Accounting estimate

Accounting estimate
See also

Accounting estimate - these are transactions that a firm enters into in final records to reflect its best judgment. Often, until the entire transaction is fully completed, the company is not sure how many expenses need to be reserved. Deciding on the method to calculating various estimates, the company must take into account the occurrence of unexpected future events that have a decisive impact on their correctness [1].

This position is a typical characteristic attribute for reporting and financial accounting [2]. Its value can be complicated or simple according to item features [3].

Until estimates remain credible, they may significantly increase the functionality of financial statements by providing meaningful and up-to-date information [4].

Determination of accounting estimate

There are two ways to determine an accounting estimate :

  • as a part of the routine accounting system which operates either continuously
  • non-standardly and which only operates at the end of the period

The accounting estimate is made using a scheme based on experience or an increase in sales revenue to calculate the provision for warranty [5].

Revisions

Changes have to be recognized currently and prospectively [6]. The financial suspension is not subject to correction or restatement [7]. When a change in accounting estimates has a significant impact on the current and future years, the effect is disclosed in all applicable accounting periods. If an accounting estimate relates to only one reporting period, the change shall be accounted for in that period only. However, if a change affects more than one reporting period, the change should be reflected in the period in which it occurred and in future periods [8] It is worth noting that when the present and future financial statements show the effects of changes in estimates, no changes are made concering for to the financial statements for the previous period [9].

Responsibility

The responsibility for making an accounting estimate contained in financial statements is taken by the management. Estimates are continually made in conditions of uncertainty about the outcome of events that have occurred or may occur in the future and are associated with the use of judgment [10].

Footnotes

  1. Loughran M. 2011
  2. Smith B. 2010, p. 78
  3. Gupta K. 2004, p. 1160
  4. Smith B. 2010, p. 78
  5. Gupta K. 2004, p. 1160
  6. Loughran M. 2011
  7. Delaney P.R., Whittington O.R. 2011, p. 111
  8. Benesh B.K., Bryant M.K., 2019, p. 7
  9. Loughran M. 2011
  10. Gupta K. 2004, p. 1160

References

Author: Klaudia Szydłowska