Question

Please explain the concept of Accounting Policy and Accounting Estimate. How to clarify between them?
Example:
1.Dog Ltd determines that it will calculate its warranty provision using past experience of products returned for repair under warranty?
2.The current year's warranty provision is calculated by providing for 1% of current year sales, based on last year's warranty claimed amounting to 1% of sales.
Why the first example is Accounting Policy and why the second example is Accounting Estimate?

Answer 1

• CONCEPTS OF ACCOUNTING POLICY AND ACCOUNT ESTIMATE :-

ACCOUNTING POLICY - Accounting policy refers to the specific principles, policies and procedures used by a corporation to prepare its Financial statements. They define specific methods, measurements basis and practices for preparation of financial statements.

ACCOUNTING ESTIMATE - Accounting estimate refers to the estimation or approximation of the amount to debit or credit on items for which no exact means of measurement are available. It involves judgement regarding the expectation of future benifits.

We can clarify between them as Accounting estimate , estimates judgements or assumptions used in applying an accounting policies. It may include estimation on selecting a technique or applying a technique and on the other hand, Accounting policy gives Specific methods, techniques etc.

• The first example is accounting policy because it clearly states that DOG LTD will calculate its warranty provision using past experience of products it is specific for how to calculate warranty provision but in second eexample, it is calculated by providing for 1% current year sale on the basis of last year warranty claimed amounting to 1% sales and not on specific calculated technique . That's why the first example is Accounting policy and second example is Accounting estimate.