Question

If a company changes the method it uses to compute the allowance for uncollectible accounts receivable because more recent information has become available, how is this change in method accounted for?

Answer 1

When a company changes its method for computing the allowance for uncollectible accounts receivable, it is treated as a change in accounting estimate. The effect of the change is recorded in the current and future financial periods, and the nature of the change is disclosed in the financial statement notes without adjusting past financial statements.

Step-by-step explanation:

If a company changes the method it uses to compute the allowance for uncollectible accounts receivable due to more recent information, this change is accounted for as a change in accounting estimate. According to Generally Accepted Accounting Principles (GAAP), a change in estimate is reflected in the financial statements in the period of change and future periods if the change affects both. This is distinct from a change in accounting principle, which requires a retrospective adjustment to previous financial statements.

Here's how the change should be accounted for:

• Disclose the nature and reason for the change in the accounting estimate in the notes to the financial statements.
• Record the effect of the change in the current period and any future periods affected by the change.
• Do not adjust the financial statements of prior periods as this change is not applied retrospectively.

It is important for the company to be transparent about such changes so that stakeholders understand their impact on the financial statements.