![]() ![]() In the retail industry, holding inventory for too long can lead to inventory write-downs due to seasonality. Inventory may lose value due to damage, spoilage, obsolescence, or lower demand resulting in discounted items. If the current replacement value is less than the historical cost, the items are adjusted down to account for the lost value in inventory. This means that any items remaining are compared to the current replacement value. At year end, however, items remaining in ending inventory are measured at the lower of cost or market. Inventory is recorded based on the historical cost principle. ![]() Therefore, uncollectible receivables reduces both the accounts receivable asset on the balance sheet and the net earnings on the income statement for the period.Įstimates for Bad Debts Affects the Balance Sheet and Income Statement Estimates for uncollectible receivables reduces both the account receivable asset on the balance sheet, and net earnings on the income statement.Ĭompanies use the accounts receivable turnover ratio to measure whether or not the company is effectively collecting payments for sales on credit. He records the same amount in an expense account to show the bad debt expense on the income statement associated with uncollectible receivables. This amount is subtracted from the account receivable balance to arrive at the reportable amount of receivables on the balance sheet. Therefore, companies report accounts receivable using the historical cost principle, adjusted to the net realizable value, or the accounts receivable balance less estimates for uncollectible amounts.Īs we have seen, Sunny estimated 1% of his receivables as uncollectible. ![]() GAAP accounting requires that companies estimate and report an amount for uncollected accounts receivable. As the accounts receivable balance ages for any customers, it becomes more unlikely that the company will collect the amount owed. The current practice of applying different rules to different assets, liabilities, and equities is what US GAAP Accounting calls the "Mixed Matrix Model."įor example, companies record accounts receivable based on the historical cost principle, which shows the amount originally owed to the company by customers who purchased products or services on credit. The Accounting Medley, or Mixed Matrix Model This currently makes financial reporting somewhere in between reliable and relevant. Asset values on the balance sheet follow a mixed set of accounting rules and regulations. Reporting at historical cost is only the starting point. are required to measure financial information using the historical cost principle. The Historical Cost Principle Accountants in the U.S. ![]()
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