How to Present Prior Period Adjustments on Financial Statements

Prior period adjustments are corrections made to financial statements for errors or misstatements that occurred in previous periods. These adjustments are necessary to ensure the accuracy and reliability of the financial statements.

Restatement of Financial Statements

When a prior period adjustment is required, the affected financial statements must be restated. This involves revising the previously reported financial statements to correct the error or misstatement. The restatement should be made as if the error or misstatement had never occurred.

Adjusting Carrying Amounts

The first step in restating the financial statements is to identify the impacted assets or liabilities and adjust their carrying amounts as of the first accounting period presented. This adjustment should reflect the correction of the error or misstatement.

Offset with Retained Earnings

The adjustment to the carrying amounts of assets or liabilities is offset by making an offsetting entry to the beginning retained earnings balance in the same accounting period. This ensures that the adjustment does not affect the current period’s retained earnings.

Disclosure of the Adjustment

The nature and impact of the prior period adjustment must be clearly disclosed in the financial statements. This includes providing a note that explains the reason for the adjustment and its effect on the financial statements. The disclosure should also include the cumulative effect of the adjustment on the change in retained earnings.

Conclusion

Prior period adjustments are an important part of the financial reporting process. They ensure that the financial statements are accurate and reliable. By following the steps outlined above, companies can properly present prior period adjustments on their financial statements.

References

1. AccountingTools. (2023, December 13). Prior period adjustment definition. AccountingTools. https://www.accountingtools.com/articles/what-is-a-prior-period-adjustment.html
2. Chron.com. (2019, June 26). How to book a prior year in adjustment accounting. Small Business – Chron.com. https://smallbusiness.chron.com/book-prior-year-adjustment-accounting-77570.html
3. Fincent. (n.d.). Prior period adjustment. Fincent. https://fincent.com/glossary/prior-period-adjustment

FAQs

What is a prior period adjustment?

A prior period adjustment is a correction made to financial statements for errors or misstatements that occurred in previous periods.

When is a prior period adjustment required?

A prior period adjustment is required when an error or misstatement is discovered in previously issued financial statements.

How do you show a prior period adjustment on financial statements?

To show a prior period adjustment on financial statements, you should:

1. Restate the financial statements for the affected period(s).
2. Adjust the carrying amounts of impacted assets or liabilities.
3. Offset the adjustment with retained earnings.
4. Disclose the nature and impact of the adjustment in the financial statements.

What is the purpose of disclosing a prior period adjustment?

The purpose of disclosing a prior period adjustment is to provide users of the financial statements with information about the adjustment and its impact on the financial statements.

What information should be disclosed about a prior period adjustment?

The disclosure about a prior period adjustment should include:

1. The nature of the error or misstatement.
2. The impact of the adjustment on the financial statements.
3. The cumulative effect of the adjustment on the change in retained earnings.

Where should the disclosure about a prior period adjustment be made?

The disclosure about a prior period adjustment should be made in the notes to the financial statements.

Who is responsible for making prior period adjustments?

The company’s management is responsible for making prior period adjustments.