Change in Accounting Estimate: Definition and Worked Examples

A change in accounting estimate is a revision of an amount, such as an allowance for uncollectible accounts or an asset’s useful life, because new information becomes available. Under U.S. GAAP (FASB ASC 250-10-45-17), it is applied prospectively: in the current period and any future periods affected. Prior-period financial statements are not restated.

Here is the part that trips students up: updating an estimate is not the same as fixing a mistake. Sort that out first, then pick the accounts and do the math. This lesson walks through two worked examples, an allowance for uncollectible accounts and an asset’s useful life.

On the CPA Exam, accounting changes and error corrections are tested in FAR Area III, Select Transactions, of the AICPA Blueprint. Expect to classify the change first, then calculate its effect.

Last updated November 2026. The Harbor and Ridge examples are hypothetical.

Key takeaways

• A change in accounting estimate comes from new information. It is not a correction of a mistake.
• Apply it prospectively: the current period and any future periods affected. Never restate prior years.
• For an allowance, compute the required ending balance first. The expense is the amount needed to bring the existing balance to that target.
• For a useful-life change, spread the remaining depreciable amount (carrying amount minus residual value) over the revised remaining life.
• A change in depreciation method is also applied prospectively. It is a change in estimate effected by a change in accounting principle.

What is a change in accounting estimate?

An estimate is a reasoned measurement when the final amount is uncertain. Examples include expected uncollectible receivables, the remaining useful life of equipment, residual value, and estimated warranty costs. Most of the time the accounting method stays the same and only an input to that method changes. Changing the depreciation method itself is a special case, and it has its own section below.

Prospective means applying the updated information from the change onward. It does not mean waiting until next year. If new evidence affects this year’s receivables, the current financial statements must reflect that evidence.

Allowance example: how do you record a change in a bad debt estimate?

Hypothetical example. Harbor Office Supplies has $400,000 of receivables at December 31, 20X8. New customer information supports a required ending allowance of 3%, rather than the earlier 2% expectation. The allowance has a $2,000 credit balance before the year-end adjustment. Assume the revised percentage appropriately measures expected losses for this simplified exercise.

Step 1: Find the required ending allowance

$400,000 × 3% = $12,000. This is the desired balance in the allowance account after adjustment. It is not automatically the expense to record.

Step 2: Compare the target with the existing balance

Required allowance of $12,000 − existing credit balance of $2,000 = $10,000 adjustment. The calculation starts from the actual unadjusted ledger balance.

Step 3: Record the current-period expense

The ending allowance is $2,000 + $10,000 = $12,000. Net receivables are $400,000 − $12,000 = $388,000. Bad debt expense is also called credit loss expense in many reporting contexts.

Under the previous 2% assumption, the target would have been $8,000 and the adjustment $6,000. The revised estimate therefore adds $4,000 to the expense otherwise needed. That incremental effect is different from the total $10,000 entry.

If the allowance had a zero balance, the entry would instead be $12,000. If it had a $2,000 debit balance, reaching a $12,000 credit balance would require a $14,000 credit. For more on the account mechanics, review the allowance method for receivables. For the newer expected credit loss wording, see the credit loss journal entry guide. To see how an aging schedule sets the allowance, see accounts receivable aging.

Useful-life example: how do you calculate depreciation after the change?

Hypothetical example. Ridge Workshop purchases equipment for $66,000 on January 1, 20X5. It originally estimates a six-year useful life and a $6,000 residual value, using straight-line depreciation. On January 1, 20X8, new operating experience supports a revised remaining life of five years. Residual value, the amount Ridge expects to recover when it is done using the equipment, stays at $6,000. Assume the equipment is not impaired, meaning there has been no loss in value that would require a write-down. The steps below start from the carrying amount (also called book value), which is cost minus accumulated depreciation.

Record $6,000 of depreciation for 20X8 and each subsequent full year in the revised remaining life, unless another change occurs. Debit depreciation expense and credit accumulated depreciation for $6,000. Do not recalculate the first three years or divide the original $60,000 depreciable cost by the five remaining years.

Quick check: Ridge has already recorded $30,000 of depreciation, and $6,000 × 5 years adds another $30,000. Together that equals the original $60,000 depreciable cost, so nothing is lost or counted twice.

Is a change in depreciation method a change in estimate?

Yes. Under U.S. GAAP, switching depreciation methods, for example from straight-line to double-declining-balance, is called a change in accounting estimate effected by a change in accounting principle (FASB ASC 250-10-45-18). In plain words, the new method is treated as an updated estimate of how the asset’s benefits get used up.

Two things follow. First, apply the change prospectively, just like the Ridge example: start from the carrying amount on the date of the change and leave prior years alone. Second, because a method is changing, the company must be able to justify the new method as preferable (FASB ASC 250-10-45-19).

Exam tip: do not treat a depreciation method change like an inventory method change. A switch from FIFO to weighted-average cost is a change in accounting principle and is generally applied retrospectively, which means prior years are revised. A switch in depreciation method is applied prospectively.

Want the whole accounting changes chapter, with more solved problems and practice questions? It is part of the Intermediate Accounting course, and Chapter 1 is free to try.

Estimate change or error correction?

Ask what information existed when the original statements were prepared. A reasonable estimate revised for newly available evidence is a change in accounting estimate. An arithmetic mistake, omitted transaction, or misuse of already available facts can be an error, even if the account normally involves estimates.

