At the end of 2015,the payroll supervisor for Claro,Inc.failed to accrue $24,790 in commissions for the outside salespersons.The cost was recorded in 2016 when the commissions were paid and Commissions Expenses was debited and Cash credited for the full amount.The error was not discovered until late in 2016 while reconciling year-end expenses for 2016.What is the proper treatment to correct the error? (Ignore income taxes.)
A)Do nothing,the error has counterbalanced.
B)Accrue $24,790 in commission expense for 2016.
C)Debit 2016 beginning retained earnings and credit commission expense for $24,790.
D)There is no error in either year because the commissions are recorded when paid.

Question

Quizplus · Accepted Answer

The proper treatment to correct the error is to accrue $24,790 in commission expense for 2016 since the commissions were not recorded in 2015 when they should have been. Leaving the error uncorrected would result in an understatement of expenses in 2015 and an overstatement of expenses in 2016. Option A is incorrect because the error needs to be corrected, and it cannot be left uncorrected as it would affect the financial statements. Option C is incorrect because it results in a restatement of the prior year's financial statements, which is not needed in this case. Option D is incorrect because it is not in accordance with GAAP as commissions expenses should be recorded in the period when earned, regardless of when paid.

At the End of 2015,the Payroll Supervisor for Claro,Inc