Question

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

Answer 1

Answer:

The use of the allowance method of accounting for bad debts.

Explanation:

We use the allowance method to match the expected ad debt with the sales or account receivables which generates.

As sales of a givne month can be declared uncollectible after several month using a direct method we are putting the burden of the uncollectible in another accounting period while leaving the one which did that sale untouched.

The allowance makesthe expense in the same time period thus, it follows the recognition principle.

Answer 2

Answer:

The use of the allowance method of accounting for bad debts.

Explanation:

The matching principle is one of the cornerstones of accrual accounting, since t states that when revenue is recorded, you must recognize all related expenses with it. E.g. you cannot only record sales revenue, you must also record COGS. Regarding bad debt expense, the matching principle states that the provision for bad debts (allowance for doubtful accounts), must be recorded in the same accounting period.

So the revenues generated by credit sales have to be matched to both COGS and a provision for uncollectible accounts or bad debt. US GAAP establishes that estimates for bad debt should be recorded in the allowance for doubtful accounts, although the estimation method is not mandatory.