ACCA Strategic Business Reporting (SBR) Practice Exam

Where are prior period errors typically reflected in the financial statements?

1. Profit or loss

2. Retained earnings

3. Current liabilities

4. Share capital

The correct answer is: Retained earnings

Prior period errors are adjustments made to correct mistakes in the financial statements of previous periods. These errors affect the financial statements historically. As per the requirements of accounting standards, such errors are not recognized in the current year’s profit or loss; instead, they are adjusted against the retained earnings. When an error is identified and corrected, the adjustment is made in the opening balance of retained earnings for the earliest period presented in the financial statements. This approach maintains the integrity of the profit or loss for the current period while accurately reflecting the overall equity in the company’s balance sheet. Thus, the correction aids in presenting a true and fair view of the financial position, complying with the relevant accounting principles. Other choices, such as profit or loss, current liabilities, and share capital, do not accurately reflect where prior period errors are recorded. Profit or loss is affected only by current transactions, while current liabilities and share capital represent specific financial positions that do not encompass the correction of historical errors.