3 Types of Accounting Changes: Principles, Estimates, Errors

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🤔 What types of Accounting Changes can be made?

☞ Accounting changes can be made for Principles, Estimates or Errors

🕑 Accounting changes in Principles are Retrospective, so they affect prior years’ financial and economic data: this can happen in case of change in inventory valuation methods (e.g., FIFO to LIFO) or a switch from percentage of completion to completed-contract method; in this case a cumulative adjustment is made, since beginning retained earnings are corrected in order to preserve comparability over the years

✍️ Accounting changes in Estimates are Prospective: they represent normal and recurring corrections and adjustments, valid for current and possibly future periods; examples are changes in an asset’s useful life or salvage value (affecting depreciation expense) or allowance for uncollectible receivables

❌ Accounting changes for Errors are corrections made for past year(s) mistakes, being them for wrong computations, measurement, principles or other accounting processes: adjustments in beginning retained earnings are necessary and disclosed in the financial statements notes.

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