[Anonymous]

Can anybody please explain to me how the counterbalance errors will automatically correct in the next accounting period?

using inventory as an example, when ending inventory is overstated, Net Income for current year will be overstated, and next year NI will be understated.

I understand why current year will be overstated.

Beginning

+Purchase

-COGS (U)

---

Ending (O)

When COGS understated, NI will be Overstated.

Revenue – COGS (U) = NI (O)

For next year, isn’t the NI will be also overstated?

Beginning (O)

+Purchase

-COGS (U)

---

Ending (O)

Can anybody shed me a light why next year NI will be understated if the current year NI is overstated,

I do not understand the auto correct concept.

[Anonymous]

If the year 1 ending inventory is overstated (and not corrected) then your beginning balance in inventory year 2 will still be overstated. This means your cost of good available for sale in year 2 will overstated. So at the end of year 2 when you count up your inventory you'll think you sold more than you did. Your cost of goods sold will be overstated causing your NI to be understated. (your didn't sell more you're just showing more expense)

[Anonymous]

Thank you very much for the explanation. It is pretty clear.

[Fredzdekid]

is that explanation just for periodic method or perpetual also?

[Monkey Wrench]

^^both, doesn't matter at the end of the year using periodic or perpetual you would be overstated, understated, or correct. and assuming they are one of the first 2 and go unchanged they will ‘reverse' in year 2.

r

[Author]

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