Reclassification adjustments refer to changes made to the presentation of items on the financial statements from one category to another. These adjustments do not represent any change in the economic substance of the underlying transactions, but rather a change in their classification or grouping for reporting purposes.

Reclassification adjustments can arise when a company changes its accounting policies or when it determines that certain items were initially classified incorrectly. For example, a company may reclassify an item from current assets to non-current assets, or from one line item to another in the income statement, based on a reassessment of the nature of the item.

Reclassification adjustments are reported as part of OCI, in the statement of comprehensive income. They represent a reconciliation between the opening and closing balances of certain items that were reclassified during the period. The purpose of these adjustments is to provide users of financial statements with a more accurate picture of the company's financial position and performance by ensuring that items are presented in the appropriate categories.

During the year, the company determines that it misclassified $5,000 of prepaid expenses as a non-current asset at the beginning of the year. It should have been classified as a current asset. Therefore, a reclassification adjustment is needed to correct the presentation of the item in the financial statements.

The journal entry to record the reclassification adjustment would be:

Prepaid expenses (current asset) $5,000

Accumulated depreciation (non-current asset) $5,000

This entry would increase the current asset balance by $5,000 and decrease the non-current asset balance by the same amount, effectively reclassifying the prepaid expenses from non-current to current assets.

The reclassification adjustment would also be reported as a component of OCI in the statement of comprehensive income. The adjustment would represent a reconciliation between the opening and closing balances of prepaid expenses for the year, showing the impact of the reclassification on the financial statements.