Question

Question: Part 1: Receivables Aging A heavy duty trucks parts re-manufacturing company has hired you as a c...

Part 1: Receivables Aging

A heavy duty trucks parts re-manufacturing company has hired you as a consultant to review their current accounting procedures and to provide them with a report addressing changes that you feel need to be made for them to improve their internal controls, and the accounting and reporting processes.

The company president does not understand the recommendations that you have offered to improve the accounting and reporting of uncollectible accounts. The company currently uses the direct write-off method and you have suggested that they use the accounts receivable aging method to estimate their future bad debts. The president stated:

"In my opinion, financial statements should be based on what actually took place rather than what we think will happen in the future. In other words, I think they should be objective rather than subjective. After all, our bad debt expense has been almost the same amount for each of the past three years and is thus very predictable. By using the direct write-off method, we are reporting exactly what took place. Why do we need to change?"

Draft a 1 page memorandum in Word responding to the concerns and objections of the company president, and in support of your recommendation for the company to adopt the receivable aging method going forward.

Additional Requirements

Written communication: Your memorandum should be clear, well-organized, and support a central idea, with no technical writing errors, as expected of a business professional.

References: References and citations should be formatted using current APA guidelines

Answer 1

To: The President, Truck Manufacturing Company.

From: Name of the student (Accountant)

Subject: Justification of using aging of accounts receivables for recording uncollectible amounts.

Respected Sir,

This memo is in reference with the above subject matter. The use of direct method to provide for bad debts in the books of accounts against the accounts receivables is not an appropriate method to prepare the income statement or profit and loss accounts of any company. The fundamental concept of matching expenditures against revenue is defeated with the use of direct written off method as the company has to wait for the actual bad debt to occur in later periods to provide for the amount of bad debts in the books of accounts. Thus, suppose the actual bad debt occurred after a year from the sales. Thus, the bad debt will be recorded in the year of occurrence whereas in the previous year the company has recognized the entre revenue thus, the income statement will not show the actual financial performance if the direct bad debt written off method is used. Whereas the aging method of accounts receivable to provide for uncollectible amounts is a scientifically advanced method to provide for the uncollectible amount in the books of account to match the expenditures against revenue in the year of earning revenue. Apart from the aging of accounts receivable is relatively a safe method to determine the possible amount of bad debts as the debtors which are outstanding for more than the normal period will be considered for the determination of uncollectible amounts to make provision in the books of accounts against the revenue of the company.

Thus, as a result of use of aging of accounts receivables to determine the amount of provision to be made in the books of accounts will help the company to disclose its actual financial performance by making necessary provisions in the books of accounts for the expected loss from bad debts in the year of earning revenue.

Dated: 20^th March, 2018

Regards and Thanking you,