Final answer:
A prior period adjustment is shown on the balance sheet under the T-account format. It is recorded in the equity section of the balance sheet, specifically in the retained earnings account. A prior period adjustment is made when an error in the financial statements of a previous period is discovered, and the adjustment is necessary to correct the error.
Step-by-step explanation:
A prior period adjustment is shown on the balance sheet under the T-account format. It is recorded in the equity section of the balance sheet, specifically in the retained earnings account. A prior period adjustment is made when an error in the financial statements of a previous period is discovered, and the adjustment is necessary to correct the error.
For example, if an accountant mistakenly recorded an expense in the wrong period, resulting in an understatement of expenses and therefore an overstatement of net income for that period, a prior period adjustment would be made to correct the error. The adjustment would reduce the retained earnings balance for that period and affect the financial statements accordingly.