What is the Difference Between Accounting Policies and Accounting Estimates?

The main difference between accounting policies and accounting estimates lies in their purpose and application in financial statements. Here are the key differences between the two:

Purpose:

Accounting policies: These are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. They determine how information should be reported, including recognition, classification, and presentation of items in financial statements.
Accounting estimates: These are monetary amounts in financial statements that are subject to measurement uncertainty due to limitations in data or the need to use judgment and assumptions. They are developed to achieve the objective set out by the accounting policy.

Application:

Accounting policies: Changes in accounting policies are applied retrospectively, meaning that financial statements have to be restated to be presented as if the new accounting policy had been applied in the past.
Accounting estimates: Changes in accounting estimates are applied prospectively, meaning that the changes are recognized in the period of the change and future periods if the change affects those periods.

Examples:

Accounting policies: Examples include inventory valuation, revenue recognition, and depreciation methods.
Accounting estimates: Examples include bad-debt allowances, warranty liabilities, and depreciation.

Distinguishing between accounting policies and accounting estimates is crucial because the approach taken can affect both the reported results and trends between periods. Changes in accounting policies are required to be applied retroactively, while changes in accounting estimates are applied prospectively.

On this page

What is the Difference Between Accounting Policies and Accounting Estimates?

Comparative Table: Accounting Policies vs Accounting Estimates

Here is a table comparing the differences between accounting policies and accounting estimates:

Feature	Accounting Policies	Accounting Estimates
Definition	Accounting policies are specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.	Accounting estimates are judgments made by experienced accountants when precise policies are not available to measure a specific item in the financial statements.
Purpose	Accounting policies provide a framework for consistent and transparent financial reporting across different periods and entities.	Accounting estimates are used to approximate information when financial data cannot be precisely measured.
Examples	Inventory valuation and revenue recognition.	Depreciation, bad-debt allowances, warranty liability, and tax revenue.
Change	Changes in accounting policies are applied retroactively, meaning financial statements must be restated to be presented as if the new accounting principle had been used in the past.	Changes in accounting estimates are applied prospectively, meaning the new estimate is used in future periods.
Reporting	Changes in accounting policies require restating line items directly affected by the change.	There are less stringent reporting requirements for changes in accounting estimates.

Distinguishing between accounting policies and accounting estimates is important because they are accounted for differently. Changes in accounting policies are applied retroactively, while changes in accounting estimates are applied prospectively.

Guilherme Mazui

Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.