Lesson 18 of 25 · 6 min

Prior-period adjustments, and how to see if one is present

A correction from February would break the opening identity, and March's opening matches February's close exactly.

A prior-period adjustment is a correction that belongs to an earlier window and is booked in this one. It appears as a line that is not a draw, not a repayment, and not this period's interest, or as an opening that does not equal the previous close. On the March page no such line is printed, and the opening identity with February holds to the cent.

February's invented chain is $1,837,260.01 opening plus $9,959.99 of February interest equals $1,847,220.00. That $1,847,220.00 is March's opening drawn balance. Subtract: $1,847,220.00 − $1,837,260.01 = $9,959.99, which is exactly the February interest figure. There is no residual. A residual would have been the adjustment.

How an adjustment announces itself when one is present:

A named line — “prior-period adjustment”, “correction”, “regrade” — sitting between opening and interest.
An opening that does not equal the previous statement's close, with no draw or repayment dated on day one to explain the jump.
An interest total that does not equal the sum of the printed legs, the leftover being a catch-up on a restated rate.

Absence is also a reading. March prints draws and repayments as $0.00, two legs that add to the interest total, and an opening that equals February's close. Those three identities leave no unexplained dollar. Seeing that there is no adjustment is as much a result as finding one. The method is the same either way: every dollar between last close and this close needs a name.

Key terms

Prior-period adjustment: A booking in this window that corrects an earlier one. It breaks the simple opening-plus-this-month identity unless it is named.
Opening identity (across statements): This opening equals the previous close. February's $1,847,220.00 close is March's opening. A break is a signal.
Residual: What is left after opening, draws, repayments and this period's interest are accounted for. A non-zero residual is an unnamed line.

Worked example

February into March, no leftover

The February chain that the fixture uses to produce the March opening, then March itself.

February opening: $1,837,260.01
February interest: $9,959.99
February close / March opening: $1,837,260.01 + $9,959.99 = $1,847,220.00
March draws / repayments: $0.00
March interest: $11,343.47
Unexplained residual at March open: $0.00

The cent-level match is the evidence. An adjustment would have been the dollars that failed that match and then needed a name.

Check yourself

February close is $1,847,220.00 and March opening is $1,847,220.00. What does that equality say about a prior-period adjustment, and what would a March opening of $1,848,100.00 have said instead?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.