Business Week Essay
Chapter 20 Review Notes
The accounting profession has identified two main categories of accounting changes:
1. Change in accounting estimate: these are considered to be part of the normal accounting process, not corrections or changes of past periods. Examples of changes in accounting estimates include bad debt expense, depreciation, residual values, and warranty obligations. A change in depreciation method is considered a change in estimate. 2. Change in accounting principle: these involve changes from one generally accepted principle or method to another. They do not include the initial adoption of an accounting principle as a result of transactions or events that had …show more content…
Error corrections are not considered accounting changes, but their treatment is specified in FASB Statement No. 154. Accounting errors made in prior years are corrected from a reporting standpoint by restating the financial statements for all years presented, and, if needed, by reporting an adjustment to the beginning balance of the retained earnings for the earliest year reported. Note disclosure of the line-by line impact of the errors is required. This is essentially the same as the treatment of changes in accounting principle.
Different types of errors differ in how easily they are corrected.
1. Errors discovered currently in the course of normal accounting procedures are usually corrected routinely as part of the summarizing process of the accounting cycle. 2. Errors limited to balance sheet accounts are easily corrected by ordinary journal entries when detected in the period wherein they occur; if detected later balance sheet data must be recalculated and restated for comparative purposes. 3. Errors limited to income statement accounts should be corrected as soon as discovered, and the misstated accounts