Change in Accounting Principle

: Change in Accounting Principle

1 . Introduction

This seeks to analyze and discuss what are the changes in accounting principles by providing an example and explaining why such is a change . An attempt will also be made to know what entries need to be made (if any ) and what are the effects on the financials (if any

2 . Analysis and discussion

2 .1 Definition of changes in accounting principle

Knowing what is and a `change in an accounting principle ' in accounting principle would lead the reader for an easier understanding of

this . Burbage , G (n .d ) defined it as a changing from one generally accepted accounting principle (GAAP ) to another generally accepted accounting principle , or changing the method of application of a particular principle . It presupposed therefore a need to have the change . Thus Burbage , G (n .d , confirmed by stating that a change should only be made when the new principle is preferable over the former ' In the US , the body that has the authority to make GAAP or changes to it is the Financial Accounting and Standards Board (FASB Thus when the FASB issues a new pronouncement that requires the use for a particular principle over another , it is but normal to expect a justification for a change which must be demonstrated

2 .2 Why the need for change in accounting principle

The need for a change in accounting principles is brought by many factors , one of which is diversity of industry where application of one accounting principle may not be appropriate . The FASB therefore in its goal of ensuring the need to provide objective and fair financial information updates from time to time the accounting principles hence the accounting changes that must follow as a result

2 .3 Example of application of change in accounting principle

This uses Change from LIFO to FIFO inventory method . This therefore assumes the following facts

January

Units Unit Cost 1 Beginning balance 800 200 160 ,000 .00

8 Sale

500

18 Purchase

700 210 147 ,000 .00

22 Sale 800

31 Purchase

500 220 110 ,000 .00 The information above shows the beginning balance , purchase and sales for the month of January . If the company is using the last in first out (LIFO ) method of inventory valuation the company 's computation of inventory and cost of goods sold (Helfert , 1994 ) would be as follows :Inventory - Jan 1 160 ,000 .00

Purchases

257 ,000 .00

Goods available for Sale

417 ,000 .00

less : ending Inventory

140 ,000 .00

Cost of Goods Sold 277 ,000 .00 Note that the ending inventory was computed by multiplying 700 units by 200 since all the cost of the later purchases were assumed to be used in costing earlier sales thus the 200 unit cost was the cost of the beginning inventory

Assume that a change from LIFO to FIFO will be made as a result for example of an decision promulgated by the FASB . The effects would be observed in the computation...