What is Forecast in Accounting and what types are there? – Forecast Examples

When we hear the term ‘forecast’, the idea of predict future actions or events in order to make decisions. This term can be used in the field of business planning or business accounting level and is a factor of great importance. Therefore, today we will see what forecasting is in accounting and what types exist.

What is forecasting in accounting?

To avoid accounting and financial problems in a company, it is very important that planning is carried out based on possible future scenarios. In this way, the progress and success of the company will not be adversely hampered by contingency situations.

In accounting, forecasting consists of predict amounts or figures in financial statements that can affect the equity of an entity, these values ​​should have a high probability rate. In general, these forecasts are based on accounting statistics from previous periods of the company.

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Forecasts are very important because they allow you to anticipate fluctuations and factors that may affect company finances, especially in budgets. In this way, effective planning can be carried out for projects and for the achievement of objectives.

Forecast types in accounting

Within any company and even small businesses, it is very important to make forecasts to plan long-range objectives. AND there are three types of forecasts that are fundamental within accounting.

Cost forecast

This type of forecast is made mostly in the planning of expenses that the company will have for a new operations process or project. The cost accounting forecasts allow to visualize in advance at what point in the operations the expenses will occur and how they will affect the assets of the company.

Through the cost accounting forecasts, it is then possible to make financing plans and search for income that allow the completion of projects. In this way, the cost forecast allows to predict, step by step, the approximate figures of the expenses that will occur.

Income forecast

They are forecasts based on the market trend, sales and investments, which they allow to foresee how much money the company will receive. Forecasts in the assets of the company will allow planning how some future expenses will be financed or how excess profits will be invested.

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In many cases, revenue forecasts are easy to create when there are stable and recurring sales conditions within stable markets. But, in other cases, they can be very difficult to predict, especially when budget accounts are quite tight.

Market forecast

They are broader predictions, that include probable income and expenses derived from changes in the market and how these affect the equity of the company. These forecasts can be reflected, for example, in interest rate increases, changes in technologies, sales seasons, and many other factors.

Forecasting example in accounting

From what has been learned before, we see that the forecasts must be exact figures that allow us to foresee actions and carry out effective planning. These forecasts must be clearly reflected in the accounting books, such as cash and bank books. Let’s look at an example of accounting forecast.

A client is about to close due to lack of activity in the market. There is a high probability that you will not make the corresponding payment to our company before closing. Imagining that the outstanding debt would be $ 1000, that amount would be a forecast that must be reflected and recorded in the accounting.

Although there is no certainty that the payment will not be made, the probability is very high and therefore a forecast must be created. Then, it will be reviewed if this forecast was actually met for take the appropriate actions with respect to assets and liabilities in accounting.

Undoubtedly, the forecasts are an aspect of great importance within the business accounting activity. They are an important part of the accounting information to make decisions within the company. And therefore, they are a fundamental factor in achieving the medium and long-range goals and objectives set by the company.

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