Firms should ideally recognise the expense related to uncollectable accounts:
A) during the period of sale.
B) when accounts are written off.
C) when customers declare bankruptcy.
D) never; there is no expense related to uncollectable accounts.

Question

Quizplus · Accepted Answer

Firms should ideally recognize the expense related to uncollectable accounts during the period of sale as credit sales generate revenue, but there is a risk of bad debts involved. Therefore, firms need to account for an estimated amount of bad debts and recognize the expense during the period of sale to provide a more accurate picture of the true profitability of the business. Waiting until customers actually default or declare bankruptcy may result in understating the bad debt expense and overstatement of profits in the interim period. Writing off accounts is only the accounting treatment for uncollectible accounts, but the expense recognition should happen earlier during the period of sale. The option D is incorrect because uncollectable accounts create an expense for the company in the form of bad debts, which should be recognized in the accounting period when the sale occurred.

Firms Should Ideally Recognise the Expense Related to Uncollectable Accounts