Question

QUESTION 1:

If an expense is inadvertently omitted in a year prior to the years presented in the current year financial statements, the correction is debited to opening retained earnings in the earliest period presented. An alternative sometimes proposed is that the error should be recognised in profit or loss in the period it is discovered. What are the reasons for proposing the error be presented through profit or loss in the period it is discovered?

Answer 1

The main reason behind this is that the retained earnings belong to the previous years & the financial statements of previous years have already been finalised. The decisions have been allready taken on those profits. So if we change them than it will be like ignoring these errors while making future decisions. So it is preferred to take effect in the current period profit/loss in the year which it is disclosed as a prior period item.

Also these errors are more common than you may think. So it is treated as a normal activity.

Hope this meets your purpose.

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