Question

Accountants are frequently called on to choose between alternative accounting methods. Which of the following choices do you think is most true to the conservatism principle? Explain.

1. FIFO or LIFO

2. Net or Gross method of accounting for cash discounts allowed to customers.

3. Using an Allowance for Doubtful Accounts account or not.

Can you think of an end-of-period entry that would affect the Cash account in the general ledger?

Answer 1

1. When costs are rising LIFO method would be conservative, as more costs ae shown/ absorbed and less profit is shown in books of records. As in the same way, if costs are going down, the FIFO method would be more appropriate as older less costly items are sold first.

2. Net or Gross method of accounting: In evaluating the Gross & net method of accounting.. though the Gross method of accounting is easier whereas, in the net method, the purchase discount lost account is created if discounts are not utilized by the company. Not only the discounts taken are accounted but the discounts lost are also treated as an expense against gross profit.

3. Using Allowance for doubtful accounts is conservative as against Bad debts account. When a company is doubtful of the collection of revenue, it is better to create an estimate so as not to overstate the receivable position ad show a true profit. It will also satisfy the matching principle. Charging huge amounts as bad debt expense in one particular period will not show the true financial position of the company & comparative analysis of profits will provide a distorted picture of the company.

4. Cash on hand, can at Imprest account-the year-end entries that could affect cash account in GL.