Question

Ande co estimate u collectible accounts expense using the ratio of past actual losses from u collectible accounts to last net credit sales,adjusted for anticipated conditions. The practice follows the accounting concept of_______

Answer 1

The practice described involves estimating uncollectible accounts expense, which follows the 'matching principle' in accounting. This principle aligns expenses with the revenues they generate, a method also applied in banking and insurance to anticipate and account for losses.

Step-by-step explanation:

The practice of estimating uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to net credit sales, adjusted for anticipated conditions, follows the accounting concept of matching principle. This principle dictates that expenses should be reported in the same period as the revenues they help to generate. Banks and insurance companies use similar concepts to anticipate potential losses, such as loan defaults or insurance claims, and these anticipated losses are factored into their financial planning. In banking, a well-run bank will estimate a certain percentage of loan defaults as part of its expense calculations to ensure that its balance sheet reflects the anticipated level of risk associated with loan repayment. Similarly, insurance companies follow the fundamental law of insurance, requiring that premiums collected cover claims, operational costs, and profits over time. Both examples epitomize the application of the matching principle, ensuring that financial statements provide a realistic view of an entity's financial performance and position.