Principles Of Accounting(会计学原理)Chapter-09.ppt

* The direct write-off method does not attempt to match bad debts expense in the period that the sale occurred. As a result, this method cannot be used when preparing financial statements using generally accepted accounting principles unless there is an immaterial impact on the financial statements. As a result, most companies preparing financial statements using generally accepted accounting principles use the allowance method to account for bad debts. * The allowance method attempts to match Bad Debts Expense in the period with the related revenue. This method requires that an estimate of bad debts be made and recorded at the end of each period. This method has two advantages: First, it adheres to the matching principle because the Bad Debts Expense is recorded in the period of the sale, and Second, it reports accounts receivable on the balance sheet at the estimated amount of cash to be collected. Let’s see how the allowance method works. * Part I At the end of the period, a company estimates how much of its accounts receivable will not be collected. This estimate is based on past collection history and current economic information. Remember that when we make this estimate, we do not know specifically WHO will not pay us. If we knew WHO would not pay us, we would never have sold to them on credit in the first place—right? At the end of the period, TechCom estimates that $1,500 of its accounts receivable will not be collected. The total balance in accounts receivable is $20,000, and the company had total credit sales of $300,000 during the year. The entry requires a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts for the estimated amount. Why can’t we just credit Accounts Receivable in this entry? Remember, we are recording an estimate of uncollectible accounts and we do not know WHO specifically will not pay us. If we tried to credit Accounts Receivable, which customer’s subsidiary account would we use? The answer is we would no