What Are Prior Period Adjustments - Definition And Meaning In Accounting

Prior Period Adjustments means those Adjustments which are made to correct the prior accounting period’s errors or mistakes made due to the some different reasons i.e., human mistakes such as undercasting, overcasting, wrongly posted, Treating Capital Expenditure As Revenue Expenditure, etc., changes in the standards and other reasons.

For Example, if the company treats the Capital Expenditure of Rs. 5000 as Revenue Expenditure, then it is added back to the previous year Retained Earning by Rs. 5000 under statement of retained Earnings. The Adjusted Entry is credited the Retained Earnings account and debited the revenue expenditure account as shown below:

                                          Revenue Expenditure a/c    5000

                                                                                  Retained Earnings a/c    5000

(Capital Expenditure wrongly treated as Revenue Expenditure, now Rectified)

Prior Period Adjustments are reported in the Current’s Period Statement of Retained Earnings and adjusted entry would be the debit or credit of Retained Earnings to adjust the cancel the effects of errors or mistakes or any updates made in accounting standards.