Final answer:
The recording of the estimate of bad debt expense follows the expense recognition ('matching') principle. It is a recognition of the potential loss that the company may incur due to uncollectible receivables.
Step-by-step explanation:
The recording of the estimate of bad debt expense follows the expense recognition ('matching') principle. The bad debt expense is recorded when a company recognizes that some portion of its receivables will not be collected. This estimation is typically done through a provision for bad debts that is set aside in the financial statements.
For example, if a company estimates that 5% of its receivables will not be collected, it will record a bad debt expense equal to 5% of its total receivables. This expense is recorded on the income statement, which follows the matching principle of recognizing expenses in the same period as related revenues.
Recording the estimate of bad debt expense does not directly increase assets or net income. Instead, it is a recognition of the potential loss that the company may incur due to uncollectible receivables.