Allowance - Income Statement and Balance Sheet Approach

Question 1

What two approaches are allowed when estimating the bad debt expense using the year-end adjusting entry?

Answer 1

The income statement and balance sheet approaches

Question 2

What is the income statement approach to estimating bad debt expense at year-end?

Answer 2

1. ) Based on observations of prior years, a company may estimate bad debt expense as a percentage of credit sales
2. ) If this approach is used, the bad debt expense is equal to a percentage of the credit sales during a given accounting period. No consideration is given to existing balance in the allowance account.

Question 3

What is the balance sheet approach to estimating bad debt expense at year-end?

Answer 3

1. ) Company estimates by analyzing ending A/R
2. ) This analysis can result in the application of a percentage to ending receivables, or they can analyze them by aging the ending A/R

Question 4

What is the aging process when analyzing ending A/R?

Answer 4

Involves grouping receivables by the amount of time they have been outstanding. Once the aging schedule is completed, the company then applies the various estimates of inconvertibility to each group of receivables.

Question 5

What purpose does analyzing ending accounts receivable serve?

Answer 5

The determination of the needed or desired balance in the allowance account.

Question 6

Are there any differences between U.S. GAAP and IFRS when dealing with allowance for uncollectible accounts?

Answer 6

No, no differences