There are often times you have to estimate for you expenses – you have to take into account your knowledge of the situation at the time and make your best judgment call. It\u2019s called \u201cmaking an estimation in the accounts\u201d and it\u2019s perfectly normal. Having to estimate certain expenses like bonuses, provisions for legal cases etc., is something that happens every now and then and there\u2019s nothing wrong with having an estimated amount in the accounts. One thing to watch out for with estimations however is their precision and adjustments if need be. If the estimated amount is a longer term provision, undoubtedly at every balance sheet date you have some additional information or more hindsight as to the amount of the provision in the accounts. <\/p>\n
If the new estimation is in fact bigger than the previous amount, you just have to charge for more expenses. Note however, that if the previous estimation was done in the prior period, this new additional charge is always charged into the current period the new estimation was done in. Changes in estimations are always recognized in the period the estimation was done in and not in prior periods, so it\u2019s never retrospective. As such, in the current period, your accounting entry is as follows:
\n
\n Db: Expense account you charged the expense in the prior period
\n Cr: Liability amount the estimated amount has been recognized on<\/p>\n
In the case where the new estimated amount is in fact smaller than the previous amount, your accounting entry (again in the current period) is as follows:<\/p>\n
Db: Liability amount the estimated amount has been recognized on
\n Cr: Expense account you charged the expense in the prior period<\/p>\n
With this you\u2019d be decreasing the liability as the new estimated amount is smaller than the initial amount, but you\u2019d also be showing \u201cincome\u201d in the account on the income statement you initially charged expense. Note here that it\u2019s again perfectly acceptable to have an expense account show positive amount (income), because it\u2019s called \u201creversing expenses\u201d and there\u2019s just one way of doing it. You have to create an entry with the opposite effect, so an income to the expense account to effectively reverse it.<\/p>\n","protected":false},"excerpt":{"rendered":"
There are often times you have to estimate for you expenses – you have to take into account your knowledge of the situation at the time and make your best judgment call. It\u2019s called \u201cmaking an estimation in the accounts\u201d and it\u2019s perfectly normal. Having to estimate certain expenses like bonuses, provisions for legal cases […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,35],"tags":[],"class_list":["post-2810","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-7-basic-entries"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2810","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=2810"}],"version-history":[{"count":2,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2810\/revisions"}],"predecessor-version":[{"id":2864,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2810\/revisions\/2864"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=2810"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=2810"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=2810"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}