Estimated revenue is important for financial activities like budgeting and tax estimation. Different methods can be used, including accrual basis accounting and considering actual collections. Sources of information include past financial periods, market analysis, and projections. Accuracy is important to avoid problems with overestimation or underestimation. Financial statements should disclose the methods used.
Estimated revenue is the amount of profit projected for a given accounting period. This calculation can be important for a number of financial activities, including estimating taxes due, budgeting, and issuing statements to shareholders and interested members of the public. There are several approaches to developing estimates. The most appropriate may depend on the company, the industry, and how the estimate will be used. Accountants typically choose one method and stick with it for consistency, because they want to be able to compare data between accounting periods.
One way to view estimated revenue is to consider earnings that are likely to accrue, even if not actively collected. This is used in accrual basis accounting techniques. Another option involves considering how much money will actually be collected from customers, vendors, and other sources. This establishes the amount of funds likely to be available for active use based on the estimate, which can be important for activities such as budgeting.
Sources of information in an income estimate may include data from prior financial periods, market analysis, and projections based on current activities. Companies with major contracts in progress, for example, might expect to complete them and bill customers in the next accounting period. Government agencies may look at the potential fees and taxes they will collect to determine your estimated revenue. Another consideration could be a planned product launch or initiative that is likely to generate higher revenue.
Creating financial projections can be challenging. Accountants want to be as accurate as possible so that organizations have the correct information they need to make financial planning decisions. Overestimating can create problems because a budget may be too large or the picture created from the estimated revenue may be too optimistic and may be considered misleading. Failing to account for potential sources of income, on the other hand, could result in an abnormally low estimate, which is also not helpful.
In financial statements, accountants may discuss the methods used. This allows readers to double check your work and consider factors that may influence the resulting estimate. For example, being aware that property tax projections may change due to falling real estate values and changes in assessments could influence the estimated revenue reading for a local taxing authority. If the estimate does not account for potential drops in property value, it may not be as accurate, and a reader may make an adjustment to make up for this deficiency.
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