Prior Period Adjustment | Meaning and Definition

What Is a Prior Period Adjustment?

They are intended to correct accounting errors, financial problems, and forgotten data from previous periods. Because the inaccuracies have already had an impact on the balance sheet and income statement, the correction must be done to the cash flows or equity value on the declaration of maintained profits. This adjustment will modify the retained profits holding balance and fix it as if the reporting had been done correctly in previous periods.

Types of Prior Period Adjustment 

They are split into two parts. The first is a correction of an economic statement mistake that was previously published. The second form of prior period adjustment was developed when income tax benefits from owned firms’ operational deficits were realized before they were acquired. Because the second criterion is both very specific and rare, a prior period adjustment only applies to the first item – the correction of an error in prior period financial statements. Mathematical errors, inefficient company practices, or the omission or misuse of data in the computation information provided can all affect financial statement inaccuracies.

It is the net of income taxes rectification of financial reporting glitches initially and was recorded on a preceding year’s accounting records. To put it another way, it’s a means to correct past accounting records that were incorrect due to a reporting inaccuracy.