COMMERCE 1AA3 Lecture Notes - Lecture 10: Matching Principle, Accounts Receivable, Financial Statement
17 Oct 2016
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However, this method does not follow the matching principle, because the revenue is not recorded in the same time as the expense (since the write - off is usually much later). This method also violates the faithful representation, since the default amount should have been assumed at the sale. However, this method can be used because the materiality principle allows for this if the amount that is written-off is insignificant. Allowance account (can also be called allowance for bad debts, etc ) Bad debt expense, and reversal of write-off increases the balance. If allowance has a debit beginning balance, then previous period write-off was greater than estimated. On the balance sheet, these accounts are shown as the following. When an account is written off, the accounts receivable is reduced, and the contra asset is reduced. This transaction has no effect on financial statements. This method calculates the amount that should be added to the allowance account xxx.
