Accounting Changes and Error Corrections: ASC 250 Guide

What is an accounting change under ASC 250?

Under ASC 250, an accounting change is a change in accounting principle, a change in accounting estimate, or a change in reporting entity. Principle and reporting entity changes are applied retrospectively, meaning prior years are revised. Estimate changes are applied prospectively, affecting current and future years. Correcting a prior-period error is not an accounting change; material errors require restatement.

Three words you will see all the way through this lesson. Retrospective means you go back and revise the prior-year statements you present, as if the new method had always been used. Prospective means you leave prior years alone and apply the change from now on. Restatement is the word ASC 250 reserves for revising prior statements to fix an error, so you will never see a principle change called a restatement.

This guide focuses on U.S. GAAP under ASC 250 for intermediate accounting students and CPA FAR candidates. Learn the differences, work through journal entries, and test both classification and accounting treatment in the quiz.

Where this topic shows up on exams: on the CPA Exam, accounting changes and error corrections sit in FAR Area III, Select Transactions, in the AICPA Blueprint. CMA candidates meet the impact of changes in accounting treatment in Part 2, Section A, Financial Statement Analysis. Expect two kinds of questions: first classify the change, then compute its effect.

Last updated October 23, 2026 · The worked examples use 2026 as the year of the change or correction and state their tax assumptions.

Accounting changes at a glance

Special case: a change in depreciation method for a long-lived nonfinancial asset is a change in estimate effected by a change in principle. Its treatment is prospective.

Key takeaways

• Change in accounting principle: a justified switch between two acceptable methods. Apply it retrospectively: revise the prior years you present and adjust opening retained earnings for earlier years.
• Change in accounting estimate: new information updates an amount such as a useful life. Apply it prospectively: current and future periods only, no revision of prior years.
• Change in reporting entity: the statements now cover a different group of entities. Present the prior periods for the new entity.
• Error correction: not an accounting change. A material prior-period error is restated, and the cumulative effect appears as a prior period adjustment to opening retained earnings.
• Changing a depreciation method is a change in estimate effected by a change in principle. It is prospective, but it still needs a preferability justification.

What is a change in accounting principle?

A change in accounting principle replaces one generally accepted method with another. For example, a company may change inventory costing from FIFO to weighted-average cost. A voluntary change must be justified because the new method is preferable; an improved earnings result alone is not a justification.

Retrospective application

For a change without special transition requirements, present prior periods using the new principle, as though it had been used throughout. Adjust the opening assets, liabilities, and retained earnings of the earliest period presented for effects arising before that period. Show each comparative period’s own effects in that period.

A new accounting standard may prescribe its own transition method. Follow those requirements first. If retrospective application is impracticable, apply ASC 250’s alternative approach from the earliest practicable period or date; this is not permission to skip available comparative information.

Video: retrospective application and retained earnings

Watch Professor Farhat explain the cumulative adjustment, deferred taxes, and beginning retained earnings. This approximately 13-minute lesson focuses on changes in accounting principle.

Watch the retrospective accounting-principle example on YouTube

• 2:32 — What retrospective application means
• 6:15 — Worked example
• 11:48 — Disclosures and retained earnings presentation

Context for the video: its construction-accounting example uses historical completed-contract and percentage-of-completion terminology to illustrate retrospective mechanics. For current revenue contracts, apply ASC 606’s criteria for recognition over time or at a point in time. These are not freely interchangeable accounting-policy choices. See the FASB’s revenue-recognition guidance.

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.

Worked example: FIFO to weighted-average cost

On January 1, 2026, ABC Corp changes from FIFO to weighted-average cost and documents why the new method is preferable. All information needed for retrospective application is available. Assume a 30% tax rate, an unchanged FIFO tax basis, and full recognition of the resulting deferred tax asset.

Quick definition: a deferred tax asset is a future tax saving. Here, book inventory drops by $50,000 but the tax return still uses the FIFO number, so the company will deduct that $50,000 for tax in a later period and save $15,000 of tax then.

Adjusted beginning retained earnings = $2,000,000 − $35,000 = $1,965,000.

