Advancement and improvements in financial accounting sometimes results to prior period adjustments. These are as follow:
- Corrections of errors in the financial statements of prior periods
- Retroactive adjustments resulting from new generally accepted accounting principle pronouncements
- Adoption of generally accepted accounting principle from non-generally accepted accounting principle
The correct accounting treatment for prior period adjustments for a comparative financial statement is to present the correct amount if the year of the error is presented. If the year of the error is not presented, adjust the beginning retained earnings of the oldest period presented.
If the organization is reporting a single year financial statement, the adjustment is presented as an adjustment on the beginning retained earnings.
The effects of the prior period adjustment should be presented in the statement of retained earnings on the beginning retained earnings, net of the tax effect.
Effects of prior period adjustments to the financial statements follow:
- No effect on the income statement
- Balances of the change is corrected on the year incurred if that period is covered in the comparative financial statements
- If the year the error or change is incurred not covered in the comparative financial statements, the effects of prior period adjustment is adjusted in the beginning retained earnings of the oldest year presented in the comparative financial statements
- There is no need to restate the retained earnings statement of the per
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