Introduction to Prior Period Adjustments

accountingnotes By accountingnotes, 19th Jan 2011 | Follow this author | RSS Feed | Short URL http://nut.bz/wlploaus/
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Financial Accounting and Reporting Lesson 5: Introduction to Prior Period Adjustments

Prior Period Adjustments

Advancement and improvements in financial accounting sometimes results to prior period adjustments. These are as follow:
1. Corrections of errors in the financial statements of prior periods
2. Retroactive adjustments resulting from new generally accepted accounting principle pronouncements
3. 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:
1. No effect on the income statement
2. Balances of the change is corrected on the year incurred if that period is covered in the comparative financial statements
3. 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
4. There is no need to restate the retained earnings statement of the per

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Comments

author avatar George Quartey
26th Oct 2011 (#)

Over the last two years A company has been accruing interest on loans to a director who has loan money to a the business. Since the company has niot been able to pay the interest the directors have agreed that the loan interest should be reversed over the past 2 years and only charged if the amount is paid , This of course is a prior year item one year falls within the comparative financial year the other year does not share your comment on the adjustment

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author avatar George Quartey
26th Oct 2011 (#)

A prior year adjustment will not affect the overall financial statement but if the adjustment has tax implication it will affect the profit after tax

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