Accounting Principles And Its Impact On Accounting

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Introduction Changes are inevitable. Things such as the economy, development, or technological advances constantly transform operations and the flow of information about operations. As a result, revised accounting standards require companies to change accounting methods. The three categories for changes are accounting principles, estimates, and reporting entity. Change in accounting principles happens when a company changes from one generally accepted accounting principle to another. For instance, Company A uses FIFO inventory cost method but decides to uses LIFO instead. Revision of an estimate because of new information or new experience is called change in accounting estimate. Lastly there is change in reporting entity, which…show more content…
This does not include the adoption of a new accounting principle because the entity has entered into transactions for the first time that require specific accounting treatment. It also does not include the change from an inappropriate accounting principle to an acceptable accounting principle. The later would be classified as the correction of an error (Terry, 2007). The types of changes that are included in a change in accounting principle are: adoption of a new FASB accounting standard, change in the method of inventory costing, change to or from the cost method to the equity method, or the change to or from the completed contract to percentage-of-completion method. FASB issued Statement No. 54, Accounting Changes and Error Corrections; stating companies must retrospectively apply all voluntary changes in accounting principle to previous-period financial statements unless doing so is impracticable or FASB mandates another approach (Jack O. Hall, 2007). Change in Estimates Other changes arise from management decisions about using the appropriate accounting methods for preparing financial statements. There are a number of estimates made in order to prepare the financial statements at the end of each period. These estimates are based on the facts and circumstances that exist at the time, but they will change from one period to the next. Unfortunately
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