When a company uses the allowance method of accounting for bad debts, its reported expense in any year is affected both by the events of that year, and also by over- or underestimates of bad debts in the previous year.

Question

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When using the allowance method, the company must estimate the amount of bad debts that will occur in the future, which can result in overestimating or underestimating bad debts from previous years. This can impact the reported expense for the current year.

When a Company Uses the Allowance Method of Accounting for Bad