Changes in accounting policy

Question

During the year ended 31 December 2015 the directors of Naples plc decided to change the companys accounting policy in respect of consumable stores, such as dyes and threads used in the manufacturing process. In the year ended 31 December 2014, and all years prior to that, Naples plcs stated accounting policy was to write off the costs of such consumable stores as incurred. The directors now wish to recognise consumable stores as inventory, on the grounds that this better matches purchases made to sales generated. As a result, Luigi included closing inventory of consumable stores of 22,600 in the draft financial statements for the year ended 31 December 2015, but made no other adjustments. Roberto has established that the equivalent figure at 31 December 2014 was 31,200, but it has not been possible to arrive at figures prior to that date.

Solution

IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, only allows a change in an accounting policy if:

it is required by an IFRS; or

it will result in the financial statements providing reliable and more relevant information.

This scenario would appear to meet the latter condition by better matching purchases made to sales. It is essentially a change in a recognition policy. However, a change in an accounting policy should be applied retrospectively, ie, as if the new policy had always applied. This means that Luigi should also have recognised the stores as inventory at 31 December 2014 and all previous years. Where it is impracticable to determine the cumulative effect, as at the beginning of the current accounting period, of applying a new accounting policy to all prior periods, an entity should adjust the comparative information to apply the new policy from the earliest practical date. Therefore Luigi should have adjusted the 2014 comparatives to include closing inventories of consumable stores of 31,200. The impact of this on the 2015 financial statements will be to include opening inventories of consumable stores of 31,200, with a corresponding adjustment to retained earnings brought forwards (which will be shown in the statement of changes in equity).

The journal entries to achieve this are:

DR Cost of sales 31,200

CR Retained earnings 31,200

This will have the effect of reducing profit for the year by 31,200, with a corresponding increase to the profit for the previous year.

MY QUESTION: Why is cost of sales debited in the solution? From my understanding inventory should be debited instead as per the new accounting policy? Under the new policy you would deal with consumables in the following manner (correct me if I'm wrong) On purchase of consumables: DR Inventory

CR Cash On the use of consumables: DR Cost of sales CR Inventory How would one end up with a debit to cost of sales? Thanks