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

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Multiple Choice

Which of the following best describes the application of the expense recognition principle to bad debts?

Bad debt expense is recognized when cash is received from customers.

Bad debt expense is recognized only when an account is determined to be uncollectible.

Bad debt expense is not recognized if the company expects to collect most receivables.

Bad debt expense is recognized in the same period as the related sales revenue, even if the specific uncollectible accounts are not yet identified.

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Verified step by step guidance

Understand the expense recognition principle: This principle states that expenses should be recognized in the same period as the revenues they help generate. This ensures proper matching of expenses and revenues in financial statements.

Relate the principle to bad debts: Bad debts arise when customers fail to pay amounts owed. Since these debts are tied to sales revenue, the expense recognition principle requires that bad debt expense be recorded in the same period as the related sales revenue.

Consider the timing of recognition: Even if specific accounts that will become uncollectible are not yet identified, the company can estimate the amount of bad debt expense based on historical data or other methods, ensuring compliance with the matching principle.

Evaluate the incorrect options: Recognizing bad debt expense only when an account is determined to be uncollectible violates the matching principle, as it delays the recognition of the expense. Similarly, not recognizing bad debt expense because most receivables are expected to be collected ignores the need for proper estimation and matching.

Conclude with the correct application: The correct approach is to recognize bad debt expense in the same period as the related sales revenue, even if the specific uncollectible accounts are not yet identified. This ensures adherence to the expense recognition principle and accurate financial reporting.