Estimating

An estimate, as it relates to the creation of financial statements, is a calculation of a financial transaction for which no exact value is determinable, and is based upon judgment, historical understanding, and experience.

Accountants use estimates when it’s not possible to calculate an exact figure supporting a financial transaction, but it is known that a future transaction will occur and it’s reasonably estimated. Typically, accountants will apply a consistent methodology between the different account periods. This methodology may rely on estimates for the basis of the financial statement transaction.

The use of estimates may be required for a vast number of reasons. Typically, they are ultimately required when information to support an exact figure is not available, or the issue generating the transaction is not complete, and therefore may be pending at the time of a financial statement close.

Accountants will use all information available, including historical trends, past experience, and judgment to estimate the true value of a financial transaction. Depending on the value of the transaction and its impact on the financial statements taken as a whole, additional disclosures may be required.

Disclosures outline how the estimate was derived and the risks associated with the true transaction value differing from the estimate. In some instances, subsequent differences between the actual amount of the financial transaction, and the estimate, may require subsequent adjustment to the financial statements.

As discussed previously, once you have forecasted the main element of sales, everything else from your projections follows on from this. The following items form an important part of your projections:

• Capital spending
• Employee costs
• Non-employee costs
• Other income and costs

Click here to view a video that explains the four items required for projections.