You are on page 1of 2

Definition of Terms Accounting policies specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and

d presenting the financial statements. Fundamental errors are errors discovered in the current period with such significance, that the financial statements of one or more prior periods can no longer be considered to have been reliable at the date of their issue. Reasons why Accounting Changes Occur: 1. The accounting profession may mandate that a new accounting principle is to be used. 2. Changing economic conditions 3. Changes in technology and in operations 4. New experience or new information may prompt companies to change its estimate of revenues or expenses. TYPES OF ACCOUNTING CHANGES 1. Change in Accounting Principles This is a change from one generally accepted accounting principle to another generally accepted accounting principle. Adoption of a new principle in recognition of events that have occurred for the 1st time is not a change in accounting principle. There is no change in accounting principle when the depreciation method adopted for a newly acquired asset is different from the method or methods used for previously recorded assets of similar class. A change from a principle that is not generally accepted to one that is generally accepted is considered to be an error correction than a change in accounting principle. Accounting Procedure: Benchmark treatment A change in accounting policy/principle should be applied retroactively unless the amount of any resulting adjustment that relates to prior periods is not reasonably determinable. Any resulting adjustment should be reported as an adjustment to the opening balance of the retained earnings. Comparative information should be restated unless it is impracticable to do so. 2. Change in Accounting Estimate This is a change that occur as a result of new information or acquisition of additional experience. Changes in estimates are viewed as normal recurring corrections and adjustments or the natural result of the accounting process. Retroactive treatment is prohibited. Accounting Procedure: a. Report current and future financial statements on the new basis. b. Present prior period financial statements as previously reported. c. Make no adjustment to current period opening balances.

NOTE: Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, or if an asset is affected by both a change in principle and a change in estimate during the same period, the change should be accounted for as a change in estimate rather than a change in principle.

CORRECTION OF ERRORS No company whether large or small is immune from errors. Errors may be intentional or unintentional. Intentional errors are significant because of the presence of fraud or intent to deceive. These errors are made for the purpose of concealing fraud or misappropriation, evading taxes, manipulating or window-dressing the company's financial statements. Unintentional errors were not deliberately committed. They result from carelessness or ignorance on the part of the company's personnel or it may result from poor internal control. The risk of material errors may be minimized through the installation of good internal control and the application of sound accounting procedures. Prior period adjustments, also called fundamental errors are reported in the current year as adjustment in the beginning balance of the Retained Earnings account. Prior period statements should be restated to correct the error when comparative statements are prepared. Accounting Procedure: 1. If detected in the period the error occurred, correct the accounts through normal accounting cycle adjustments. 2. If detected in subsequent period, adjust errors by making prior period adjustments directly to Retained Earnings or restate the beginning balance of the Retained Earnings account. 3. Correct all previously presented prior period statements. Examples of Accounting errors: a. A change from an accounting principle that is not generally accepted to an accounting principle that is generally accepted. b. Mathematical mistakes c. Mistake in the application of accounting of accounting principle d. Oversight e. Misuse of facts f. Incorrect classification of expense as an asset or vice versa g. Changes in estimates which are not prepared in good faith

You might also like