Error of complete reversal enty?

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Error of Complete Reversal

The error of complete reversal, also known as the "reversed change error," occurs when the original accounting entry is completely reversed instead of being corrected. This can lead to a significant error in the financial statements, as the original transaction will be improperly recorded.

Causes:

- Misinterpretation of the original entry
- Incorrect accounting software settings
- Human error

Consequences:

- Overstatement or understatement of assets, liabilities, or equity
- Incorrect calculation of expenses or revenue
- Difficulty in reconciling accounts
- Loss of confidence in the financial statements

Example:

Suppose that a company accidentally records a purchase of inventory for $10,000 instead of $1,000. To correct this error, the following entry should be made:

```
Debit: Inventory $9,000
Credit: Accounts Payable $9,000
```

However, if the error of complete reversal is made, the following entry would be made instead:

```
Debit: Accounts Payable $10,000
Credit: Inventory $10,000
```

This entry would completely reverse the original transaction, resulting in an overstatement of inventory and an understatement of accounts payable.

Prevention and Detection:

- Establish clear accounting procedures for correcting errors
- Use accounting software with built-in safeguards to prevent reversal errors
- Regularly review accounting records for any discrepancies
- Implement internal controls to ensure the accuracy of accounting entries