Correction of prior-period errors

What it means

Correcting prior-period errors is needed when a company, after preparing and approving its annual financial statements, finds that a transaction was recorded wrongly, in the wrong amount or not at all. A closed period cannot be reopened, so the error is corrected in the current accounting period.

The method depends on the materiality of the error. Under Slovak rules, material errors are booked to the prior-period errors account and flow into equity, that is into retained earnings or accumulated losses. Immaterial errors are charged to current costs and revenue.

Correcting a prior-period error is not the same as an event after the reporting date. The error already existed when the statements were prepared and the company could have known about it, whereas an event after the reporting date brings new information that was not available at the time.

How it works in practice

When we take over bookkeeping from another provider and find errors from past years, we first list them and quantify their effect on profit and taxes. Only then do we decide with the client which of them are material and choose how to correct them.

The accounting correction goes hand in hand with the tax one. If the error reduced the tax base, an amended tax return must be filed for the original year and the tax paid, and a timely voluntary correction usually carries a lower penalty than an audit would impose.

For an immaterial error booked in the current period, we check whether it affected the tax base of the previous year. If so, the entry in the current year does not fix the tax by itself, and the income or expense must be adjusted in the current return so it is not taxed or claimed twice.

What to watch out for

A common mistake is to fix the error by having the accountant “rewrite” figures in statements that were already filed. That is not allowed: the statements sit in the public register, and the correction belongs to the new period, explained in the notes if the amount is material.

The second risk is leaving the error alone in the hope nobody notices. It is wiser to make the correction yourself, because a voluntarily filed amended return has milder consequences than an additional assessment during a tax audit.