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XYZ Limited is charging depreciation as per Straight line method till year 2020 , Now the company is changing the method from SLM to WDV.
Identify which accounting concept is violated.
Answers
Answer:
Accounting policies and principles need to be consistently applied while recording the financial transactions. This is the Principle of Consistency. Any change in the method of depreciation implies a change in accounting estimate. Thus, there should be valid reasons for a change in method of depreciation.
Change in Method of Depreciation
At the end of each financial year, management should review the method of depreciation. When there is a significant change in the pattern of the future economic benefits from the asset then the method of depreciation should also be changed.
As per the Accounting Standard 1- Disclosure of Accounting Policies, the change in the method of depreciation is a change in the accounting estimate. Thus, it requires quantification and full disclosure in the footnotes. Also, the justification and financial effects of the change needs to be disclosed.
Thus, the method of depreciation can be changed without retrospective effect or with retrospective effect. Without retrospective effect means no adjustment will be made for past entries and only in the future depreciation shall be charged by the new method. While with retrospective effect implies that the amount of depreciation to be charged is adjusted from the date of purchase of the asset.