Instructor Blog - Financial Analysis

Q: Our credit folks are having a difficult time understanding and reconciling prior period adjustments to the equity section.

A: Since a prior period adjustment can be triggered by many events that generally boil down to a prior period adjustment for accrual expenses or accrual revenue - assuming the institution is using accrual statements for analysis.  The same causes apply for business income tax returns.  

If a prior period net income number gets revised, it no longer reconciles with an unadjusted retained earnings and net worth. The difference between the adjusted prior period net income and unadjusted prior period retained earnings is the amount that needs to be explained or identified. That, in turn requires an adjustment in prior period retained earnings and net worth so everything is back in balance.