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