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Let’s say you forget to record revenue in year 1 and record it in year 2 instead. Your year 1 revenue is understated because you didn’t record it but your year 2 revenue is overstated because you recorded it later than you should have. Does that help?
You would need more details on how they overstated income without a timing issue. Debits and credits have to equal.
I think you are referring to the turnaround effect. You should read the SAD topic in GAM on it. Basically what it says is that misstatements in income that are corrected out of period (i.e it was wrong in year one but pushed through in year two) “turn” in the year they are corrected (year two in this case). If the misstatement remains uncorrected, it doesn’t turn.
I think we might be getting corrected and uncorrected SAD’s intertwined. OP I’m assuming you also did the SAD WBL prereq for New a Senior training today🙃
I am assuming these are IS differences that were recognized in the wrong year and they have the reverse effect on net income in the second year
What about an overstatement of income not related to timing
EY1, that is mostly correct, but also need to consider the turnaround effect of a prior year entry that still hasn’t been corrected (ie the balance sheet is still wrong). When putting it on the SAD schedule, you’d have a P&L effect of correcting the balance sheet, but also the turnaround effect of the PY entry as well, which if it were the only entry, you could see that after turnaround, the net effect on CY P&L is zero. Whenever one of my team members struggles to see how it works, or has their turnaround signs flipped, I have them do that as a stand-alone entry so they can see how it should work.
I can’t understand your question. Are you saying you found an overstatement in income? Two options to fix that, fix it in the correct year or it hits equity in the next year. Better describe the situation and I can give you a better answer
EY 2, ty it finally clicked. Thanks all for weighing in!