The expense recognition (matching) principle, as applied to bad debts, requires:
A) The use of the direct write-off method for bad debts.
B) That bad debts not be written off.
C) That bad debts be disclosed in the financial statements.
D) That expenses be ignored if their effect on the financial statements is unimportant to users' business decisions.
E) The use of the allowance method of accounting for bad debts.

Question

Quizplus · Accepted Answer

The expense recognition (matching) principle requires the use of the allowance method of accounting for bad debts. Under this method, a company estimates the amount of accounts receivable that will not be collected and records this as an allowance for doubtful accounts. This allowance is then used to offset the accounts receivable balance on the balance sheet, and any actual bad debts that are later written off are recorded as a reduction of the allowance and an increase in bad debt expense on the income statement. This method better matches expenses with revenues and provides a more accurate picture of the company's financial position.

The Expense Recognition (Matching) Principle, as Applied to Bad Debts