revenue or expenses applicable to a previous period. The beginning balance of retained earnings is adjusted for the prior period adjustment (net of tax). An illustrative retained earnings section of the balance sheet follows:
Retained Earnings 1/1/2004 - Unadjusted
Add or Deduct: Prior Period Adjustment
Retained Earnings 1/1/2004 - Adjusted
Add: Net Income
Less: Dividends
Retained Earnings 12/31/2004
The only two examples of prior period adjustments are: (1) the correction of an error made in a prior year; and (2) the recognition of a tax loss carryforward benefit arising from a purchased subsidiary.
in accounting, charge that relates to a previous year that should have no effect on the current year, such as the collection or payment of money arising from litigation of an event that occurred in the past. Once made by changing retained earnings, accountants should consult the most recent statement of the Financial Accounting Standards Board for instructions.
