Answered: Companies that sell inventory on the…

Name: Companies that sell inventory on the account have bad debts to deal wi
Uploaded: 2024-03-04T10:43:15.000Z
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Description: Companies that sell inventory on the account have bad debts to deal with. Explain how we can account for Bad Debts Expense and comply with GAAP requirements.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Companies that sell inventory on the account have bad debts to deal with. Explain how we can account for Bad Debts Expense and comply with GAAP requirements.

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Meaning of Bad Debts: Bad debts expense is related to a company's current asset accounts receivable. Bad debts expense is also referred to as uncollectible accounts expense or doubtful accounts expense. Bad debts expense results because a company delivered goods or services on credit and the customer did not pay the amount owed.

Bad debt expense is an unfortunate cost of doing business with customers on credit, as there is always a default risk inherent to extending credit.
The direct write-off method records the exact amount of uncollectible accounts as they are specifically identified.
In order to comply with the matching principle, bad debt expense must be estimated using the allowance method in the same period in which the sale occurs.
There are two main ways to estimate an allowance for bad debts: the percentage sales method and the accounts receivable aging method.

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