Question
As accounts uncollectable are bad debts, circumstances arise when a customer cannot pay a firm for goods or services. The firm would mark the sale
As accounts uncollectable are bad debts, circumstances arise when a customer cannot pay a firm for goods or services. The firm would mark the sale in accounts receivable, but the credit used on the sale may take somewhere between 30-90 days for delivery. Following this, the amount may be assigned under different categories if unpaid. The firm could then debit this through crediting allowances for doubtful accounts.There are some situations in which businesses deal with these situations at a higher frequency then other firms. Maybe they deal with more high risk customers, have strict credit rules or other similar situations. It seems to me that this statement holds true in most all cases. However, there are tax related reasons where this can be a benefit. Taking the debt into account for the firm's taxable income at the end of the year can reduce a firms tax burden. This is not something to rely on and, if possible, customer selection and encouraging positive and long lasting customer relations would be better then tax breaks on lost income.
References
Young, S. D., Cohen, J., & Bens, D. A. (2019).Corporate Financial Reporting and
analysis(4th ed.). Wiley.
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