An accounting procedure that (1) estimates and reports bad debts expense from credit sales during the period of the sales and (2) reports accounts receivable at the amount of cash to be collected is the:
A)Allowance method of accounting for bad debts.
B)Aging of notes receivable.
C)Adjustment method for uncollectible debts.
D)Direct write-off method of accounting for bad debts.
E)Cash basis method of accounting for bad debts.

Question

Quizplus · Accepted Answer

The allowance method of accounting for bad debts meets the given criteria of estimating and reporting bad debts expense based on credit sales during the period, as well as reporting accounts receivable at the estimated amount to be collected. This is achieved through establishing an allowance for doubtful accounts, which is based on a percentage of credit sales or an analysis of the aging of accounts receivable. The direct write-off method does not estimate bad debts expense and violates the matching principle, while the aging of notes receivable and adjustment method for uncollectible debts are not relevant to the criteria given. The cash basis method of accounting for bad debts is not in accordance with Generally Accepted Accounting Principles (GAAP) and does not consider the matching principle.

An Accounting Procedure That (1) Estimates and Reports Bad Debts