Accounting Changes and Error Corrections Under US GAAP
By SimplyCPA · 11 October 2026
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- Change in accounting principle: Retrospective — restate prior periods presented and adjust opening retained earnings of the earliest period, unless impracticable.
- Change in accounting estimate: Prospective — current and future periods only; no restatement.
- Change in estimate effected by a change in principle: Such as changing depreciation method — treated prospectively, like an estimate.
- Change in reporting entity: Retrospective — present statements as if the new entity had always existed.
- Error correction: A prior period adjustment — restate prior periods and correct opening retained earnings, net of tax, with full disclosure.
The four categories at a glance (ASC 250)
| Type | Example | Treatment |
|---|---|---|
| Change in accounting principle | FIFO to weighted average; completed-contract to over-time recognition where a choice exists | Retrospective application |
| Change in accounting estimate | Useful life, salvage value, bad debt percentage, warranty rate | Prospective |
| Change in estimate effected by a change in principle | Straight-line to declining-balance depreciation | Prospective |
| Change in reporting entity | Consolidating a subsidiary not previously consolidated (not a business combination) | Retrospective |
| Error correction | Mathematical mistakes, misapplying GAAP, using a non-GAAP principle, overlooking facts | Restatement — prior period adjustment |
Retrospective application of a new principle
- A change is allowed only if required by a new standard, or if the entity can justify that the new principle is preferable.
- Prior periods presented are adjusted to show the new principle. The cumulative effect on periods before the earliest period presented is recorded as an adjustment to that period's opening retained earnings, net of tax.
- If it's impracticable to determine period-specific effects, apply the new principle from the earliest period practicable. A change to LIFO is usually applied prospectively for this reason.
- Indirect effects (such as profit-sharing payments) are not restated.
Prospective treatment of a change in estimate
Equipment cost $100,000 on January 1, Year 1, with a 10-year life and no salvage value. At the start of Year 4, management revises the total life to 8 years.
Carrying amount at the start of Year 4 = $100,000 − 3 × $10,000 = $70,000. Remaining life = 8 − 3 = 5 years.
Year 4 depreciation = $70,000 ÷ 5 = $14,000. No adjustment to Years 1–3.
Correcting an error
In Year 3, a company discovers that Year 2 depreciation of $50,000 was never recorded. The tax rate is 21%, and the error also affected the tax return.
Correcting entry: Dr Retained earnings (opening, Year 3) 39,500; Dr Income tax payable / refundable 10,500; Cr Accumulated depreciation 50,000.
If Year 2 statements are presented comparatively, they are restated. The nature of the error and its effect on each line item and per-share amount are disclosed.
"Big R" vs "little r" restatements
Practitioners use these labels for material errors. A "Big R" restatement corrects an error that is material to previously issued statements — those statements are reissued and, for SEC registrants, filed again (often with an Item 4.02 Form 8-K). A "little r" revision corrects an error that is immaterial to prior periods but would be material if corrected in the current period — the prior-period comparatives are revised in the current filing without reissuing the old statements.
Counterbalancing errors
Some errors reverse themselves automatically over two periods, such as overstating ending inventory (overstates this year's income, understates next year's). After the second year-end, retained earnings is correct, so no entry is needed — but comparative statements must still be restated.
Study it further in FAR accounting changes and error corrections.