[Spartans92]

Hey guys,

So I just reviewed Bad debts expenses. But I am still having some issues understanding the relationship between the accounts. Hypothetically, if Bad debts were understated then would AR be overstated? