Chapter 4
The Accounting Cycle: Journals and Ledgers
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tenant decides to move out and stops paying rent to GG. However, the rent revenue for the tenant
continues to be recorded in GG’s accounting system for every subsequent month after the office
has been vacated. Allowing the entries to continue being recorded automatically is inaccurate.The
additional entries for rent revenue will automatically flow to the general ledger, the trial balance,
the income statement and ultimately the balance sheet. Earnings for the period will be inflated.
The financial statements will be misstated and this significant error will mislead the users of the
financial statements if it goes undetected.
If the above behaviour is intentional and management conceals the misstatement, then it is con-
sidered highly unethical and fraudulent. However, assume the error was unintentional and the
business wants to ensure it does not happen again. A possible control that may detect the error is
to compare the current list of tenants to the transaction details in the journal at regular intervals
(such as at month end). Another method of preventing this error is to program the software to
automatically prompt the software administrator to authorize each entry or avoid using automated
recurring entries entirely.
