Types of Accounting Changes

Lesson:

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.

      In other words, all changes are made retrospectively, except changes in estimate.

Michael Jones, inc. revealed an accounting change and needs to make an accounting change.

You've been provided with the following information:

  • The firm's approach to measuring depreciation has been radically altered.
What should the accounting team do with respect to the change?

Answer:

  • The change should be made retrospectively (accountants need to revise prior financials).

Explanation:

    Remember: This is a change in accounting principle, so we need to go back and make sure that comparing current and previous financial records is an apples-to-apples comparison.
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