Estimate is a financial statement approximation of the amount to be either credited or debited for items that cannot be clearly measured.
The purpose of accounting estimates is financial statement accuracy improvement. Analysts' decisions are based on those financial statements and accountants' duty is to generate these statement as precise as possible even if the monetary value is unknown.
In order for estimates to be effective, the basis, on which the accountant estimates numbers, needs to be reliable:
- Historical information's reliability is based on the fact that those numbers are not likely to change.
- Documentations are a good source of information when the accountant estimates numbers using a vendor contract.
- Own calculation have to be well documented for future reference.
Examples of estimates include:
- Warranty claims
- Bad debts
- Depreciation calculations