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Prior Period Adjustment [With Case Examples]



The two types of prior period adjustments are: (1) Correction of an error that was made in a previous year; and (2) Recognition of a tax loss carryforward benefit arising from a purchased subsidiary. How are prior period adjustments handled? Through this post, I am going to quickly demonstrate ways to handle several prior period adjustments with easy—to—follow examples. Enjoy!

When a single year is presented, prior period adjustments adjust the beginning balance of retained earnings.


The presentation follows:

Retained earnings—1/1 Unadjusted
Prior period adjustments (net of tax)
Retained earnings—1/1 Adjusted
Add: Net income
Less: Dividends
Retained earnings—12/31


Have I made the point? Not yet, you said.  I am going to show you in clearer manner with some case examples, shortly. So, read on…


Errors may arise from mathematical mistakes, misapplication of accounting principles, or misuse of facts existing when the financial statements were prepared. Furthermore, a change in principle from one that is “not GAAP” to one that is “GAAP” is an “error correction“. Disclosure should be made of the nature of the error and the effect of correction on profit.

When comparative statements are prepared, a retroactive adjustment for the error is made to prior years. The retroactive adjustment is disclosed by showing the effects of the adjustment on previous years’ earnings and component items of net income.


Case Example-1 [Misclassification]

In 2009 a company incorrectly charged furniture for promotion expense amounting to $30,000. The error was discovered in 2010. The correcting journal entry is:

[Debit]. Retained earnings = $30,000
[Credit]. Furniture = $30,000



Case Example-2 [Expenses were not Accrued]

At the end of 2010 a company failed to accrue telephone expense that was paid at the beginning of 2011. The correcting entry on 12/31/2011 is:

[Debit]. Retained earnings = $16,000
[Credit]. Telephone expense = $16,000



Case Example-3 [Revenue was not Deferred]

On 1/1/2010 an advance retainer fee of $50,000 was received covering a five-year period. In error, revenue was credited for the full amount. The error was discovered on 12/31/2012 before closing the books. The correcting entry is:

[Debit]. Retained earnings = $30,000
[Credit]. Revenue = $10,000
[Credit]. Deferred revenue = $20,000

Case Example-4 [Repairs Expense Was Charged]

A company bought a machine on January 1, 2012, for $32,000 with a $2,000 salvage value and a five-year life. By mistake, repairs expense was charged. The error was uncovered on December 31, 2015, before closing the books. The correcting entry is:

[Debit]. Depreciation expense = $6,000
[Debit]. Machine = $32,000
[Credit]. Accumulated depreciation = $24,000
[Credit]. Retained earnings = $14,000

Accumulated depreciation of $24,000 is calculated below:

= [$32,000 – $2,000]/5
= $6,000 per year × 4years
= $24,000

The credit to retained earnings reflects the difference between the erroneous repairs expense of $32,000 in 2012 versus showing depreciation expense of $18,000 for three years (2012–2014).



Case Example-5 [Salvage Value Was not Charged]

At the beginning of 2013 a company bought equipment for $300,000 with a salvage value of $20,000 and an expected life of 10 years. Straight-line depreciation is used. In error, salvage value was not deducted in computing depreciation. The correcting journal entries on 12/31/2015 follow.

Year 2013
and  2014
Depreciation taken $300,000/10 × 2 years                  $60,000
Depreciation correctly stated
$280,000/10 × 2years                                                  $56,000
$  4,000

[Debit]. Depreciation = $28,000
[Credit]. Accumulated depreciation = $28,000
(Note: To recognize depreciation for current year)

[Debit]. Accumulated depreciation = $4,000
[Credit]. Retained earnings = $4,000
(Note: To correct prior year depreciation misstatement)



  1. sreeram

    Dec 30, 2009 at 1:24 pm

    At the end of 2010 a company failed to accrue telephone expense that was paid at the beginning of 2011. The correcting entry on 12/31/2011 is:

    [Debit]. Retained earnings = $16,000
    [Credit]. Telephone expense = $16,000

    What is the treatment if there is no retained earnings ? for eg. a sole trader concern

  2. Putra

    Dec 30, 2009 at 2:16 pm

    Regardless if it is a sole trader or a corporation, as you concern about ‘fail to accrue an expense”, means you concern about a cut-off date, means you make “closing entries” to close the income statement, am I right? I doubt if one able to close the book if “retained earning” account isn’t exist.

    Happy holiday and a healthy new year 2010.

  3. Michelle Chang

    Jan 29, 2010 at 2:44 pm


    If we overstated expense in 2008, and would like to correct it. What would be your advise? Journal entry in 2008 and 2009 were as such:

    2008 Entry
    -Expense 500,000
    A/P Accrual 500,000

    2009 Entry
    -Retained Eernings 500,000
    Expense 500,000

    Then what should we do about the A/P accrual?

