Running head: ACCOUNTING PRINCIPLES

Accounting Principles
Name
Institutional Affiliation

Accounting Principles

ACCOUNTING PRINCIPLES

Question 1
Reassessing the estimated lives of long-term assets will allow the company to change
from straight line method to declining -balance method without reducing net income of that
period. This is because the company can alter the estimated useful lives of the long-term assets
such that the depreciation value will either be same or less than the value of the previous method.
Therefore the company will have no cumulative effect on its net income in this period. The
remaining depreciation will be allocated over the remaining life of the asset (Accounting
Financial & Tax., 2014)..
Question 2
A change in accounting principle involves when an organization decides to adopt a
different accounting method from the one that it currently uses. Accounting principles are the
guidelines which dictate the methods of recording and reporting financial statements. A change
in accounting estimate, on the other hand, refers a change that occurs due to introduction of new
information or additional experience, for instance when a company changes the useful lives of its
depreciable assets.
When calculating net cash inflow from working activities, we normally add back
depreciation to the profit before interest and income taxes. Therefore, the company will have a
higher cash inflow as a result of the change in principle (Accounting Tools, 2016).. This is
because; changing the depreciation method from a straight line to double declining method
without modifications to the estimated useful lives will increase the depreciation value.
However, a change in the estimate, which involves altering the estimated useful lives, will result

ACCOUNTING PRINCIPLES

in the same depreciation value as that of straight line method, hence will have no effect on the
cash inflows.

Question 3
To some extent, a companys income level should determine the accounting methods
which it uses, as well as the accounting estimates it makes. The accounting method that a
company uses determines the gross income reported by the company. Different accounting
methods result to different depreciation values and costs, among others for a particular period. In
turn, the gross income determines the amount of taxes that the company has to pay. A good
example is when a company has low income or is making losses. In such a scenario, there are
certain accounting methods that the company can use to transfer some expenses to the following
accounting period. Therefore, a company can choose the accounting method to use for a certain
period depending on its level of income. However, it is worth noting that the company has to
report the reason for adopting a different accounting method each time it does.
Question 4
Counterbalance errors are those that are automatically corrected in the following
accounting period hence fix themselves over two periods. These errors include overstatement or
understatement of ending inventory, understatement and overstatement of year-end liability for
revenue received in advance, failure to accrue expense or revenue at the end of the year and
overstatement of accrued expense or revenue at the end of the year. These counterbalancing
errors involve the income statement and balance sheet. However, the errors do not affect the

ACCOUNTING PRINCIPLES

balance sheet or the income statement at the end of the two periods since they cancel out each
other. These errors also affect the expense and revenue accounts. For instance, failure to accrue
expense at the end of the year will affect the expense account, and the same case applies to
failure to accrue revenue which will affect revenue account. Counterbalance errors will affect
current accounts since they are detected within a short period.
Non-counterbalance errors, which are those that carry over from period to period, are
not offset in the next accounting period and therefore take more than two periods to correct. Such
errors include failure to record depreciation, recording discount on bond as interest expense and
recording a depreciable asset as an expense. These errors affect the balance sheet and income
statement as well as the non-current account. The errors also affect expense and revenue
accounts. For instance, recording a depreciable asset as an expense will have an effect on the
expense account.
For counterbalancing errors, the systematic method involves determining if the books for the
current year are closed. If the books are closed, a journal entry is not necessary if the error has
counterbalanced but its necessary if the error has not counterbalanced. If the books are not
closed, and the company is in the second year, an entry is necessary in order to correct the
current period as well as the adjusted beginning retained earnings. In the same way, if the error
has not counterbalanced, it is necessary to make an entry to the adjusted beginning retained
earnings as well as to correct current period (Stice & Stice, 2013). However, in counterbalancing
errors, a correcting journal entry is always necessary irrespective of whether the books are open
or closed.

ACCOUNTING PRINCIPLES

ACCOUNTING PRINCIPLES

References
Accounting Financial & Tax. (2014). Journal Entry for Correction of Errors and
Counterbalancing. Accounting Financial Tax. Retrieved from http://accounting-financialtax.com/2008/07/journal-entry-for-correction-of-errors-and-counterbalancing/
Accounting Tools. (2016). Fixed Assets Topics: Depreciation Topics. Accounting Tools.
Retrieved from http://www.accountingtools.com/summary-fixed-assets/
Boundless. (n.d). Overview of Statement Changes and Errors. Boundless. Retrieved from
https://www.boundless.com/accounting/overview-of-statement-changes-and-errors-4061905/
Stice, J.D &Stice, E.K. (2013).Intermediate Accounting. Boston: Cengage Learning