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What are the differences between a change in accounting principle and a change in accounting estimate?

Change in Accounting Principle

Accounting principles are general guidelines that govern the methods of recording and reporting financial information. When an entity chooses to adopt a different method from the one it currently employs, it is required to record and report that change in its financial statements. A good example of this is a change in inventory valuation; for example, a company might switch from a FIFO method to a specific-identification method. According to the FASB, an entity should only change an accounting principle when it is justifiably preferable to an existing method or when it is a necessary reaction to a change in accounting framework.

Change in Accounting Estimate

Accountants use estimates in their reports when it is impossible or impractical to provide exact numbers. When these estimates prove to be incorrect, or new information allows for a more accurate estimation, the entity should record the improved estimate in a change in accounting estimate. Examples of commonly changed estimates include bad-debt allowance, warranty liability and the service life of an asset. There are different and less stringent reporting requirements for changes in accounting estimates than for accounting principles. In some cases, a change in accounting principle leads to a change in accounting estimate; in these instances, the entity must follow standard reporting requirements for changes in accounting principles.

Read more: What are the differences between a change in accounting principle and a change in accounting estimate? | Investopedia

Financial Accounting / Recognized Vs. Realized Gains
« on: November 28, 2018, 02:31:36 PM »
Recognized Vs. Realized Gains
When you sell an asset, you may face federal income tax liability if you earn a profit. The Internal Revenue Service makes a distinction between recognized gains and realized gains. While a recognized gain may create a tax liability, the realized gain often determines the amount of tax you must pay. The IRS taxes capital gains earned from the majority of assets, but profits from certain assets may include tax exclusions.


Financial Accounting / Do Deferred Gains Go on the Balance Sheet?
« on: November 28, 2018, 02:22:11 PM »
Do Deferred Gains Go on the Balance Sheet?
Deferred gains are profits that the business has not yet accepted the money. It is sometimes called unearned revenue, and while it represents a future asset, it is treated as a liability on the balance sheet. As a liability, the recorded deferred gains are listed on the right side of the balance sheet equation in liabilities. Understanding how the balance sheet works help clarify why gains are considered a liability until they are realized as an asset, thus gain.


Financial Accounting / How to Classify Capital Gains on a General Ledger
« on: November 28, 2018, 02:20:46 PM »
How to Classify Capital Gains on a General Ledger
When a company sells an asset other than inventory for more than the original purchase price, it has a capital gain. There's no universal way to classify capital gains on a company general ledger. Instead, U.S. generally accepted accounting principles instruct companies to classify the gains based on the nature of the asset.


Financial Accounting / GAAP Accounting Rules on Unrealized Capital Gains
« on: November 28, 2018, 02:19:23 PM »
GAAP Accounting Rules on Unrealized Capital Gains
Companies often invest in the securities of other companies. Sometimes, the intent is to gain significant influence over the investee, while at other times the investment is simply a way to earn money. U.S. generally accepted accounting principles provides differing treatments of unrealized capital gains and losses, depending on the nature of the security, the size of the investor’s stake and its plans for selling the security.


How to Record a Journal Entry for a Sale of Business Property?
When you sell property that you use in your small business, such as buildings, furniture or machinery, you must record the transaction in your accounting system to show whether the sale resulted in a gain or loss. In a journal entry, you must remove the original cost of the property and its accumulated depreciation from your records. Depreciation is an expense recorded to reflect the wear and tear on the property over time, decreasing the property’s original value. So basically, you’re subtracting the accumulated depreciation from the original cost of the property, then subtracting that amount from the sales price. The result reflects whether your company made a profit or took a loss on the sale of the property.

What Is the Journal Entry to Record Realized Loss on Investment?
There's no way around it, sometimes your business investments go south. When they do, you need to report the losses in your financial statements and accounting ledgers. An unrealized loss is one that takes place on paper. Suppose the stock you hold in another company has lost $5,000 but you aren't selling. As long as you hold the stock, your loss is unrealized. If you sell at the lower price, you then have a realized loss.

