Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Net Accounts Receivable: Allowance for Doubtful Accounts

Financial Accounting

7. Receivables and Investments

Net Accounts Receivable: Allowance for Doubtful Accounts

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Multiple Choice

Which method of estimating bad debts is required by GAAP when the amount of bad debt is material?

Direct write-off method

Allowance method

Percentage of sales method

Aging of inventory method

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Verified step by step guidance

Understand the concept of bad debts: Bad debts are accounts receivable that are unlikely to be collected. Companies must estimate these amounts to comply with accounting principles.

Learn about the direct write-off method: This method records bad debts only when they are confirmed as uncollectible. However, it does not comply with GAAP when bad debts are material because it violates the matching principle.

Understand the allowance method: This method estimates bad debts in advance and creates an allowance for doubtful accounts. It complies with GAAP because it matches expenses with revenues in the same period.

Explore the percentage of sales method: This is a type of allowance method where bad debts are estimated as a percentage of total sales. It is commonly used but is not the only approach under the allowance method.

Clarify the aging of accounts receivable method: This is another type of allowance method where bad debts are estimated based on the age of receivables. Older receivables are more likely to be uncollectible. GAAP requires the allowance method when bad debts are material, and either percentage of sales or aging of accounts receivable can be used within this framework.