Prior period errors
In one sentenceAn omission or error in a previous year's statements discovered after they were issued; it is corrected retrospectively by restating the comparative figures and opening balances, not by an entry in the current year's profit.
Simply put
If you corrected last year's error in this year's profit, both years would be distorted. That is why international standard IAS 8 requires restating the previous year's figures as they should have been, and disclosing the error and its effect.
If the error is older than the comparative year, the opening balance of retained earnings for the earliest period presented is adjusted.
Worked example
This year a company discovered that an expense of 30,000 SAR relating to last year was not recorded, and its opening retained earnings balance is 500,000 SAR (with no tax effect for simplicity).
Opening balance before correction500,000 SAR
Effect of the error30,000 SAR
Restated opening balance: 500,000 − 30,000470,000 SAR
Don't confuse it with
Change in accounting estimatesA new estimate does not mean the past was wrong, so it is applied to the future only.