[Anonymous]

Hello!

I tried finding old topics but most of them were error vs. entity.

I’m sure I’m making too huge a deal out of this, but I’m losing my freaking mind.

I understand that with an error you have to restate to correct the error. Got it.
I’m not understanding the difference from that and a principle, where Becker just says “retrospective – adjust beg RE in earliest period presented”.

… Can someone just put this in the most stupid, simpleton terms for me? Because while I grasp the difference between what an error is and what a principle is, I’m not grasping the difference in the treatment.

Thank you!!

[Pete E. Rino]

An error is what it sounds life. A mistake. Like let's say I am in charge of putting in entries, and the company bought a $100,000 equipment on January 1, 2010, and the estimated life is 5 years. By mistake I put 4 years and calculated 25k a year in depreciation when it should have been 20k. A change in principle is like switching from inventory costing methods. NOTE: A change from cash-basis to accrual basis is NOT a change in principle. It is a change in error because cash-basis is not GAAP. NOTE 2: Change in a depreciation estimate method is NOT a change in principle, but is a change in estimate, and should be treated prospectively.

Both a change in estimate and principle are treated the same way. Whatever the earliest period that is show you will need to adjust the beginning year R.E, net of taxes. This is because, let's take that depreciation error for example. Let's say it is December 31, 2013 (3 full years), and we spot that error. That extra 5k a year of depreciation went to the Income Statement as a fixed cost reducing our N.I, resulting in less taxes being paid. And where do I/S entries get closed to? Retained Earnings. Let's say you have just a one year Balance Sheet for Year 2013. You will need to adjust the 1/1/13 R.E. to reflect that error. So we already depreciated 2 years, which resulted in 10k in more expenses, net of tax = 6500 (assuming 35% tax rate).We should have paid $6500 over those two years in taxes, but never reported it, so therefore we need to reduced the R.E. by $6500. Both types of changes are treated the same way

[Anonymous]

@PeteE.Rino – Thank you for those real life examples. I appreciate it!

I suppose I shouldn't get tied up with words that are basically synonyms, but I felt like I was missing a huge piece there that should have been simple.

[Skynet]

Error : I made an error dating a Female CPA with Daddy issues.

Principle : I should have never lowered my principle when I decided to date that female cps with daddy issues.

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[vodrldnr]

4 type that you must know

1 current period error( misclassification of account)- Restate
ex: you record A/R instead of A/P. then you just simply correct it

2. prior period error (None Gaap to Gaap)-Retrospective
ex: you record higher ending balance then the actual balance on previously issued F/S

3. Accounting change (GAPP to other GAAP standards)-Retrospecitve
you decide to change from LIFO to FIFO (it is not change of estimation because you do not estimate the number of inventory you have. instead, you physically count it)

4. change of estimation ( Such as change of depreciation method) -Prospective
one day, you decide to change your depreciation method from S/L to DDB
( you do not count depreciation, you estimate it. therefore it is change of estimation)

It ain't About How Hard You Hit

[Anonymous]

Thank you for the responses!!

I definitely won't be forgetting your example, @Skynet.

[Author]

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