When recording prior period expenses, it's important to accurately reflect these expenses in the current period while maintaining transparency. This can involve adjusting retained earnings if the expense impacts previous periods' net income.
Scenario:
Assume an expense of ₹50,000 was incurred in the previous year but not recorded. Now, you need to record this expense in the current year.
Journal Entry for Prior Period Expenses:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-01 | Prior Period Expenses A/c | 50,000 | |
| To Cash/Bank A/c (or Accounts Payable A/c, if not paid) | 50,000 | ||
| (Being prior period expenses recorded in the current year) |
Explanation:
- Prior Period Expenses A/c is debited to record the expense.
- Cash/Bank A/c (or Accounts Payable A/c if the expense is not yet paid) is credited to reflect the payment or liability.
Adjusting Retained Earnings (if applicable):
If the prior period expense impacts the net income of previous years, you may also need to adjust the retained earnings. This entry is typically made at the beginning of the current fiscal year.
Adjusting Entry for Retained Earnings:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-01-01 | Retained Earnings A/c | 50,000 | |
| To Prior Period Expenses A/c | 50,000 | ||
| (Being prior period expense adjusted against retained earnings) |
Explanation:
- Retained Earnings A/c is debited to reduce the retained earnings due to the prior period expense.
- Prior Period Expenses A/c is credited to offset the previously recorded expense.
Combined Journal Entries (if recording in the same period):
If you are making the adjustments in the current year and not backdating to the start of the year:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-01 | Prior Period Expenses A/c | 50,000 | |
| To Cash/Bank A/c (or Accounts Payable A/c, if not paid) | 50,000 | ||
| (Being prior period expenses recorded in the current year) | |||
| 2024-06-01 | Retained Earnings A/c | 50,000 | |
| To Prior Period Expenses A/c | 50,000 | ||
| (Being prior period expense adjusted against retained earnings) |
These entries ensure that prior period expenses are accurately recorded, providing a true and fair view of the company's financial position and performance.
