What effect does a change in accounting principle usually have on retained earnings?

A change in accounting principle typically requires retrospective application, meaning that prior financial statements must be adjusted as if the new principle had always been used. This adjustment affects the retained earnings balance as of the beginning of the earliest period presented, which reflects cumulative effects of the change.

When a different accounting principle is applied, it can result in alterations to prior reporting periods' net income and consequently the retained earnings balance. In many cases, switching to a principle that recognizes more expenses sooner can lead to a decrease in retained earnings since past net incomes would have been higher under the former principle. Thus, this reflects the correct scenario where retained earnings are impacted by the cumulative effect of accounting principle changes.

In contrast, an increase, no effect, or depending on specific circumstances would not encompass the general expectation that most changes result in affecting the retained earnings from a cumulative standpoint.