The final type of estimating relates to unusual and infrequent items. These are commonly referred to as extraordinary items. Basically, they rarely occur but do happen once or twice over an economic cycle.
With the accounting discipline, estimates refer to reasonable calculations for the purpose of determining accounting profits adjusted for depreciation, amortization, warranties, and unusual or infrequent events.
Warranties are assurances to customers that the product sold or service rendered will perform as stated or contracted. Often products or services are defective and therefore require replacement or repair. To properly match the cost of warranty work against the revenue generated an estimate of costs is made and recorded to cost of sales.
There are many transactions in accounting requiring the accountant to use estimates for the respective debits and credits. The following five lessons cover how estimating is performed with depreciation, payroll benefits, bad debts, warranties and extraordinary items. This lesson explains why estimating is needed and used in business.