Question

Topic: Allowance Account

Jim: This year has been great for business with fantastic customers. This should definitely help our net income and bonuses for the year! Nancy: Exactly what do you mean, Jim? Jim: Well, with great customers who should pay their bills, we will not need to establish an allowance for doubtful accounts for our accounts receivable. Nancy: Wait a minute, Jim. In my accounting classes, we always recorded bad debts expense and the related allowance account. Therefore, I believe we need to estimate our bad debts and prepare an adjusting entry at year-end. Jim: But with good customers, I don’t think it is required to establish an allowance account. Without recording bad debts expense, our net income should increase by $250,000, which definitely helps our year-end bonuses! Nancy: We need to check whether this is acceptable under GAAP.

Required: Use the FASB Codification to determine whether GAAP requires the establishment of an allowance account for all accounts receivable.

What specific Codification references support your conclusion?

Answer 1

Reference -FASB ASC 450-25-2

Accounting estimates are significant in the preparation of financial statements.They require judgement of the management basing on the best estimates and past experiences.Under US GAAP allowance for doubtful is one of the important estimate made by the management.

Under US GAAP states that the condition under which receivables exist usually some degree of uncertainty in collections,in which contigency exists.The loss to be reflected in income statement and balance sheet for fair presentation.

There are mainly 2 methods in estimates

1.Based on past experiences.

2.By performing aging method

conclusion :The US GAAP says that there is madatory to estimate allowance for receivables for fair presentation of financial statements.The estimation should be based on current industry factors customers credibility etc.. In the present case JIM opinion is wrong,they need to provide allownace account eventhough they believes their customers are good enough to pay the bills.