For example, Ridge’s new experience can support a longer remaining life. Forgetting to record a year’s depreciation cannot. The latter requires the error-correction and retained earnings analysis. A switch between acceptable inventory cost methods instead follows the change in accounting principle approach.

What must be disclosed for a change in accounting estimate?

Report the revised expense in its usual income statement line, such as depreciation expense or bad debt expense. It is not shown as a separate or special item.

Prospective treatment does not remove disclosure. When a change in estimate affects several future periods, such as a new useful life, disclose its effect on income from continuing operations, net income, and related per-share amounts for the current period (FASB ASC 250-10-50-4).

For Ridge, the change lowers 20X8 depreciation from $10,000 to $6,000. That makes 20X8 income before income taxes $4,000 higher than it would have been under the old estimate.

Routine estimates that are updated every period, such as the allowance for uncollectible accounts, do not need this disclosure unless the effect of the change is material. Material means large enough to influence the decisions of someone relying on the financial statements.

If the current-period effect is immaterial but a material effect in a later period is reasonably certain, describe the change in the notes whenever the financial statements for the period of change are presented (ASC 250-10-50-4).

A change in depreciation method also requires the applicable disclosures for a change in accounting principle (ASC 250-10-50-1 through 50-3). Explain what changed and why the new method better reflects how the company uses the asset’s economic benefits. The company still applies the new method prospectively.

Common mistakes to avoid

• Confusing the target allowance with expense. Subtract the existing credit balance to calculate the adjustment.
• Using original cost for revised depreciation. Begin with the carrying amount when the estimate changes.
• Calling every unfavorable revision an error. Review the evidence available at the original reporting date.
• Changing opening retained earnings for new information. New information changes the current and future periods only, so opening retained earnings stays as it is.
• Treating a depreciation method change like an inventory method change. A depreciation method change is applied prospectively, not retrospectively.

Practice with answers

1. Harbor has a $5,000 credit allowance before adjustment. What expense is required?

Answer: $7,000. The required allowance remains $12,000. Subtract the $5,000 existing credit balance; the ending balance then equals the target.

2. What is Ridge’s depreciation expense for 20X8?

Answer: $6,000. Divide the $30,000 remaining depreciable amount by the five-year revised remaining life. No prior-year catch-up entry is needed.

3. A company discovers that last year’s allowance formula omitted known overdue balances. Is that automatically a new estimate?

Answer: no. The omission concerns facts already available. Investigate an error and its materiality rather than assuming prospective treatment.

4. Ridge also lowers the residual value to $1,000 on January 1, 20X8. What is 20X8 depreciation?

Answer: $7,000. The carrying amount is still $36,000. Subtract the new $1,000 residual value to get $35,000, then divide by the five-year revised remaining life. Both revisions are changes in estimate, so nothing before 20X8 changes.

5. A company switches from straight-line to double-declining-balance depreciation. Does it restate prior years?

Answer: no. A change in depreciation method is a change in estimate effected by a change in accounting principle. Apply the new method prospectively to the carrying amount at the date of the change.

Studying for FAR? Drill this topic in the FAR test bank.

Frequently asked questions

Can a change in accounting estimate increase income?

Yes. A supported longer remaining useful life can reduce annual depreciation. The result must follow the evidence, not an earnings target.

Does prospective mean current year or next year?

Prospective treatment starts in the period of change, which means the current year, not next year. Future periods are included when the revised estimate affects them too.

Does changing an estimate always require a separate journal entry?

No. A change in estimate often just changes the amount in the regular adjusting entry, such as the year-end bad debt or depreciation entry.

Is a change in accounting estimate applied retrospectively or prospectively?

Prospectively. Record the effect in the period of change and in any future periods affected. Prior-period financial statements are not restated (FASB ASC 250-10-45-17).

What is the difference between a change in accounting estimate and a change in accounting principle?

A change in accounting estimate updates a number, such as a useful life, because of new information, and it is applied prospectively. A change in accounting principle switches from one acceptable accounting method to another, such as FIFO to weighted-average cost, and it is generally applied retrospectively.

Is a change in accounting estimate the same as correcting an error?

No. A change in estimate reflects new information that was not available when the original estimate was made, and it is applied prospectively. An error comes from a math mistake, a misapplied rule, or facts that were available but overlooked. A material error in prior-period statements is corrected by restating them.

Does a change in accounting estimate have to be disclosed?

If a revision affects several future periods, disclose its current-period effect on income from continuing operations, net income, and related per-share amounts. For routine estimates such as uncollectible accounts, disclose material effects. If the effect is immaterial now but reasonably certain to be material later, describe the change in the notes for the period of change. A change in depreciation method also requires the applicable disclosures for a change in accounting principle, including why the new method is preferable (ASC 250-10-50-4).

Sources and further study

The current authoritative reference is Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), Topic 250. Public historical background appears in FASB Statement 154, paragraphs 19–22. The key paragraphs are ASC 250-10-45-17 (prospective treatment), ASC 250-10-45-18 and 45-19 (a change in estimate effected by a change in accounting principle), and ASC 250-10-50-4 (disclosure). The Harbor and Ridge examples on this page are original, hypothetical examples. The existing ASC 250 guide discusses the broader accounting-changes framework. New to ASC paragraph references? Our FASB Codification guide explains how to read them.

About the author

Mansour Farhat, CPA, CIA, DBA, is the founder of Farhat Lectures. He teaches financial accounting, intermediate accounting, and CPA Exam topics through on-demand video lessons, worked examples, and practice questions used by accounting students and CPA candidates. More about Professor Farhat · Farhat Lectures on YouTube