Month End Glossary

Prior Period Adjustment

A revision of previously published financial statements to correct errors or reflect changes from prior periods that affect the current reporting.

A prior period adjustment refers to a correction made in the financial statements of the current period to rectify an error or an oversight found in the financial statements of a previous period. Such adjustments are necessary when the error is significant and could mislead financial statement users about a company's financial health.

For instance, if a company discovers that it failed to account for a significant expense or income item properly in a prior period, the error might necessitate a restatement of those periods to ensure accurate historical reporting. Prior period adjustments are recognized in the opening balance of retained earnings in the current statement of changes in equity. This highlights their impact clearly without distorting current- and prior-period performance comparisons.

An example of a prior period adjustment could be: If Company X found out in 2023 that a $500,000 expense incurred in 2021 wasn't recorded due to an accounting oversight, the company would adjust the opening retained earnings balance for 2021 by reducing it by $500,000, after adjusting for any related tax. Financial statements of 2023 would disclose this adjustment to maintain transparency.

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