How to Account for a Change in Accounting Estimate:
Changes in estimates, such as the estimated useful like for a tangible asset or the bad debt allowance percentage, are accounted for on a prospective basis. This means that the current and future financial statements must reflect the change, but the company does not need to change historical periods. Instead, the change will be made prospectively. This means that the change will be made in the current period and all future periods.

Changes in Accounting Estimates: Treated Prospectively:
Management will often create estimates for components of their financial statements. Keep in mind, these will also include changes in accounting principle that are considered inseparable from a change in accounting estimate such as changes in depreciation methodology and changes in inventory methods to last in, first out (LIFO). Other changes in accounting estimate that are often seen on the CPA exam are as follows: such as:
- Warranty obligations
- Bad debts/estimates of uncollectible receivables
- Changes in the useful lives of their fixed assets
- Obsolete inventory
- Pending litigation that has been settled
- Changes in accounting principle that is inseparable from a change in accounting estimates (e.g. depreciation method and change in inventory to LIFO)
When companies experience changes in accounting estimates, they will prospectively change their estimates on the financial statements. This means that the changes will be made in the current and future years only.
Below is an example of changes in accounting estimate, courtesy of Universal CPA Review:



Back To All Questions
You might also be interested in...
-
CECL Excel Workbook
If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)
-
Journal Entry for Direct Materials Variance
Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...
-
Understanding Variance Analysis
Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...
CECL Excel Workbook
If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)
Journal Entry for Direct Materials Variance
Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...
Understanding Variance Analysis
Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...