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This year P got a new client from the firm down the street, Dewey, Cheathan and...

This year P got a new client from the firm down the street, Dewey, Cheathan and Howe. After reviewing the client’s prior year return, he found, as he had expected, an error in the way Dewey had computed depreciation. What should P do?

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Answer #1

In this situation, such error shall be treated as ' Prior Period Adjustment'.

Prior Period Adjustment may be because of the following reasons;

1. The correction of an error in the financial statement that were reported in the earlier period.

2. Any adjustments as a result of tax benefit arising from the operating losses purchased subsidiaries before they were acquired.

Error in the financial statement;

a. Mathematical mistakes

b. Due to the changes in accounting standards and policies

c. Some other reasons.

Accounting treatment;

The financial statement shall be restated by passing an error rectification journal entry in the current year books of accounts,
And shall prepare the result of the prior period as though the error had never occurred.

Disclose the effect of correction on each financial statement as well as the cumulative effect on the change in retained earnings.

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