Let me try again: Any error involving acquisition, depreciation, or major repairs to a long-lived asset will be corrected when that asset leaves the firm at disposal. The error will change the gain or loss on disposal; once the asset exits the firm, all will be well.
These errors ARE self-correcting. It just takes a bit more time for these to correct themselves than inventory, for example, which is disposed of more rapidly.
Most accounting errors are self-correcting, with one exception that does not reverse is the error of over/understating Depreciation expenses. Once you determine the effect on net income in the first year, flip-flop it for the next year's effect. Total it for the net effect on net income for the year and cumulative effect on retained earnings throughout the years. If you did the math of flip-flopping correctly, the number leftover hitting R/E would be the error for Depreciation expenses.
Depreciation errors also self-correct when the asset is sold. Take a 5-year $100 asset erroneously depreciated over 4, not 5, years. If asset's sold at end of Year 2 for $60, you will have reported $50 expense and $10 gain on sale, not $40 expense and $0 gain. Either way, Retained Earnings shows a $40 diminution. ANY depreciation error self-corrects no later than the asset's exit from the firm. Effects could cover decades, but the error does self-correct.
Bit confused with 5:02. In the second year wont Equity be overstated considering that there is higher assets in year two?
Ramadog 1 year ago
not only depreciation, but also non capitalization of major repairs on fix assets
jbsantos2526 2 years ago
Hmmm. This issue seems to be a problem!
Let me try again: Any error involving acquisition, depreciation, or major repairs to a long-lived asset will be corrected when that asset leaves the firm at disposal. The error will change the gain or loss on disposal; once the asset exits the firm, all will be well.
These errors ARE self-correcting. It just takes a bit more time for these to correct themselves than inventory, for example, which is disposed of more rapidly.
Thanks for the note!
enlight09 2 years ago
Most accounting errors are self-correcting, with one exception that does not reverse is the error of over/understating Depreciation expenses. Once you determine the effect on net income in the first year, flip-flop it for the next year's effect. Total it for the net effect on net income for the year and cumulative effect on retained earnings throughout the years. If you did the math of flip-flopping correctly, the number leftover hitting R/E would be the error for Depreciation expenses.
MisterKwakkles 3 years ago
Depreciation errors also self-correct when the asset is sold. Take a 5-year $100 asset erroneously depreciated over 4, not 5, years. If asset's sold at end of Year 2 for $60, you will have reported $50 expense and $10 gain on sale, not $40 expense and $0 gain. Either way, Retained Earnings shows a $40 diminution. ANY depreciation error self-corrects no later than the asset's exit from the firm. Effects could cover decades, but the error does self-correct.
enlight09 3 years ago