Question

Which of the following would NOT be an acceptable method to account for bad debts if accounts receivable is a material aspect of a company’s operations?

		wait until the account becomes uncollectible, and then recognize bad debt expense
		estimate a percent of future uncollectible accounts at the time of each credit sale, and assign this amount to an allowance for uncollectible accounts
		periodically conduct an aging of accounts receivable to determine the size of the allowance for uncollectible accounts.

Answer 1

Allowance for bad and doubtful debts is dealt by doth IFRS and also US GAAP

Let us discuss how the treatment under both the methods -

Under US GAAP - Under US GAAP Allwance for bad and doubtful debts will be recognised is recognised when the loss is probable and it can be estimated on a reliable this is in line with the concept of prudence .

Under IFRS - Under IFRS Debtors were classified as the financial Asset , Financial Assets were impaired depending on the change in the estimated future cash inflows . Expected credit loss is nothing but the amount of debors that is uncollectible depending upon the their ageing.

More over as per prudence any anticipated future losses has to be recognised immediately.

Hence in the given options waiting till the debt completely becomes doubtful violates all the three accepted accounting standards and also the prudence concept

Hence the first option is not the acceptable once