Final answer:
Changes in accounting principles are recognized in the financial statements by retrospectively adjusting retained earnings in the earliest period presented.
Step-by-step explanation:
The general rule is that changes in accounting principle should be recognized in the financial statements by adjusting retained earnings in the earliest period presented. When a company decides to change an accounting principle to another generally accepted accounting principle, it must retrospectively adjust its financial statements as if the new principle had been in use all along unless it is impracticable to determine the effects of the change. Retrospective application requires adjustments to the retained earnings balance at the beginning of the earliest period presented to reflect the cumulative effect of the change on periods prior to those presented.