If a company does not know at the end of a year exactly how much of its accounts receivable will not be collected, it is not allowed under GAAP to estimate the bad debt expense.

Question

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Under GAAP, companies are required to estimate the bad debt expense at the end of the year, based on historical trends and current economic conditions. This estimation process is necessary to accurately reflect the value of accounts receivable on the company's financial statements.

If a Company Does Not Know at the End of a Year