However, it is otherwise an unacceptable practice. Small firms and large firms with small losses may use this approach due to its simplicity and on the basis of lack of materiality. For these reasons, this approach is not generally accepted. However, it has the potential for income manipulation by allowing management to determine when to record the expense.Īnother weakness of this approach is that the recognition of the expense is dependent upon observing its effects instead of matching it with its related revenues. The reliability of this approach is potentially high because it does not rely on estimates. Some have supported the point of view that it should not be recorded until it is known for certain that the debtor will not pay. When Does the Loss Occur?Īccountants also have debated the question of the time period in which to recognize the loss on non-collection. This view has been persuasive in the development of the generally accepted accounting principles (GAAP). The fact that the buyer fails to perform is properly described, they conclude, as an expense. They rely on the accrual approach, which calls for recognizing revenue when the seller performs. Most accounting theorists have endorsed the position that the loss arising from bad debt is an expense. The article also discusses the practical aspects of disclosing the impact of non-collection and the entries that are made for dealing with bad debts. In the scenario of recording uncollectible accounts and bad debts, the accountant's task is to consider three issues:Įach of these questions is discussed below. This risk influences both the measurement of income and the description of the receivables held by the seller. The risk associated with extending credit arises from the possibility that the creditor will not pay.
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