Question

Prior period adjustments are reported as
a. An unusual item in the income statement
b. An addition to (or deduction from) net income in the income statement
c. An addition to (or a deduction from) the beginning balance of retained earnings

Answer 1

Answer:

c. An addition to (or a deduction from) the beginning balance of retained earnings

Explanation:

A prior period adjustment is the correction of an accounting error that occurred in the past and was reported on a prior year's financial statement, net of income taxes. Prior period adjustment are reported in the statement of retained earnings as an increase or a decrease in the beginning retained earnings. Therefore, the adjusted beginning retained earnings balance is the amount that retained earnings would have been if the error had not been made.