Human vision relies heavily on prior knowledge. Here, we show for the first time that prior-knowledge-induced reshaping of visual inputs emerges gradually in late childhood. To isolate the effects of prior knowledge on perception, we presented 4- to 12-year-olds and adults with two-tone images – hard-to-recognize degraded photos. In adults, seeing the original photo triggers perceptual reorganization, causing mandatory recognition of the two-tone version. This involves top-down signaling from higher-order brain areas to early visual cortex. We show that children younger than 7–9 years do not experience this knowledge-guided shift, despite viewing the original photo immediately before each two-tone. To assess computations underlying this development, we compared human performance to three neural networks with varying architectures. The best-performing model behaved much like 4- to 5-year-olds, displaying feature-based rather than holistic processing strategies. The reconciliation of prior knowledge with sensory input undergoes a striking age-related shift, which may underpin the development of many perceptual abilities.