Changes in accounting policies and estimates

This article discusses changes in accounting policies and estimates in financial accounting. It covers topics such as accounting for prior period items, changes in accounting estimates, and changes in accounting policies. The article provides examples and journal entries to help readers understand the concepts. The subject is financial accounting, and the course code and college/university are not mentioned.

Running Head: Changes in accounting policies and estimates
Financial Accounting

Changes in accounting policies and estimates 1
Question 1:
If an expense of the previous year is inadvertently omitted in that particular year and is
discovered in the subsequent financial year. Then such expense must be treated as the prior
period items in the current year. As a result, such an expense must be adjusted to subsequent
year’s profit in which it is discovered, by way of debiting it to the income statement of such
financial year. However, such prior period item must be shown separately in the current year
so as to allow the users to understand the impact of such transaction on the current year
profitability.
Question 2
Part 1
In the present case of Fishtail Ltd, the manufacturing equipment was previously measured at
the cost in accordance with AASB 116 and now such asset is proposed to be measured in
accordance with revaluation method. This change must be accounted as the change in
accounting estimate since in order to measure assets at revaluation method various
estimations have to be made.
The effect on account of change in accounting estimate must be shown in the current year
under the same head as it was previously classified before change. Moreover, if the nature
and amount of such change is significant enough, it must be disclosed separately (AASB 108,
2015).
Part 2

Changes in accounting policies and estimates 2
In the present case of Fishtail Ltd, the company is proposing to change the method of
depreciation of its motor vehicle fleet from straight line method to diminishing value method
to reflect the consumption of assets in the better way. It is the change in accounting policy.
The change in accounting policy must be disclosed separately along with quantifications if
such change is significant enough (AASB 108, 2015).
Question 3
Part 1:
As per AASB 108, Accounting policies, change in accounting estimates and error, an
accounting estimate is the adjustment in the value of carrying value of the asset, liability or a
related expense. The change in the accounting estimates takes place on account of
reassessment of expected future benefits or obligations associated with such assets or
liabilities.
In the present case, Rabbit Ltd had been calculating provision for warranty at the rate of 2%
of the sales. However, for the current year company has decided to make the provision for
warranty at the rate of 3% of sales. This is change in the accounting estimate and it cannot be
treated as this change in the accounting treatment is not due to the errors or omissions made
in the previous years (AASB 108, 2015).
Part 2
The loss on inventory held by Rabbit Ltd, due to flood in the previous year is a prior period
item which is not recorded as the expense in previous financial year. However, since the loss
amount is material enough it must be charged to income statement this year and the deferred
tax account must be created for the tax benefit on such loss (AASB 112, 2015). The impact of

Changes in accounting policies and estimates 3
such loss will be given in the present year’s income statement as a prior period item.
However, such loss shall be shown separately in current year’s income statement.
Journal Entry:
Debit Credit
Loss on inventory write off
A/C $ 75,000.00
To Inventory A/C $ 75,000.00
Deferred Tax Assets A/C
(75000* 30%) $ 22,500.00
Profit and Loss Account A/C
(75000*70%) $ 52,500.00
To loss on inventory write off
A/C $ 75,000.00
Question 4
Debit Credit
Part 1
Provision for warranty cost
A/c (640000*4%) $ 25,600.00
To Warranty Expense A/c $ 25,600.00
Warranty Expense A/c $ 25,600.00
To Profit and Loss Account
A/c $ 25,600.00
Part 2
Provision for annual leave A/c $ 22,000.00
To Annual Leave Expense
A/c (112000-90000) $ 22,000.00
Annual Leave Expense A/c $ 22,000.00
To Profit and Loss Account
A/c $ 22,000.00
Part 3
Depreciation A/c $ 47,000.00

Changes in accounting policies and estimates 4
To Fixed Asset A/c $ 47,000.00
or
To Provision for depreciation
A/c
Profit and Loss Account A/c $ 47,000.00
To Depreciation A/c $ 47,000.00
Part 4
Allowances for doubtful debts
A/c (170000*3%)-
(230000*2%) $ 500.00
To Accounts Receivables A/c $ 500.00
Profit and Loss Account A/c $ 500.00
To allowances for doubtful
debts A/c $ 500.00

Changes in accounting policies and estimates 5
References:
AASB 108. (2015). Accounting Policies, Changes in Accounting Estimates and Errors.
Retrieved from: https://www.aasb.gov.au/admin/file/content105/c9/AASB108_08-
15.pdf
AASB 112. Income Taxes. (2015). Retrieved from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB112_08-15.pdf
BusinessLine. (2018). Accounting for provisions. Retrieved from:
https://www.thehindubusinessline.com/news/education/Accounting-for-provisions/
article20192323.ece
Double Entry Bookkeeping. (2018). Inventory Write Off. Retrieved from:
https://www.double-entry-bookkeeping.com/inventory/inventory-write-off/