Topic: Allowance Account

• Jim:

• This year has been great for business with fantastic customers. This should definitely help our net income and bonuses for the year!

• Nancy:

• Exactly what do you mean, Jim?

• Jim:

• Well, with great customers who should pay their bills, we will not need to establish an allowance for doubtful accounts for our accounts receivable.

• Nancy:

• Wait a minute, Jim. In my accounting classes, we always recorded bad debts expense and the related allowance account. Therefore, I believe we need to estimate our bad debts and prepare an adjusting entry at year-end.

• Jim:

• But with good customers, I dont think it is required to establish an allowance account. Without recording bad debts expense, our net income should increase by $250,000, which definitely helps our year-end bonuses!

• Nancy:

• We need to check whether this is acceptable under GAAP.

Required: Use the FASB Codification to determine whether GAAP requires the establishment of an allowance account for all accounts receivable. What specific Codification references support your conclusion?