Why GAAP stresses the importance of estimating your uncollectibel accounts and recording an allowance for uncollectible...

Why GAAP stresses the importance of estimating your uncollectibel accounts and recording an allowance for uncollectible accounts?

Why the users of the financial statements would care about an estimate of uncollectible accounts?

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Expert Solution

The purpose of any GAAP is to present true and fair view of the financial position and state of affairs of the organisation. The process of estimating the amount of uncollectibles is also one example of it. By accounting for uncollectibles the organisatio would be able to assess what portion of debtors are likely to recovered and whether the remaining balance represent a justified and reasonable sum which will be recovered. The management would also be interested in knowing the amount of uncollectibles which would directly impact the net profits and any incentice bonus/commissions payable to them based on their performance. Another aspect is that the shareholders would be interested in knowing the true profits of the organisation and whether their investments is turning fruitful or not. By not accounting for uncollectibles the net results would become unreasonably inflated when infact those net results doesn't represent true financial position. Also it has been stated innumerously in the accounting concepts that prudence or conservatism is necessary during accounting. by providing for expected lossed against the income received/receivable the firm shows a reasonable unscathed position.

ekkarill92 answered 2 years ago

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