The entry reduces book inventory while its tax basis remains unchanged. Its tax effect is a deferred tax asset under the stated assumptions, not an immediate cash tax refund.

Which year’s opening retained earnings changes?

If only 2026 statements are presented, the cumulative $35,000 reduction appears in beginning 2026 retained earnings. If 2025 and 2026 are presented together, the comparative presentation must also reflect the change.

For illustration, assume the cumulative pretax difference was $30,000 at January 1, 2025 and rose to $50,000 by December 31, 2025. The comparative presentation is:

The ledger entry and comparative presentation serve different purposes. Recording the cumulative adjustment in the current ledger does not eliminate the requirement to adjust comparative statements. Do not count the same effect twice.

Direct effects vs. indirect effects

Retrospective application includes only the direct effects of the change plus their income tax effects. The inventory adjustment and the deferred tax asset above are direct effects.

An indirect effect is a change in current or future cash flows caused by the change, such as a profit-sharing or royalty payment that is based on reported income. Indirect effects are not pushed back into prior years. If they are actually incurred, they are recognized in the period of the change (ASC 250-10-45-8).

Example: suppose ABC pays a bonus equal to 10% of pretax income and the plan requires a true-up when prior income is revised. If a different accounting change had increased prior pretax income by $50,000, the extra $5,000 bonus would be expensed in 2026, the year of the change, not spread back into the restated years.

What to disclose

Describe the nature and reason for the change, why the new method is preferable, how it was applied, the effects on affected statement lines and applicable per-share amounts, and the cumulative opening-equity adjustment. Explain any impracticability exception used. See ASC 250-10-50-1.

What is a change in accounting estimate?

A change in estimate updates an amount because new information, experience, or circumstances become available. Examples include useful lives, residual values, expected credit losses, inventory obsolescence, and warranty obligations.

Apply the change prospectively: recognize its effect in the current period, and in future periods when affected. Do not revise prior financial statements simply because a reasonable estimate later changes.

Worked example: revise an asset’s useful life

On January 1, 2021, XYZ Corp purchased machinery for $1,000,000, with no residual value and a 10-year useful life. After five full years of straight-line depreciation, accumulated depreciation is $500,000. At the start of 2026, new information reduces the total useful life to eight years, leaving three years (2026–2028).

• Remaining carrying amount: $1,000,000 − $500,000 = $500,000.
• Revised annual depreciation: $500,000 ÷ 3 = $166,666.67, approximately.
• Increase from the former annual charge: $166,666.67 − $100,000 = $66,666.67, approximately.

Depreciation for 2021–2025 remains unchanged. Depreciate the remaining carrying amount over 2026–2028, with a final rounding adjustment so total remaining depreciation equals $500,000. Disclose the nature and material current-period effect of the revision, including applicable per-share effects. See ASC 250-10-50-4.

Special case: changing depreciation methods

Changing the method used for a long-lived nonfinancial asset—for example, from straight-line to an accelerated method—is a change in estimate effected by a change in accounting principle. Account for it prospectively, justify the new method as preferable, and provide the applicable disclosures. It is not the same as an ordinary retrospective inventory-method change.

What is a change in reporting entity?

A change in reporting entity means that the financial statements represent a different reporting entity under ASC 250. Examples include certain changes in the entities included in combined statements and qualifying reorganizations under common control.

Common control simply means the same parent, or the same group of owners, controls both businesses before and after the transfer. Nothing has changed hands with an outsider, which is why the receiving entity presents the combined history rather than recording a purchase.

An ordinary acquisition from an unrelated party is not an ASC 250 reporting-entity change. Do not revise prior years to include an acquired business as though it had always been owned. Apply the relevant acquisition and consolidation guidance. Likewise, a substantive gain or loss of control is not automatically a retrospective reporting-entity change.

Worked example: a transfer under common control

Parent P has controlled operating businesses A and B throughout 2023–2026. On January 1, 2026, P transfers business B to A in a qualifying common-control reorganization. Consider the receiving entity A’s financial statements, not P’s unchanged consolidated group.

If A presents 2024, 2025, and 2026, it presents the receiving reporting entity on a combined basis for those periods, with intercompany amounts eliminated. All those periods fall within common control in this example. Do not extend the example to periods before common control or to an unrelated-party acquisition.