    Thanks a lot and look forward to hearing from you,

    Michelle Chang

  4. mrh

    Apr 1, 2010 at 12:09 pm

    Dear Putra.You Should make the following entry in 2009
    Dr/ Accrued expenses 500,000
    Cr/ Retained Earnings 500,000

  5. mrh

    Apr 1, 2010 at 12:12 pm

    Sorry the previous comment was to Michelle Chang.

  6. vk

    Apr 30, 2010 at 6:09 pm

    What happens if you discover Unrecorded Revenue of 150K in first quarter of 2010? Do you restate 2009 financials? Make a prior period adjustment to RE? or can you make a current period adjustment in 1st Qtr?

    Please help!

    Thank you,

  7. mbb

    May 26, 2010 at 6:23 pm

    What if we find a not reported depreciation expense from previous year? How should we include it on the income statement?

  8. Gadissa

    Jun 1, 2010 at 12:57 pm

    In the fiscal year 2008/2009 i recognize an income from commission by total. but in this year, i found that from the total, portion of it would not be an income. so how can i make prior period adjustment? for the amount wrongly recognized as income?

  9. Diane

    Jun 16, 2010 at 9:58 pm

    What if a wholly owned subsidiary failed to debit the expense and credit the ppd expense in the correct year and the consolidation for that year has already occured and the year has been closed leaving the amount still sitting in the ppd expense as an asset?

  10. sidrow_c

    Aug 15, 2010 at 2:45 pm

    an invoice cost that was not included in the accrual for 2009 was charged to 2010 budget, what are the possible ways to adjust the budget in order to accomodate this unaccrued cost. if there is no more budget adjustment allowed, is it possible that the year end invoice cost will be charge to 2011 by no including it in the accrual.


    Aug 30, 2010 at 4:02 pm

    My client’s previous accountants understated closing inventories in the immediate prior period thereby understating profits. However, the difference between the closing inventories in their FSs and the actual closing inventories for the period is less than the adjustment that needs to be made.
    Where else should I debit the difference?

  12. deepika

    Sep 18, 2010 at 1:30 pm

    i want to the meaning of prior period income, prior period expense and prior period discloure and the treatment for the above.

  13. Love D

    Sep 20, 2010 at 3:40 pm

    Prior Period Income is the income earned in the previous year, Prior period expense is expense in the prior year and prior period disclosure requires that there should be disclosure for recognition of prior period income and expenditure. you have to state reasons while these income and expenditures were not reported during the previous period.

  14. koko

    Oct 18, 2010 at 11:46 am

    If the company cost center (not profit center) and overstated expense in 2009, and would like to correct it in 2010. What would be your advise? Journal entry

    • George

      Mar 16, 2018 at 10:02 am

      In 2010:

      If the overstatement on one cost centre resulted in understatement of another:

      DR Correct cost centre
      CR Overstated cost centre


      If the it was, maybe a duplication error:

      Dr Retained income
      Cr Overstated cost centre

  15. Dj

    Oct 26, 2010 at 4:44 am

    What happen to the tax if there is a prior year adjustment to the current year? Should we also made adjustment to the tax computation for previous year or current year? If taking the example for Case Example-2 [Expenses were not Accrued].

    I.e.: Let’s say last year 2009 the net profit before taxation is $50,000 and we were based on $50,000 to compute the tax 2009. But error discovered in 2010. The current year (2010) profit before tax suppose is $100,000 but after the prior year adjustment (the case 2), the profit increased to $116,000. So how do we make the adjustment on last and current year taxation?

  16. Julie B

    Feb 7, 2011 at 2:52 am

    I have a question. How would you handle a refund on a litigation that was related to a prior year? Would it be a prior period adjustment? Litigation or lawsuit are usually disclosed in the notes to the financial statements. Litigation or lawsuits can take years to resolve.

    Thanks for your help.

  17. DG

    Mar 5, 2011 at 6:09 pm

    lawsuits are accrued in the financial statements only when you are likely to lose and the amounts of estimated loss recorded needs to be a reasonable amount. Otherwise they all stay in the notes of the financial statement.

  18. Shyama

    Apr 6, 2011 at 2:07 pm

    In 2009 audit report we had recognised about 5million additional to the revenue and as trade receivables.In 2010, the projects were do I treat this issue and whats the entry and is it allowed to make the correction in 2010

  19. Ryan

    Aug 5, 2011 at 2:41 am

    I need to make a prior year adjustment of 8 million to prior year period. The cost of sales for that 8 million is 5 million, may I know what is the entry that I should pass?

  20. Henry Shaka

    Aug 15, 2011 at 6:48 am

    I need to make a prior year adjustment for assets previously left out of the register and depreciation underdeclared because of using a wrong method.May I know what entries I should pass? How does this appear the statement of cash flows.

