Prior period adjustments

Definition

Adjustments made to correct errors in financial statements from previous accounting periods, impacting the beginning balance of retained earnings. These adjustments ensure the accuracy and integrity of financial reporting.

5 Must Know Facts For Your Next Test

1. Prior period adjustments are reported in the statement of retained earnings.
2. They can result from errors such as mathematical mistakes, incorrect application of accounting principles, or oversight of facts existing at the time financial statements were prepared.
3. Both overstatements and understatements in prior years' income can necessitate a prior period adjustment.
4. These adjustments do not affect current period net income but adjust the opening balance of retained earnings for the current period.
5. The nature and amount of prior period adjustments must be disclosed in the notes to the financial statements.

Review Questions

• Where are prior period adjustments typically reported?
• What kinds of errors might lead to a need for a prior period adjustment?
• Do prior period adjustments affect current period net income?

Related terms

Retained Earnings: Accumulated net income that is retained by a company instead of being distributed to shareholders as dividends.

Owners' Equity: The residual interest in the assets of an entity after deducting liabilities; also known as shareholders' equity.

Restatement: The revision and publication of one or more previously issued financial statements to correct an error.