Learning how to do accounting estimates
Is there any place on your site that talks about how to do estimates and how to tell if something is reasonable or not? - I tried to do site search but nothing came up :(
For the benefit of other readers, estimates and assumptions are often used in bookkeeping and accounting. Some examples where estimates may be used would be in determining:
- bad debt expense - the loss rate must be estimated;
- amortization/depreciation expense - the useful life and salvage value must be estimated;
- obsolete inventory items;
- periodic inventory - there are two well known methods to estimate periiodic inventory;
- impairment of assets;
- warranties - the number of repairs and replacements must be estimated;
- contingent liabilities and other accrued liablities;
- pension plan obligations - are based on actuarial assumptions;
- deferred taxes.
Estimates require subjective judgement and are based on the bookkeeper's, accountant's and management's experience. When using estimates to prepare your books, it is important that you do so with as much information as possible ... and disclose it in the notes when required to do so.
It is also important to update your estimates when new or better information comes along. For example, you may want to update your estimates and assumptions to reflect the current economic environment or updating your historical information used as the basis to prepare your original estimate.
The accuracy of your estimates often gets better over time ... just like preparing your budget
and financial plan or forcasting your cash flow
Deloitte's has an excellent summary of IFRS's policy on Changes in Accounting Estimates and Errors
that may or may not be useful to you. You can find it at:
iasplus.com> Standards> International Financial Reporting Standards> IAS08 Accounting Policies, Changes in Accounting Estimates and Errors.
When asking your question, you didn't give me much to go on. Without more details on what you are trying to estimate, I don't know what else I can explain about making accounting estimates.