Financial Accounting Discussion Questions

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Category:
Accounting
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Question description

DQ#1 (no min word count, no apa format needed)

Let's say you are just starting a business and plan to allow purchases of inventory and services to be made on account.  Knowing what you've learned in this material and have discussed in your response, how would you handle the inevitable bad debts that occur in your new business?

***This is what you answered earlier this week***

1.Under the direct write-off method, bad debts are expensed once they are ascertained that they are uncollectible. It is a general accounting technique that is used to account for bad debts once they are determined to be uncollectible. There are corresponding journal entries once bad debts become uncollectible. The bad debts are debited while the accounts receivable account is credited. Under the direct write-off method, accountants do not make use of 

the allowance or reserve account. Although the method is preferred for small businesses, it has disadvantages. It results to the violation of the matching principle under the Accepted Accounting Principles. The violation is due to the expensing of bad debts that are usually related to the previous accounting period. 

Percentage of sales method for calculating doubtful debts should be used instead of the percentage of receivables method since it follows the Generally Accepted Accounting Principles. The GAAP requires that a receivables to be recognized at the net realizable value. Therefore, using the percentage of sales method, the estimation of the bad debts is usually in accordance with the matching principle which requires that bad debts to be recorded at the same accounting period that is associated with it. 


DQ#2 

Let's say you are just starting a business and plan to allow purchases of inventory and services to be made on account.  Knowing what you've learned in this material and have discussed in your response, how would you handle the inevitable bad debts that occur in your new business?

***This is in response to what you answered earlier this week for me- its listed below***

Under the direct write-off method, bad debts are expensed once they are ascertained that they are uncollectible. It is a general accounting technique that is used to account for bad debts once they are determined to be uncollectible. There are corresponding journal entries once bad debts become uncollectible. The bad debts are debited while the accounts receivable account is credited. Under the direct write-off method, accountants do not make use of the allowance or reserve account. Although the method is preferred for small businesses, it has disadvantages. It results to the violation of the matching principle under the Accepted Accounting Principles. The violation is due to the expensing of bad debts that are usually related to the previous accounting period. 

Percentage of sales method for calculating doubtful debts should be used instead of the percentage of receivables method since it follows the Generally Accepted Accounting Principles. The GAAP requires that a receivables to be recognized at the net realizable value. Therefore, using the percentage of sales method, the estimation of the bad debts is usually in accordance with the matching principle which requires that bad debts to be recorded at the same accounting period that is associated with it. 



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