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Prior period adjustments are adjusted against the opening accumulated profits.
Sir could you please explain what the above statement means and why is it true?
Suppose we discover this year that there was an error made last year that resulted in an expense of $20,000 not having been recorded. That means that last years profit should have been $20,000 less than what was reposted and that therefore the accumulated profits at the end of last year/start of this year should have been $20,000 lower.
When we discover the error we need to reduce the opening balance on accumulated profits/retained earnings by $20,000.
It is an adjust for the prior year. We only do this in respect of major errors.