Change in Accounting Principle

1 . Change in Accounting Principles

Accounting principles comprise general decision rules being the result of theoretical accounting concepts together with objectives that administer the accounting procedures adopted . The revenue principle for example , contends on the following important aspects of revenue

The timing upon which revenue is recognized and recorded in the books

The measurement of such revenue figure and

The features of the revenue item

Two separate schools of thought have evolved with respect to revenue components , the broad view and comprehensive view . The former one regards revenue as all

the business activities leading to a change in the net assets of the company . A recent accounting measurement basis known as fair value accounting abides with such principle . While the narrower view perceives that revenue comprises solely revenue-producing activities and should not account for investment income and profits or losses arising from the sale of tangible non-current assets

If a company switches the recognition of revenue from the narrow view to the broad view , this is considered as a change in an accounting principle

Another accounting principle that is recurrently adopted by organizations is the cost principle . This principle states that resources acquired by the company should be valued at their historical or original cost . Recently such principle was put under considerable pressure on the grounds that it does not reflect the true value of the firm 's resources as portrayed in the corporation 's Balance Sheet . Even though it leads to high objectivity new measurement basis of accounting commenced to develop in practice leading to a change in such principle Nowadays even accounting standards accept the fact that financial instruments ought to be measured at fair value

Entries arising from a change in Accounting Principles

A stated in the previous section , accounting principles affect the accounting techniques used in the organization . Therefore a change in an accounting principle will affect the way with which a business transaction is regarded and computed . For example , the timing of revenue recognition is an element , which forms part of the revenue principle that can be subject to change . The revenue principle contends that revenue can be recognized on all the stages of the operating cycle of the corporation . This principle guides accountants by stating that revenue should be accounted for in the accounts as revenue when it realizes and reflects an economic benefit to the firm . This can be on delivery of goods or on issuance of invoice and more

If for example the organization changes the revenue recognition from delivery of goods to issuance of invoice in light that such change reflects more fairly and truthfully the financial performance of the company , it would drastically affect the way in which revenue is accounted for in the books . At this stage revenue would be accounted for when the invoice is issued to the client and not when the goods are delivered . This will thus lead to a different source of transaction leading to the inception of revenue . In such case , the financial figure...