A prior period adjustment should be reported as an adjustment to the retained earnings balance at the beginning of the period in which the adjustment was made.

Question

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A prior period adjustment is a correction of an error in the financial statements that occurred in a prior accounting period. It is reported retrospectively by restating the opening balances of the affected period, including the beginning balance of retained earnings. The effect of the adjustment on the net income of the prior period is also disclosed in the financial statements. Therefore, a prior period adjustment should be reported as an adjustment to the retained earnings balance at the beginning of the period in which the adjustment was made.

A Prior Period Adjustment Should Be Reported as an Adjustment