Accounting Principle Change
Accounting Principle Change refers to modifying a company’s accounting policies, standards, or methods. It involves changing how a company records, recognizes and reports financial transactions and events. Accounting principle changes can significantly impact a company’s financial statements, which can affect how investors, creditors, and other stakeholders view the company’s financial health and performance.
Examples of accounting principle changes include:
- A change in depreciation methods.
- A change in the inventory valuation method.
- A change in the method of revenue recognition.
- A change in the method of accounting for lease transactions.
Accounting principle changes are generally made to improve financial reporting accuracy or align with industry standards or regulatory requirements. However, accounting principle differences can also be made for strategic reasons, such as to improve the company’s financial performance or to manage tax liabilities.
What is Accounting Estimate Change?
An accounting estimate change refers to a revision made to an accounting estimate that was previously reported in financial statements. Accounting estimates are approximations made by a company based on current data and historical trends to reflect future uncertain events or circumstances. Examples of accounting estimates include allowances for doubtful accounts, depreciation, and warranty expenses.
Changes in accounting estimates can occur due to various reasons, such as new information or a change in circumstances. These changes can impact a company’s financial statements and financial performance. When an accounting estimate changes, the difference is applied prospectively, affecting the current and future financial statements.
It’s important to note that accounting estimate changes differ from accounting principle changes. Accounting principle changes refer to a change in the accounting method used to prepare financial statements.
Accounting Principal Change VS. Accounting Estimate Change:
Accounting principle changes, and accounting estimate changes are two different concepts in accounting.
An accounting principle change refers to a change in the way accounting transactions are recorded or reported. This could be due to a new accounting standard being issued, a change in the company’s operations, or a change in management’s accounting policies. For example, a company may change from using the LIFO (Last In, First Out) inventory valuation method to the FIFO (First In, First Out) method.
On the other hand, an accounting estimate change refers to a change in the estimated amount of an asset or liability. This could be due to new information, a shift in market conditions, or a change in management’s assumptions about future events. For example, a company may increase its estimate of bad debt expense due to a change in its credit risk assessment.
In summary, while both types of changes can impact a company’s financial statements, an accounting principle change involves changing how transactions are recorded or reported. In contrast, an accounting estimate change consists of a difference in the estimated amount of an asset or liability.