Question

In terms of managing Account Receivable we covered two major approaches in class. If your objective is to minimize taxable income state your choice, how it will achieve minimizing the taxable income?

Answer 1

Two methods of recording accounts receivable are:
1. Record receivables and sales gross.
2. Record receivables and sales net.

The net method is desirable from a theoretical standpoint because it values the receivable at its net realizable value. In addition, recording the sales at net provides a better assessment of the revenue that was recognized from the sale of the product. If the purchasing company fails to take the discount, then the company should reflect this amount as income. The gross method for receivables and sales is used in practice normally because it is expedient and its use does not generally have any significant effect on the presentation of the financial statements.

if our objective to minimize taxable income then my choice is record receivales and sales net. This method is appropriate for recording actual income because if we have incurred any expenses like cash discount, allowances and sales return then we should deduct from it and claim these as expenses.

And if we will take gross sale then our groos profit will be over stated. Taxable income will increase if we record gross sales.