How to Report a Prior Period Change to Balance Sheet

[Ephesians3-14]

I have a new S Corp client who owns an interest in a partnership. The S Corp has always picked up the Sched K-1 income on the S Corp return so the tax reporting (that is, tax due on any income) has always been correct.

However, the Sched K-1 income has never been recorded on the books. Now I need to record the past 7 years' of Sched K-1 income on the books and establish the partnership investment asset account.. 

I'm going to make a journal entry on the books so that the partnership investment is picked up as an asset on the balance sheet. The other side of the journal entry will be to increase retained earnings. 

I have to report the this change on the tax return balance sheet. Which should I do:

1. Make an adjustment to the M-2 to report the cumulative change? "Previously Reported Sched K-1 Income"

OR

2. Change the beginning balance sheet to reflect the correct beginning balances? (This choice would also require a change to the beginning balance for R/E on the M-2.)

Any input would be useful. Thanks

[sjrcpa]

I'd do 1.

[Ephesians3-14]

My biggest concern is getting flagged for an audit. I figured if I at least indicated that the income was previously reported then that might reduce the chance of being audited.

[IRonMaN]

I really doubt that is going to be some kind of flag.  But as long as there isn't anything fishy on the return, I wouldn't lose a lot of sleep over being afraid of having the IRS come knocking.

[Ephesians3-14]

Thanks for the feedback - really appreciate it

[IRonMaN]

You betcha!