AccountingHub
A1

An error that corrects itself

Overstate this year's ending inventory and watch next year's profit swing back.

Year 1
Cost of goods sold, reported$60,000
Cost of goods sold, correct$62,000
Gross profit, reported$40,000
Gross profit, correct$38,000
Year 2
Cost of goods sold, reported$58,000
Cost of goods sold, correct$56,000
Gross profit, reported$42,000
Gross profit, correct$44,000
Year 1 profit swing+$2,000
Year 2 profit swing($2,000)
Two-year total$0

An overstated ending inventory understates , which overstates gross profit and income — in the same year, by the same amount.

The very same overstated number becomes next year's beginning inventory, which overstates next year's cost of goods sold and understates its income. Over two years the error washes out completely, but each year on its own is wrong.