What to disclose

Explain the nature and reason for the change and its effects on income from continuing operations, net income, other comprehensive income, and applicable per-share amounts for the periods presented (ASC 250-10-50-6). The receiving entity’s common-control presentation also requires consideration of ASC 805-50.

Reference: ASC 250-10-20 and 45-21; see the ASC excerpts and common-control discussion in EY’s accounting-changes guide.

How do you correct an accounting error?

An accounting error can arise from arithmetic mistakes, incorrect application of GAAP, or failure to use facts available when the statements were prepared. Correcting an error is not an accounting change, even though correcting a prior-period error may also require revising comparative information.

Timing and materiality determine the correction

• Current-period error found before statements are issued: correct the affected accounts before issuance.
• Error material to previously issued statements: restate the affected prior periods and adjust opening balances of the earliest period presented for earlier effects.
• Error immaterial to prior periods: also assess the effect of correcting it in the current period. Do not record a catch-up adjustment that would materially misstate current results; revision of comparative information may be necessary.

Materiality involves both amounts and circumstances; a percentage threshold alone is insufficient. Under U.S. GAAP, there is no impracticability exemption for correcting material prior-period errors. The exception for some principle changes must not be carried over to this section.

Worked example: equipment incorrectly expensed

XYZ bought equipment for $100,000 on January 1, 2024 but incorrectly expensed the entire amount. The equipment has a five-year useful life, no residual value, and straight-line depreciation. The material error is discovered at the beginning of 2026, after two full years. Ignore income taxes in this example.

• Correct annual depreciation: $100,000 ÷ 5 = $20,000.
• Accumulated depreciation for 2024 and 2025: $40,000.
• Missing net equipment and cumulative understatement of retained earnings: $100,000 − $40,000 = $60,000.

The debit restores the equipment’s original cost. The credits establish the depreciation that should already have accumulated and increase retained earnings for the cumulative net income understatement. This entry does not create $60,000 of current-year income.

How the correction appears in the statements

The $60,000 is shown as a prior period adjustment in the statement of retained earnings (or the statement of stockholders’ equity). It restates the opening balance and never runs through current-year net income. Assume XYZ had reported retained earnings of $900,000 at January 1, 2026.

In a real set of statements the prior period adjustment is shown net of tax. Taxes are ignored here to match the example.

Restating the comparative information

If only 2025 and 2026 are presented, increase beginning 2025 retained earnings by $80,000 for the 2024 effect, then reduce 2025 income by $20,000. Beginning 2026 retained earnings is therefore $60,000 higher. Record the normal $20,000 depreciation for 2026 separately.

Disclose that the prior statements have been restated, the nature of the error, the effect of correction on each affected financial statement line and applicable per-share amount, and the cumulative opening-equity adjustment (ASC 250-10-50-7). Include tax effects when they are relevant; they are omitted here solely to isolate the correction mechanics.

Counterbalancing vs. non-counterbalancing errors

Some errors fix themselves over two periods. Others do not. Exams love this distinction.

A counterbalancing error reverses on its own in the next period. The classic case is an inventory error. Suppose a count mistake overstated ending inventory at December 31, 2024 by $30,000.

• 2024: cost of goods sold is understated by $30,000, so net income is overstated by $30,000.
• 2025: beginning inventory is overstated by $30,000, so cost of goods sold is overstated and net income is understated by $30,000.
• Retained earnings at December 31, 2025 is correct. The two years offset.

If the error is found in 2026, after the 2025 books are closed, no correcting entry is needed because the balance sheet is already right. But if 2024 and 2025 are presented as comparatives, you still restate them so each year shows the correct income.

If the error is found during 2025, before the books close, record:

A non-counterbalancing error does not reverse on its own. The equipment example above is one: expensing a $100,000 asset leaves retained earnings misstated until the asset is fully depreciated, so a correcting entry is needed whenever the error is found. For more practice with inventory errors, see the inventory errors lesson.

