When a company overstates its Inventory at the end of a prior reporting period, a prior-period adjustment must be made to the financial statements. Suppose the error is made in 2016, but the error is not discovered until 2017 after the books have been closed.
The entry to correct the error at the beginning of 2017 includes a
in the Inventory account and a
account. (Ignore the income tax effect of the error.)