Financial Accounting / Is Gain or Loss Reported in an Income Statement?
« on: November 28, 2018, 01:45:54 PM »
Is Gain or Loss Reported in an Income Statement?
Financial managers report a gain or loss in an income statement, similar to a revenue item or operating expense. An income statement also goes by the names "statement of profit and loss," "report on income" and "P&L." In addition to revenues and expenses, other financial accounts include assets, liabilities and equity items.

How Should Extraordinary Gains & Losses Be Reported on the Income Statement?
An extraordinary gain or loss is money you earn or lose as a result of an event or transaction that is both unusual in nature and infrequent in occurrence. When a gain or loss meets both of these criteria, your small business must report the after-tax amount separate from your normal operating revenues and expenses on your income statement. Extraordinary gains and losses are rare, one-time items, such as the discovery of buried treasure on a farm. Reporting these items separately helps financial statement users analyze your performance with and without their effects.

How Should Discontinued Items Be Presented on the Income Statement?
When your small business sells or plans to sell a business component, such as a subsidiary or division, that is separate from the rest of your continuing operations, you must report the component’s financial items in a separate section on your income statement. Report the after-tax operating income or loss the component generated during an accounting period prior to the sale and the after-tax gain or loss your small business recognized from the sale. Reporting these items separately helps financial statement users to better forecast future financial performance.


What is the difference between gross profit margin and gross margin?

The use of the terms such as gross margin and gross profit margin often varies by the person using the terms. Some people prefer to use gross margin instead of gross profit when referring to the dollars of gross profit. Often they want to avoid the use of the word profit because the selling and administrative expenses must also be covered. Recall that gross profit is defined as Net Sales minus Cost of Goods Sold.

Others use the term gross margin to mean the gross profit as a percentage of net sales. Perhaps the term gross profit margin means the gross profit percentage or the gross margin ratio.


What is the difference between gross profit and net profit?

Gross profit is sales revenues minus the cost of goods sold.

The term net profit might have a variety of definitions. I assume that net profit means all revenues minus all expenses including the cost of goods sold, the selling, general, and administrative (SG&A) expenses, and the non-operating expenses. At a corporation it may also mean after income tax expense.

What is meant by non-operating revenues and gains?

Non-operating revenues are the amounts earned by a business which are outside of its main or central operations. Non-operating revenues are also described as incidental or peripheral. A common example is a retailer's investment income or interest income. The retailer's main operations are purchasing and selling merchandise. Investing its idle cash in interest-bearing investments is outside of its main or central operations.

Gains often involve the disposal of property, plant and equipment for a cash amount that is greater than the carrying amount (or the book value) of the asset sold. An example would be a retailer's disposal of a delivery truck for a cash amount that is greater than the truck's carrying amount. Another example is a gain from a settlement of a lawsuit.


Non-operating revenues and gains are often reported on the income statement after the subtotal Income from operations and will often appear with the caption Other income.

Financial Accounting / Why is interest expense a non operating expense?
« on: November 25, 2018, 05:13:33 PM »
Why is interest expense a non operating expense?

Interest expense is a non-operating expense when it is not part of a company's main operations. For example, a retailer's main operations are the purchasing and sale of merchandise, and a manufacturer's main operations are the production and sale of goods.  Neither the retailer nor the manufacturer has as its main operations the borrowing and lending of money. (On the other hand, a bank's main operations involves interest expense on its depositors' savings accounts and interest revenues on its loans and bond investments.)

By reporting interest expense as a non-operating expense, it also allows for a better comparison between the operating income of a retailer that has little debt with a retailer that has a significant amount of debt.

Financial Accounting / Discontinued operations definition
« on: November 25, 2018, 05:11:47 PM »

Discontinued operations definition

Operations of an entire division, subsidiary, or segment of a company where a formal plan exists to eliminate it from the company. (It involves more than pruning a product line of certain models of products.)

The revenues, gains, expenses, and losses pertaining to the business segment are removed from the company's continuing operations and are reported separately on the company's income statement. The amounts that pertain to discontinued operations are reported near the end of the income statement but before the amounts for extraordinary items and the cumulative effect of a change in an accounting principle. The amounts will be shown on a per share basis, if the company's stock is publicly traded.

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