  21. Leo

    Oct 17, 2011 at 5:55 am

    hello guys. am stuck with an unrecorded sales in FY2010, payment was received this FY2011, just when we find out that it wasnt booked at all in the previous year. our FS were already audited. how am i going to get this trx in my current books?

    your ideas are highly appreciated.


  22. Latwania Patterson

    Nov 6, 2011 at 11:45 pm

    The accountant for K. Bailey and Associates reviewed the financial statements for the financial years 2008 and 2009. The Accounts Receivable was $780,000 and $500,000 for 2008 and 2009 respectively. The Accountant collected the $200,000 for cash sales in 2007. The amount was kept by the Accountants. The Accountant created fictitious addresses for those customers and treated the cash sales as credit sales. A clerk discovered what the Accountant did on Monday, January 26, 2009. The Directors had not yet approved the 2008 Financial Statements.
    (i) Is this the correction of a prior period error? Explain.
    (ii) How should it be corrected, retrospectively or prospectively? Explain your answer.
    (iii) What are the determinants of selecting accounting policies?

  23. Latwania Patterson

    Nov 7, 2011 at 1:16 am

    What are the determinants of selecting accounting policies?

  24. Lakshmipathi

    Feb 23, 2012 at 9:07 am

    Question regarding Depreciation.I have received one request to capitalize an invoice with Date placed in service ” 11-Mar-2011″,Cost 24000/-, and life 3 years. Here I got a question like shall we calculate prior period (From Mar 11 to Dec 11) depreciation? but we have already been closed 2011 books and moved profit/loss to retained earnings. If we book prior year deprection in the current year we may get loss on P&L statement.

    Pls let me know the accounting treament and Tax liability for prior and current year

    Thank you,

  25. PM

    Jun 21, 2012 at 1:14 pm

    What if a company purchase fixed assets(vehicles) in 2009 costing 31,000 and 2010 costing 32,000 and did not recognize the purchase of these assets in their respective periods(the amount was omitted from the records). However, during 2011 the error was realized,what are the appropriate accounting entries to incorporate the assets in the records of the company?

  26. Harish

    Aug 12, 2012 at 10:12 am

    Hi ,

    If some how company has overstated its revenue by raising duplicate invoices . Now we come to know that these will not get paid , so if we pass credit notes then this will treated as SUAD . How should go in this …

  27. Benjie Farlin Sabanal

    Feb 9, 2013 at 9:38 am

    how do you account for trading securities and available-for-sale securities and how would you know if they should be part of comprehensive income or in other reserves?

  28. Alka Gupta

    Dec 19, 2014 at 7:53 am

    Respected sir,
    I am really stuck with prior year adjustment entry. Actually my problem for the entry is that if I credit shareholder and debit management salary(as expense) then how i am gonna show prior year adjustment in income statement. As i have to show this management salary as prior year adjustment(for three years).
    Please help me, I do not know how to show this prior year adjustment in income statement( I could not find any map number for that).
    I would appreciate response.

  29. nayana

    Mar 10, 2015 at 8:08 am

    is prior year adjustment affect this year cash flow statement

  30. Gerald

    Jun 1, 2015 at 5:19 am

    Good day SIR, what is the correct entry when let’s say, a fully depreciated fxed asset sold this yr for cash but no sale was recorded until next year?what isthe possible reason of committing error?tnx in advance

  31. Penny Teoh

    Jul 13, 2015 at 11:21 am

    Dear Sir

    We forgot to accrued for income tax last year.

    I made the following adjustment this year:
    Dr Retain earning
    Cr Income tax.

    How should my Balance sheet and PL look like?

  32. Amy

    Oct 15, 2015 at 4:16 am


    We forgot to put audit adjustment in book in 2013, what shall I do in 2014?

    Dr Exchange gain
    Cr Purchases

    Cr Retained Earnings

  33. Thazin

    Nov 28, 2015 at 8:47 am


    Year 2014 August Sales done, but the payment received on Year 2015 May, pls advise how to enter this entries in Bookkeeping account and what are the statements need to be prepared.

  34. MUNYA

    Feb 17, 2016 at 2:27 pm

    DR: BANK

  35. Mulan

    Mar 1, 2016 at 5:31 am

    Amy, since you needed to adjust the forex gain but didn’t and you want to correct it – then your RE is overstated. To correct the overstatement your entry should be
    Dr – Retained Earnings
    Cr – Payable

    Note: However, I wonder why your initial correcting entry is crediting purchases, when your purchases should be booked at the gross amount (not net of the gain)

  36. Mulan

    Mar 1, 2016 at 5:41 am

    Thazin, income should be recognized in 2014. In 2014, you should have
    Dr – Receivable
    Cr – Sales

    (also need corresponding entries on inventories)

    In 2015 –
    Dr Cash
    Cr Receivable

    This is reflected in the income statement.

