Change in accounting estimate meansa)Differences arising between certa...
The correct answer is option 'A', which states that a change in accounting estimate means differences arising between certain parameters estimated earlier and re-estimated during the current period.
Explanation:
A change in accounting estimate refers to a revision made to an accounting estimate, which is an approximation of a future event or transaction's financial impact. Accounting estimates are necessary because some items cannot be measured with precision, and they require management's judgment or expertise. These estimates are reviewed periodically to ensure they remain relevant and accurate.
The key points to understand about a change in accounting estimate are as follows:
1. Definition:
- A change in accounting estimate occurs when there is a revision to an estimate made in a prior period.
- It is not a correction of an error, but rather a change in judgment or new information that leads to a revision of the estimate.
2. Parameters Estimated Earlier:
- A change in accounting estimate refers to differences arising between certain parameters estimated earlier.
- Parameters can include items like useful life, depreciation rate, bad debt provision, inventory obsolescence, etc.
3. Re-Estimated During Current Period:
- The change in accounting estimate occurs when these parameters are re-estimated during the current period.
- The re-estimation can be due to new information, changes in circumstances, or improved estimation techniques.
4. Examples:
- For example, if a company estimates the useful life of its machinery as 10 years but later determines that it should be 8 years based on new information or technological advancements, it would result in a change in accounting estimate.
- Similarly, if a company estimates the provision for bad debts at 5% of accounts receivable but later determines that it should be 7% based on historical trends or economic conditions, it would also be a change in accounting estimate.
In summary, a change in accounting estimate occurs when there are differences between certain parameters estimated earlier and re-estimated during the current period. It reflects a revision in judgment or new information that leads to a more accurate estimation of future financial impacts.
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