Cumulative effect adjustment to income statement. Why is that above NOT used for changes in accounting...

Cumulative effect adjustment to income statement.

Why is that above NOT used for changes in accounting principles? Please explain the concept...

Expert Solution

Explanation:

Cumulative effect adjustment arises in the case errors are identified subsequent to the finalization of accounts. Then in order to correct to that error the same needs to be adjusted with retained earnings of earlier years reported. Accounting standards also specifies the same criteria to be applied while dealing with errors.

Changes in accounting estimates are required to applied prospectively as per accounting standards. That does not tantamount to change in accounting principles but simply change in estimates. Estimates changes du to change in circumstances and facts of the case. For example -: Taking Useful life while depreciation PPE is an accounting estimate. This useful life may change due ti impairment, fire etc. This change is not change of accounting principle. Accounting principle in this case is the same i.e.. depreciate PPE. Only useful life is being change to compute depreciation. So change in accounting estimates is not a change in accounting principles.

ekkarill92 answered 2 years ago

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