  37. derek enriquez

    Aug 5, 2016 at 7:38 am

    what would be the adjusting entry for overstatement of gain on sale? over/understatement of working capital?

  38. balaji

    Jan 16, 2017 at 7:14 am

    Hi.. Sir i have not paid my Audit fees for last three years, now i have to book expenditure in my books of account and how to claim Service tax input credit of 12.36% now in this F.Y

  39. Venus Caddarao

    Jan 21, 2017 at 4:06 am

    Hi! Would like to ask, how am I going to treat unrecorded sales of 2015 in the book of 2016. Will i treat it as PPA? Or, record it as 2016 sales?

  40. Manar

    Feb 5, 2017 at 9:12 am

    the CFO in my company insisted to make a prior year adjustment to include an consultation expense for an engineer , that wasn’t approved or paid until next year is that goes with the standard??

    • Adam Brink, CPA

      Feb 13, 2017 at 9:27 pm

      Hi Manar,

      If your company operates on an accrual basis for accounting (which most do), then the expense should be recognized as the service is provided, and if it is not paid until later, then a liability should be recognized for the services provided. Let’s say your consultant provided 100 hours at $100/hour in 2016. The 12/31/16 entry would be:

      Debit: Consulting Expense $10,000
      Credit: Consulting Fee Due $10,000

      Once the bill is paid (say on 2/13/17), the following entry would be:

      Debit: Consulting Fee Due $10,000
      Credit: Cash $10,000

      Let me know if I can be of further assistance,

      Adam Brink, CPA

      • Jabpotin Dunkwa

        Sep 9, 2017 at 10:59 am

        What will be the entry for say 2015 corporate tax ‘liability’ paid of say 10,000 in 2017 by cheque, which liability wasn’t created in 2015 because that portion of the liability was claimed to have been covered by withholding tax credits which in effect was not the case, per irs verification.

  41. raqs

    Mar 14, 2017 at 11:07 am

    How to record previous expenses as part of cash advance for operation?

  42. raqs

    Mar 14, 2017 at 11:08 am

    How to record previous year expenses as part of cash advance for operation

  43. Camille

    May 11, 2017 at 9:06 am

    What if a company would like to acquire a personal capital asset from an employee, a car for instance, the employee has already paid for the downpayment and 5 monthly installments for 2016. The arrangement to acquire the personal asset of the employee to be used as company car happened in January 2017, in which both parties agreed that the company would just be paying for the remaining monthly installments but would not be reimbursing the amount paid by the employee for 2016 installments and downpayment. The transfer of ownership would just take place after the outstanding balance of the car has been paid by the company. Let’s say the accountant recorded Dr. Advances fr. Employee ; Cr. Cash in Bank – BOA1234567, everytime that the company made its monthly installments. At the time that the outstanding balance was paid, the accountant recorded Dr. Property, Plant and Equipment; Cr. Advances fr. Employee to close the account for advances and an adjusting entry at year end, Dr. Retained Earnings; Cr. Accumulated Depreciation, in relation to the car. Did the accountant made the correct entries?

  44. Oswald

    May 23, 2017 at 2:55 pm

    I wanted to know the tax implications on these transactions.
    E.G. #5 (if IT was 40%):
    Would we reduce RE by 40% tax on current 2015 machine book value, and credit that to Income Tax Payable?
    What about previous years?

  45. sammi

    Aug 16, 2017 at 9:06 am

    Hi how to record previous year 10,000 capital contribution in the current fiscal year & also how to record previous year purchase of fixed asset 5,000 that was not recorded in its current year but to record it now.Also the unrecognized depreciation 20% (1000) from the previous year.


  46. Shmily

    Sep 27, 2017 at 5:27 pm

    If the previos research and development expense were wrong recorded as intangible asset, how should we made the adjustment?


    Nov 23, 2017 at 9:03 am

    Dear RAQS,

    You can apply Prior Year adjustment, like :
    Operational Expenses Dr.
    Retained Earnings Cr.

  48. Calvin Poon

    Dec 25, 2017 at 1:19 pm

    Hello, I have a trouble in making adjustments for overpaid and underpaid expense in prior year. I come to realise these mistakes in this year, and wouder to know on how to make the adjustment for retained earnings in Year 2017.
    In Year 2016
    a) RM10,000 underpaid for wages
    b) RM10,000 overpaid for accounting fee

    • George

      Mar 16, 2018 at 10:17 am

      You do not need to adjust retained income because of compensating errors, rather in 2017:

      Dr Wages 10,000
      Cr Accrued wages 10,000

      Dr Prepaid Accounting fees 10,000
      Cr Accounting fees 10,000

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