Estimated earnings are the amount of earnings projected for a given accounting period.
Estimated earnings are the amount of earnings projected for a given accounting period. This calculation can be important for a variety of financial activities, including estimating taxes due, preparing budgets, and issuing statements to shareholders and interested members of the public. There are several approaches to developing estimates. Which one is better depends on the company, the industry, and how the budget will be used. Accountants generally choose one method and stick with it for consistency because they want to be able to compare data between accounting periods.
One way to look at estimated earnings is to consider earnings that are likely to accrue even if not actively billed. This is used in accrual accounting techniques. Another option is to consider how much money will actually be raised 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 significant ongoing contracts, for example, can expect to complete them and bill customers in the next accounting period. Government agencies can look at the likely fees and taxes they will collect to determine your estimated revenue. Another consideration might be a planned product launch or initiative that is likely to result in increased 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. Overestimation can create problems because a budget may be too large or the picture created from estimated revenue may be too optimistic and could be considered misleading. On the other hand, not taking into account possible sources of income can 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 property values and changes in valuations may influence the reading of estimated income by the local taxing authority. If the estimate does not take into account possible drops in property value, it may not be as accurate and the reader can make an adjustment to compensate for this gap.