How does the matching principle apply to bad debt expense?

In order to comply with the matching principle, bad debt expense must be estimated using the allowance method in the same period in which the sale occurs. There are two main ways to estimate an allowance for bad debts: the percentage sales method and the accounts receivable aging method.

What method of recording bad debts is more inclined towards the matching principle?

The allowance method
The allowance method is the more widely used method because it satisfies the matching principle. The allowance method estimates bad debt during a period, based on certain computational approaches. The calculation matches bad debt with related sales during the period.

What methods have you used for estimating bad debt?

The two methods used in estimating bad debt expense are 1) Percentage of sales and 2) Percentage of receivables.

• Percentage of Sales. Percentage of sales involves determining what percentage of net credit sales or total credit sales is uncollectible.
• Percentage of Receivables.

What factors affect the bad debt expense estimate?

How to Estimate Bad Debt Expense

• Allowance. Your company’s accounts receivable consists of bills owed by your customers.
• Percentage of Outstanding Accounts.
• Aging Analysis.
• Percentage of Credit Sales.

How is bad debt expense calculated in accountinguide?

Likewise, the calculation of bad debt expense this way gives a better result of matching expenses with sales revenue. Under the percentage of sales basis, the company calculates bad debt expense by estimating how much sales revenue during the year will be uncollectible. For example, the company ABC Ltd. had USD 95,000 credit sales during the year.

How does the direct write off method work for bad debt?

The direct write-off method records the exact amount of uncollectible accounts as they are specifically identified. In order to comply with the matching principle, bad debt expense must be estimated using the allowance method in the same period in which the sale occurs.

What are the GAAP rules for bad debt?

GAAP Rules for Bad Debt. Under accrual accounting, GAAP requires that revenue be recognized at the time the sale is made. GAAP also requires that bad debt be recognized and deducted from revenue during the same time period the revenue is generated.

How is the allowance method used to estimate bad debt?

The allowance method estimates bad debt during a period, based on certain computational approaches. The calculation matches bad debt with related sales during the period. The estimation is made from past experience and industry standards. When the estimation is recorded at the end of a period, the following entry occurs.