we learned about interest expense on notes payable. Interest expense is an actual expense. we learned...

we learned about interest expense on notes payable. Interest expense is an actual expense.

we learned about bad debt expense. Bad debt expense is an estimated expense.

1. What is the difference between an actual expense and an estimated expense?

2. Why do we have to record bad debt expense, which is an estimated expense?

Solutions

Expert Solution

Difference between Actual cost and Estimate cost:

Actual cost:

Actual cost means the actual expenditure which are incurred for a period for an activity

We will know the actual interest which we are suppose to pay on a monthly basis which is an example of actual cost

Estimated cost:

We will know the actual interest which we are suppose to pay on a monthly basis which is an example of actual cost.

Bad expenses will be the best example of estimated cost. Debts which are impossible to collect are bad debts.

In simple terms if we go to car shop for repair mechanic estimated the cost to be around $500 whereas after the repairing is done the actual cost was $400.

Actual Cost	Estimated cost
It is the actual realised cost and not based on estimates	It is the estimated or forecasted cost and it is based on estimates

2) Bad Debts:

Bad debts are uncollectable debts which are impossible to collect.If it is definitely known that amount recoverable from a customer can not be realized at all,it should be treated as a business loss and should be adjusted against profit. In short, the amount of bad debtshould be transferred to Profit and Loss Account for the current year to confirm the principles of matching.

Companies have to take bad debts into consideration in its financial statements to limit overstatement of potential income or understatement of potential expenses.

ekkarill92 answered 1 year ago

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