Corrections of errors

Sometimes mistakes are made in the calculation of depreciation, depletion, or amortization. These errors sometimes affect multiple years of financial statements. When there is a material error affecting a previous year or years, four things need to be done.

How corrections of errors are handled

1. The previous years' financial statements are restated.

2. Account balances in the balance sheet are corrected.

3. If the error or errors affects retained earnings, a correction is made and reported as a "prior period adjustment".

4. A note is included in the notes to the financial statements that describes the error and its impact on net income.

Example