Types of Accounting Changes

Lesson Exercise Solution

Sometimes companies need to change their accounting. It can do this in two ways:

Retrospectively - Accountants go back and change previous financial statements.
Prospectively - Accountants only make changes to the current financial statements.

Here's why a change might have to be made:

Change in accounting principle - Switching between GAAP-approved methods (voluntary or mandatory) is done retrospectively.
Change in reporting entity - If the nature of the firm is fundamentally changed, the financials are updated retrospectively.
Change in estimate - If an estimate turns out to be incorrect, changes are made prospectively.
Errors - If there was a mistake in the application of accounting rules or a calculation, changes are made retrospectively.

Ginny LLC revealed an accounting change and needs to make an accounting change.

This is what you've been told:

The comany's latest experience in collecting debt suggest that the firm's earlier predictions of debt collectability were too high.

How should the change be handled with respect to timing?

The change should be made prospectively (accountants only need to make changes going forward).

Remember: This is a change in estimate, so we only make changes going forward.