Question

Sky-High, Inc. pays company management bonuses at the end of each year if net income is equal to or greater than a specific percentage of net sales. However, in the past five years, that metric has not been reached. During these past five years, Sky-High has been lowering the requirements for granting credit to customers so that more sales can be generated. However, making those credit changes has caused the company’s uncollectible accounts percentage to rise substantially; for last year, it was 8.5% of the year’s net sales.

Before the past five years, Sky-High had been estimating uncollectible accounts at 3% of net sales. That rate had been effective in that no material adjustments needed to be made at any year-end. The CEO has asked you (the company accountant) to return to using that 3% percentage. His rationale is that the economy is strengthening and so uncollectible accounts should begin to decrease. If the 3% is used, all company management will receive a small bonus for this first time in five years.

1. Would making such a change in the uncollectible accounts estimate violate any basic accounting concepts? Explain your yes or no answer.

Answer 1

Yes, a change in estimate of uncollectible accounts is allowed under generally accepted accounting principles for estimating bad debts expense for the year if some new information is available that requires to change percentage of uncollectible to represent more accurate bad debt allowance.

Any adjustment in bookkeeping gauge is accounted as forthcoming alteration. No review modification is required for change in appraisals according to sound accounting guidelines.

Anyway simply changing the rate to control the financials to get wanted outcomes is unscrupulous as money related proclamations ought to give precise budgetary data to clients.