Distinguish among:
a) change in accounting policy
b) change in accounting estimate and
c) accounting error
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Change in accounting policy is a general rule which must
be applied retrospectively in the financial statements.
Meaning to say that the company must adjust all the
comparative amounts of prior years in the current year
due to such change in the financial statement. For
example, if you change your inventory valuation method
from FIFO into average method, so this change accounting
policies should be change retrospectively.
Change in accounting estimate is normal and expected. It
arises from the appearance of new information that alters
the existing situation. Therefore, the absence of new
information can’t occur changes in estimate. When there
is a change in estimate, account for it in the period of
change.
Accounting policies and estimation are made to make
financial statements relevant and reliable for the user
and economic condition on the reporting date.
Accounting error was not intentional error in accounting
entry, it is often immediately fixed. It can include
duplicating the same entry, or an account is recorded
correctly but to the wrong customer or vendor.
Give two examples of financial statement items that may require
estimates.
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Goodwill
Warranty Estimates
How is a change in accounting estimate reported?
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A change in accounting estimate is accounted for
prospectively. Accounting changes that result in
financial statements of a different reporting entity are
reported prospectively by restating all prior periods.