Question

Using the allowance method, is bad debt expense recognized in (a) the period in which sales related to the uncollectible accounts are made or (b) the period in which the sellers learn that the customer is unable to pay

Answer 1

A) the period in which sales related to the uncollectible accounts are made

Step-by-step explanation:

When a company uses the allowance method for recording bad debt, it first sets aside an estimate of the amount of bad debt expense, e.g. 5% of total sales.

Then as time passes and the accounting period finishes (monthly, quarterly or yearly), all the clients' accounts receivables that are identified as uncollectible are written off against the allowance for bad debt account. The accounts receivable is credited and the allowance for bad debt is debited. If the amount of bad debt was correctly estimated at the beginning of the accounting period, then this should not result in any further loss or expense since all the bad debts should have already been covered. This should basically be an adjustment entry only.

Answer 2

The answer is: a

Step-by-step explanation:

In accounting for financial transactions, there are generally accepted standards used in practice. These standards are based on accounting principles that are designed to result in more consistent and comparable financial statements. One of these principles is the matching principle, where revenues recognised are matched with expenses incurred to generate that revenue.

In line with this principle, revenues should be matched with expenses at the time which the transaction, in this case the sale, occurs. An estimate of the amount receivable that is deemed noncollectable at the time of the sale is recognised as a bad debt expense and an adjustment is made in the allowance for doubtful debts account* in the period which the sale occurs.

*this account increases on the credit side and effectively reduces the accounts receivable amount