Correcting bookkeeper errors in Nybrostrand Company's financial statements

Financial Accounting

Nybrostrand Company had a moderately successful year last year. Correcting the bookkeeper's error brings the revenue down to $421,500. It also brings the cost of goods sold down to $219,500, since those goods were never sold and need to be deleted from that line. The company's net income after these adjustments is $70,650. This represents a net margin of 16.7%, which could be a good number or a mediocre one, depending on the nature of the company's business.

This income statement gives the same bottom line as the previous income statement. The matching principle means that an adjustment to the credit side must be offset with an equal adjustment to the debit side. Thus, in this situation, the cost of goods sold (debt side) was lowered $34,500 as was the revenues (credit side) $34,500. It is not indicated whether or not the bookkeeper made a separate entry to record payment for the transaction, so no adjustment could be made here. It is important that each transaction be matched against another. In this case, it appears that only one transaction was entered in error, so the adjustment simply undoes that single transaction.

There is the possibility of further error, however, since the two sides of the statements do not match. This error would have arisen from the use of a physical count to determine the inventory, rather than the books. There are no means of reconciliation for this number, but it clearly is not what it should be. The $34,500 would presumably have been taken out of the inventory account, meaning at least $9,500 that was considered to have already been sold has in fact not yet even been produced. A proper reconciliation on the inventory will need to be done for the firm's benefit, but the inventory figure on the statement needs to reflect the journal entries, not a physical count.