A type of transaction (transaction class) that involves management judgments or assumptions in establishing account balances in the absence of a precise means of measurement. An accounting estimate is the estimation used for measurement of monetary amounts is subject to the so-called estimation uncertainty, corresponding to inherent limitations in management’s judgment or data. This relates to items on financial statements that have no accurate quantification and are therefore figured out based on judgment and knowledge derived from experience and past performance.

These limitations lead to inherent subjectivity and variation in the measurement outcomes. Applying management’s judgment adds to complexity and subjectivity of the process of estimation, and the effects of such factors and other inherent risk factors on the measurement of monetary amounts would increase their susceptibility to misstatement.

The main examples of accounting estimate transactions include determining the allowance for doubtful accounts, establishing warranty reserves, and assessing assets for impairment. An accounting estimate transaction constitutes an accounting treatment whereby management makes an informed judgment or estimation about an uncertain event or condition. The process involves reviewing, analyzing, and evaluating relevant information that harbors substantial measurement uncertainty. The allowance for doubtful accounts, as an example, involves estimating the amount of accounts receivable (A/Rs) that are expected to be uncollectible.

Estimates, routine or non-routine, about transactions and events are also necessary for maintaining proper details in the books of accounts for future reference and use. Therefore, even though uncertainties and values must be estimated using historical data and approximations, all such estimates should also be a part of financial reporting. A well-established estimation provides for transparent and reliable financial statements, and vice versa.

Accounting estimates vary greatly in nature and are required to be made by an entity’s management when the monetary amounts cannot be directly observed from available data or conditions. The process of making accounting estimates involves selecting and applying a specific method that would be based on a set of assumptions and data, requiring the application of management’s judgment.