Introduction
Generally accepted accounting principles are a set of rules that are followed by accountants in preparing the accounts to ensure uniformity. Assembled information is always relied upon by various stakeholders on the assumption that the accounts prepared are good and free from bias and are consistent. The principles of accounts originate from traditions of auditing, compiling and reviewing transactions that are used by accountants (White, Sondhi, and Fried, 1997, 42).
The information also provided by the financial statements is subjected to generally accepted accounting principles to have a proper economic view. Generally accepted accounting principles and accounting have developed for a long period and they have been accepted all over the world (Delaney and Epstein, 2001, p. 8-10).
Accounting principles, policies, and procedures adopted by the company should be used consistently to provide reliable and consistent information to the stakeholders. This means Procedures and processes are crucial to the business due to the fact any changes to them will create inconsistency and provide information that may be suspect (Delaney and Epstein, 2001, p. 8-10).
Accounting situations
- Situation 1:-The type of accounting change under this situation is the change of accounting estimate. In this case, the accounting convention of matching revenues produced and the cost of an asset was used. Assets are used in any business enterprise to generate income loss value for a given point of time. Therefore depreciation is provided for these assets to measure this value of the benefit the asset has generated during a certain accounting. Therefore the balance sheet value of depreciable assets is that portion of the original cost which has not yet been allocated as a periodic expense in the process of income measurement. To determine the useful life of an asset is to estimate the expected period the asset will be useful in generating income. Hence, this accounting estimate is what has been changed (Delaney and Epstein, 2001, p. 8-10). Under the current generally accepted accounting principles, this can be reported and be disclosed in the financial statements. The amounts will be computed using the new reduced figure and this figure will be based on the book value of the asset but not the historic value. It will be shown as a footnote in the accounts (White, Sondhi and Fried, 1997, 42). The change of this accounting estimate of depreciation will affect the balance sheet because the asset so affected will be recognized on its book value rather than its historic value. Depreciation for past years will not be adjusted. In the income statement, the figure for depreciation expense will as well change since the estimated number of useful years has also changed (White, Sondhi and Fried, 1997, 43).
- Situation 2:- The situation here is the change of reporting entity because initially, it is a firm operating in another country that has been recorded as a nonconsolidated business. Currently, it is being recorded as consolidated and it should be extensively covered under footnotes and change of accounting methods. This change will not affect the amounts or figures of the financial statements because it is only the format recommended which is not followed but the calculation is correct. This will affect both the balance sheet and income statement. The company will have to have three sets of balance sheets and income statements to consist of the main company, the subsidiary, and the group. The consolidated balance sheet and income statement will consist of a minority shareholder of the subsidiary something that was not there before. Footnotes will be required to explain properly why that change of representation occurred on the financial statements (Delaney and Epstein, 2001, p. 8-10).
- Situation 3:- This is a change of accounting principle. The reason why aim stating that its change of accounting principle is because the change is changing the existing company policy of depreciating assets. The past depreciation method was an accelerating method and now it is changed to the straight-line method. The manner of reporting the change under current generally accepted accounting principles is that companies are required to disclose the pro forma impact of the new method on prior periods when there is a new method applied to all assets. In addition, the accumulative effect of the change is required to be reported separately and net of tax. The change on the new machine will be gradual as the new asset will be useful to the business. But in the future there will be an increase in revenues depreciation will be lower. But in this situation where it is applied to all, the effect of the change will be greater and very important in that year of change and future years. This effect will cause income to increase in the year of change and future. This is because of the difference between the originally reported depreciation and the adjusted depreciation for all previous years which brings about a cumulative effect (White, Sondhi and Fried, 1997, 42).
Conclusion
These changes should be effected when an explicit significant event has occurred and the amount of change is quantifiable. In most enterprises, changes are made at whatever time the company finds fair. However, there are several situations in which exceptions may apply. The principles, policies, and procedures are rather essential to accounting and any changes to them should be reported as footnotes, notes, or as changes of policies. Information contained in the financial statement should reflect all that is necessary (Delaney and Epstein, 2001, p. 116-22).
List of References
Delaney, P, and Epstein B (2001) Wiley GAAP 2001: Interpretation and Application of Generally Accepted Accounting Principles 2001, NY John Wiley & sons, 2001 pp 3-23.
White G.I., Sondhi A.C. and Fried, D 1997 Analysis and Use of Financial Statements, John Wiley, U.S.A.