Intermediate Accounting

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20 Accounting Changes and Error Corrections Overview There are two kinds of accounting changes. Each kind has a very different way of being handled for accounting purposes. Therefore, the first important step is to be able to distinguish between the two so that you don’t account for one in the way in which the other is to be accounted for. Change in accounting estimates usually occur when new information comes to light. Common forms include a change in method, rate, or one-time amount adjustments for accounting for the allowance for bad debts and a change in method, estimated useful life, or residual value for an asset or assets that are being depreciated, depleted, or amortized. To account for a change in estimate, the current period and future periods are adjusted to conform to the new estimate. Past financial statements are not adjusted and the entire amount of the adjustment is not usually reflected in the current year (at least in the case of depreciation estimate changes). Changes in accounting principles, on the other hand, occur when a company is changing from one proper way of doing their accounting to another. Examples include changing the method used for accounting for long-term construction contracts and changing the inventory valuation method (LIFO to FIFO, etc.). When a change in principle occurs, prior financial statements are changed to make them look like they would have had the new method been used all along. Accounting errors can happen to any company. Correcting the errors can be more complicated and time consuming than doing the accounting correctly to begin with. That is because, for most errors, it isn’t as simple as reversing the original entry and creating the new correct entry. If the error happened in a prior accounting period, and an income statement account was involved, then retained earnings will likely need adjustment instead of an expense or revenue account. Also, some entries impact more than just the account receiving the debit or credit. For instance, purchases can go on to affect ending inventory, cost of goods sold, beginning inventory for the next year, and retained earnings. If financial statements for multiple years are being presented, then the prior years’ financial statements will be adjusted for any prior years’ errors.
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20-2 Chapter 20 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the
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032459237X_177438 - 20 Accounting Changes and Error...

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