Estimates are very important when it comes to understanding potential financial losses that a business might face. This is especially true for something called contingent liabilities.

According to the rules known as GAAP, if a business thinks there’s a good chance (over 70%) that a loss could happen and they can make a reasonable guess about how much it could be, they need to write it down in their finances.

Here are some key points to remember:

• When to Record It:

  • Probable: This means there’s a better than 70% chance it will happen.
  • Reasonable Estimate: The business must be able to make a good guess about the amount.

• Real-Life Example:

  • A study in 2019 showed that 65% of companies reported having at least one type of contingent liability.

• How Estimates Are Made:

  • Businesses often use statistics and past data to make their estimates. This can affect important financial numbers, like how much debt the company has compared to its ownership.

To sum it up, having accurate estimates is key for being open and following the rules in financial reports.