Accounting estimates: the numbers in the accounts with no document behind them

Hook

This series has said it many times: document first (the twenty-first lesson). Today, a truth that sounds like a contradiction: a family of numbers in your accounts has no document behind it at all — they are "estimated". And it is lawful, compliant and required. Where there is a document you follow the document; where there is none, what then? That is today's subject: accounting estimates — the craft of getting the number right with no document to go on.

Estimates are everywhere

Let us count the "estimate family" in a set of accounts. Depreciation — how many years will this machine last? Five, ten: that is an estimate (the fortieth lesson). Closing materials — at the end of the month in a factory, how much material was used up this month? Stocktake plus estimate. Work in progress — the renovation job from the tenth lesson is half done: what percentage is complete? Estimate. Expenses whose bill has not arrived — the month-end electricity bill, the year-end audit fee; the bill is not here yet, so you estimate and record it first (the sixth lesson). Warranty and returns provisions — of the goods that went out, how many will come back for repair or be returned? By the historical proportion, you estimate an amount and set it aside. Unearned revenue — you took a year's money from the customer up front and the work is not finished; the part not yet delivered is not income, it is a liability, and you recognise as much as you have done — how much is that? Estimate. And then sudden costs — a lawsuit, a claim, a price rise, the outcome undecided: should you provide, and how much? Estimate again.

Estimating is not guessing

So where is the difference between an estimate and a wild guess? Three things. One, method — the set of three from the fortieth lesson: the method, the rate and why, written into a schedule. Two, prudence — the old accounting rule: when you are not sure, recognise losses early and gains late; better conservative than blowing bubbles. Three, experience — the real skill in this trade. An accountant or CFO who has seen hundreds of sets of books can take your business and bring the historical accounts into a range close to reality. That is not magic, it is judgement: knowing roughly what proportion of material this industry burns, what percentage bad debts usually run at, and which estimates are the easiest to hide behind. Historical accounts, estimated by a professional, come out accurate.

The boundary of accounting: reporting the past is not predicting the future

Now the honest word from inside the trade: most accountants are in the business of reporting the past. Historical numbers we estimate accurately and report steadily. But predicting the future — how much you will sell next quarter, when raw materials will go up — most accountants cannot do, because that is not in the books, it is on the floor of the business. Who can do it? The process owner of the operation — the boss, the plant manager, purchasing, the branch manager. You know which way your regular customers' orders are heading next quarter, you know a supplier is working up to a price rise, you know which line slows down once the rainy season arrives. That is called domain knowledge — the knowledge outside the books. Add modern tools on top of it — the live data in the system (the twentieth lesson), a dashboard, AI as a helper (the fourteenth lesson) — and your judgement plus the accountant's structure equals a forecast you can rely on (the forty-first lesson). This is the two worlds from the eleventh lesson: the accountant supplies the skeleton and the historical baseline, the business person supplies the direction and the judgement — and only together can you see the road ahead.

How the boss helps the estimates

Three moves that make the estimates sharper. One, say what you know (the full disclosure from the fourteenth lesson): how many years the machine actually lasts, how much usually comes back as returns — you know your industry better than any accountant. Two, help review them — the accountant lays the estimates out, and you look at them with a trade eye: are they reasonable? Three, look back and compare every year — last year's estimate against what actually happened, how far apart are they? If it is far off, recalibrate that ruler. An estimate is a living thing, and the ruler has to be sharpened.

To close

In summary: accounts = the facts from documents + professional estimates; estimating runs on method, prudence and experience; leave the past to the accountant, and the future to your domain knowledge plus modern tools — two worlds looking at the road together. Want your accounts estimated steadily and close to the ground? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.