In: Accounting
What are three examples of estimates that are used in accounting that are not contingencies? Can you explain why they are not considered contingencies?
Answer
Accounting estimate is an approximation of the amount of the transaction that are likely to occur in and have not yet occurred, mostly they are considered probable because their occurrence is not sure and therefore, they are contingent. But there are few estimates whose occurrence is sure in the natural course of business.
Examples of estimates that are used in accounting that are not contingencies are: -
Valuation of Inventory: Since inventory includes both finished goods as well as good-in-process, therefore its estimates are required to determinant the actual inventory.
Tangible Assets valuation: Accounting estimates includes valuation of tangible assets because assets (asset whose estimate is made) are repaired, purchased or sold which increase or decrease the value.
Depreciation: Estimates of depreciation are made as when machinery, asset is in work it loses a part of its value every year due to wear and tear.
These estimates are not considered as contingencies because contingency is something whose occurrence is not yet sure. But the occurrence of these activities whose estimates are made are likely to occur, since they are the few main of business, In order to get the true and fair value of the items.