The financial accounting term correction of an error in financial reports refers to the rectification of a mistake caused by a transaction that was recorded incorrectly or omitted. Accounting principles require the retrospective restatement of financial statements that were incorrect.
While it certainly strives for perfection, the accounting profession is not infallible. An accounting change can result from a change in reporting entities, principles and estimates. As is the case with accounting changes, the correction of an error requires the restatement of the financial statements in those prior periods affected by the error. These errors can involve both incorrectly recorded transactions as well as transactions that were never recorded. Examples of such errors include:
Correction of errors are handled as prior period adjustments, going back to the earliest period the error appeared in a financial statement. A disclosure in the notes to financial statements describing the error is also required.
Note: In May 2005, the Financial Accounting Standards Board issued SFAS 154, Accounting Changes and Error Corrections, which replaced APB Opinion 20 and SFAS 3. This was an attempt to move to a more consistent approach with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, which was revised in December 2003.