If a company fails to record estimated bad debts expense,

Question

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If a company fails to record estimated bad debts expense, profit will be overstated because accounts receivable will be overstated. This is because bad debts expense is the cost of the company doing business on credit, meaning that some customers will ultimately not pay their bills. By failing to take this into account, the company is essentially assuming that all of its customers will pay on time, leading to an overstated profit figure.

If a Company Fails to Record Estimated Bad Debts Expense