@CPA2014Dream they offset each other because the error is for the same amount. if you look at the COGS equation:
BI + Purchases – End Inventory = COGS
if inventory is overstated by $100 in year 1, COGS will be understated by $100 in year 1. which means net income is over by $100, and RE is by extension over by $100.
now in year 2, because year 1's ending inventory was $100 overstated, year 2's beginning inventory is overstated by $100, that same amount. if you look at the COGS formula, the effect of that will be to overstate COGS by $100 in year 2. which means net income is understated by $100 in year 2.
now, net income flows into RE, which is cumulative. last year, RE was overstated by $100. this year, net income, which is $100 too low, flows into RE. so if you look at RE for year 2 ALONE, it's understated by $100. but year 1, it was overstated by $100. the net effect is 0. for example, in year 1, it should've been $100 but it was $200. in year 2, it should've been $200 but it was $100.
it should have been $100 year 1 + $200 year 2 = $300 total
due to errors, it was $200 year 1 + $100 year 2 = $300 total
now in year 3, ending inventory was just fine for year 2, so beginning inventory is just fine for year 3. COGS will be unaffected, net income will be unaffected, so RE will be unaffected. with no more errors, everything has gone back to normal. you just have too much income in one year and not enough in another.
.