Common exam mistakes

• New information versus an old mistake: distinguish a reasonable estimate revised today from an estimate that ignored information already available.
• Current ledger versus comparative presentation: a beginning-retained-earnings entry does not remove the need to adjust comparative statements.
• Depreciation method versus inventory method: the former has special prospective treatment; do not classify both mechanically as retrospective principle changes.
• Acquisition versus reporting-entity change: buying an unrelated business does not make its pre-acquisition results part of the acquirer’s historical consolidated results.
• Cash basis versus GAAP: cash-basis statements properly prepared under a special-purpose framework are not automatically erroneous. An error arises when the prior statements were required or claimed to follow GAAP and failed to do so. If you need the mechanics, see converting cash basis to accrual.
• First-time transactions: adopting a method for a genuinely new type of transaction is not necessarily a change from a previously used accounting principle.
• Prior period adjustment versus current income: the cumulative effect of a restatement, or of a retrospective principle change, adjusts opening retained earnings. It never appears as a line in the current income statement.
• Counterbalancing errors: an inventory error that has already reversed needs no correcting entry, but you still restate any prior year you present.

How does IFRS (IAS 8) differ from ASC 250?

This lesson’s main rules and examples use U.S. GAAP. Under IFRS, IAS 8 also distinguishes policies, estimates, and errors, but the detailed requirements differ. In particular, IAS 8 permits an impracticability exception for retrospective correction of prior-period errors; U.S. GAAP does not extend that exception to material error corrections. Read the IFRS Foundation’s IAS 8 overview for the IFRS framework.

One naming note: when IFRS 18 takes effect for annual periods beginning on or after January 1, 2027, IAS 8 is renamed Basis of Preparation of Financial Statements. Its rules on policies, estimates, and errors carry over. If you are also studying U.S. GAAP, our FASB vs IASB comparison explains how the two standard setters differ.

Accounting changes and errors: practice quiz

Back to the lesson topics

Accounting changes FAQ

What are the three types of accounting changes under ASC 250?

A change in accounting principle (switching between two acceptable GAAP methods, such as FIFO to weighted-average), a change in accounting estimate (updating an amount such as an asset’s useful life because of new information), and a change in reporting entity (the statements now cover a different group of entities, such as after a common-control reorganization). Error corrections are covered by ASC 250 too, but they are not accounting changes.

What is the difference between retrospective and prospective application?

Retrospective application revises the prior-year statements you present as if the new method had always been used, with the effect of earlier years recorded in opening retained earnings. Prospective application leaves prior years alone and records the change only in the current and future periods. Principle and reporting entity changes are retrospective; estimate changes are prospective.

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

No. An error comes from a math mistake, misapplied GAAP, or overlooked facts that existed at the time. A principle change is a justified switch between two acceptable methods. Both can require revising prior statements, but an error correction is called a restatement and is disclosed as a correction, not as a change.

Is a change in depreciation method a change in principle or a change in estimate?

ASC 250 calls it a change in estimate effected by a change in principle. You account for it prospectively, like an estimate change, but you must still justify the new method as preferable, like a principle change.

What is a prior period adjustment?

It is the line in the statement of retained earnings that adjusts the opening balance for the correction of a material prior-period error, shown net of tax. It restates the beginning balance and never runs through current-year net income.

Where do accounting changes appear on the CPA Exam?

In FAR, Area III, Select Transactions, according to the AICPA Blueprint. Expect classification questions (which category and which treatment) and calculation questions (the cumulative effect on retained earnings, or the revised annual depreciation).

References and further reading

• ASC 250: accounting changes and error corrections, including 250-10-45-5 through 45-10 (principles), 45-17 through 45-20 (estimates), 45-21 (reporting entity), and 45-23 (errors). EY’s August 2026 guide reproduces relevant ASC text and provides further explanation.
• ASC 805-50: transfers of assets or businesses between entities under common control.
• FASB: Revenue Recognition Implementation Q&As — background for the video context note.
• IFRS Foundation: IAS 8 overview — the separate IFRS framework.
• New to ASC paragraph references? Our FASB Codification guide explains the Topic, Subtopic, Section, and Paragraph levels, and What Is GAAP? covers the hierarchy behind 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