Accounting estimates refer to the estimations that the accountants would make on the amounts that they should debit or credit (Also see Accounting – Understanding credit and debit in the business) on the items that do not have a defined and accurate method of measuring the value. Thus, the accountants need to use their knowledge and expertise they obtain from training and experience to make the judgement. If you are doing accounting tasks on your own without having much accounting knowledge, this part can be challenging for you. Thus, the best way to solve this problem is by hiring an accounting firm in Singapore.
In some occasions, the accounting estimates that the accountants have made may change. This may happen when new information appears, and it has replaced the data that the company has used to make the decision earlier. This will cause a change in the carrying amount of a particular asset or liability. At the same time, the subsequent accounting for the recognition of assets and liabilities in the future would be different too.
When we account for business transactions, we have to consider the number of estimates we have made, as well as the things that we use our own judgment or prudence. Some examples of these items include the provisions for obsolete inventories, change in the liability, bad debt reserve, as well as a change in the useful life of some depreciable assets (Also see Introduction to Impairment of Fixed Asset). Sometimes, we may realise that our estimates or judgment are inappropriate since the basis that we use to make assumptions have changed. Thus, we will need a change in the accounting estimates so that our books of accounts will be in line with the subsequent changes.
However, some people may be confused between the change in accounting estimates and the change in accounting policies. Note that both of them are totally different. A change in the accounting estimates will cause the valuation of financial data of that company to change. On the other hand, a change in the accounting policies that a company has been using will result in a change in the way it calculates the financial statements (Also see What is a Financial Statement Review?).
An example of the change in accounting (Also see What is the Purpose of Accounting?) estimate would be a change in the salvage value of an asset. As an instance, a company that has been using the straight-line method for the depreciation of assets has predicted that the salvage value of a machine will be RM5000. However, as the trends in the marketplace has changed, the salvage value has decreased to RM2500. As this value has changed, the depreciable value will vary too. This leads to a change in the accounting estimates.
For the change in accounting policies, an example would be changing the method that the company is using for valuation of inventory. For example, a company has been using the FIFO method (first-in, first-out method) to deal with its inventories. Then, it changed to the LIFO method (last-in, first-out method) to comply with the requirement of law.
The management of a company should do their best to minimise the risk associated with the changes in accounting estimates. This can be done by implementing internal controls on this matter. For example, the management should appoint a qualified individual to make necessary adjustments on the estimates when required. It should also list out the differences between the amount before it changes the accounting estimate as well as the sums after the change is made. Also, the management needs to understand the crucial methods and assumptions that the company is using and make sure that the controls can identify unnecessary changes regularly.