During 20Y5, the accountant discovered that the physical inventory at the end of 20Y4 had been understated by $42,750

During 20Y5, the accountant discovered that the physical inventory at the end of 20Y4 had been understated by $42,750. Instead of correcting the error, however, the accountant assumed that the error would balance out (correct itself) in 20Y5. 

Are there any flaws in the accountant’s assumption? Explain.

Answer:

When an error is discovered affecting the prior period, it should be corrected. In this case, the merchandise inventory account should be debited and the owner’s capital account credited for $42,750.

Failure to correct the error for 20Y4 and purposely misstating the inventory and the cost of merchandise sold in 20Y5 would cause the income statements for the two years not to be comparable. The balance sheet at the end of 20Y5 would be correct, however, because the 20Y4 inventory error reverses itself in 20Y5.