What is the difference between an Accounting estimate and an Accounting policy?

• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
• A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability. ( IAS8)

Financial statements provide investors and analysts with information about a company’s ability to manage its financial transactions and build value in the organization. Accountants gather information to use when creating the financial statements. This information includes both actual dollar amounts and estimated amounts. Accounting estimates require the accountant to determine what financial value to record when the actual amount is unknown.

Accounting estimates improve the accuracy of the financial statements. Investors and analysts make decisions based on the financial statements. The accountant has an obligation to create these statements to the best of her ability. When the accountant knows that financial activities occurred, even if the dollar amount is unknown, she needs to reflect those activities. Estimating the value of those activities allows her to include that impact in the financial statements.

For the accounting estimates to be useful, the accountant needs a reliable basis for estimating those numbers. She might use historical information, documentation or personal calculations to estimate the numbers. Historical information provides a reliable basis for numbers that rarely change. Documentation provides a good basis when the accountant uses a vendor contract to estimate the numbers. If she calculates the estimate using her own calculations, she needs to document those calculations. The accountant needs to keep notes regarding the basis she uses for future reference.

Accounting estimates include depreciation calculations, warranty claims or bad debts. Depreciation calculations require the accountant to estimate the number of years the asset the company will use the asset and the value of the asset at the end of the asset's life. Warranty claim estimates require the accountant to estimate the number of customers who will file warranty claims and the cost of the repairs for each claim. Bad debt estimates require the accountant to estimate the number of customers who will default on their accounts and the dollar value of those accounts.