorities. Accounts receivable includes payments due from customers for goods or services provided, while tax receivable refers to any anticipated refunds or credits from tax authorities.
Funds withdrawn by shareholders/owners that have not been declared as salary or dividends: These funds should be treated as excess funds owed to the corporation. These funds should be listed as "Due from Shareholders." Additionally, funds or temporary loans received by shareholders should normally be repaid within 180 days of year-end to avoid being classified as taxable income to the shareholders.
Learn More: Canada Revenue Agency - Loans, Interest-Free, Low-Interest
