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Could you read my paper and Could you give a specific example of an item we might find in regular accounting transactions where estimates are used?
Could you also show the journal entry we would use to record this type of estimate?
Are there any accounting standards that determine/guide how and when adjusting entries should be made?
Discussion: Adjusting Entries
The use of accounting estimates involves an approximation in financial statements of certain amounts to be debited or credited on items with no actual means of measurements such as provisions for bad debts and depreciation (Whittington, Delaney & Feller, 2011).
The use of accounting estimates affects the financial statements of a company in different ways. The balance sheet of a particular financial period should show the correct financial position of a business as at a specific date but the figures shown may be inaccurate since some of the current assets may valued at estimated amounts due to depreciation. (Beasley, Mark & Carcello, 2008). Thus, the balance sheet in such a case does not give an accurate reflection of the company’s financial position (Albrecht, 2007). Time changes and so do different items of the statements, therefore when the estimates are held constant from the previous calculations then the financial statement may cease to give correct accounting information required by the users given the irrelevancy of some estimates over time.
Additionally, the use of estimates may lead to inaccurate cost determination in some accounting methods such as the High-Low method of cost estimation hence affects the value statements (Albrecht, 2007). Finally given the difficulty correctly to estimate different provisions in the Trading Profit and Loss account, the reported profits or losses may be inaccurate.
In my opinion, use of estimates can make the management of a company manipulate accounting figures in order to meet their desired interests (Whittington et al., 2011). One of the primary practices by the management hiding behind accounting estimates is creative accounting, where they manipulate accounting records through different valuations and depreciations in order to report higher profits.
Moreover, where there are no strong internal control systems in an organization, the management can use unethical ways to conjure quick profits through optimistic asset estimates leading to a culture of corruption.
For a company to rely effectively on accounting estimates there should be a full disclosure of the estimates and periodic reviews in order to take care of variations in time (Beasley et al., 2008). Additionally, there should be an audit committee to check whether the financial statement and information on estimates shows a true and fair value of a company’s financial position.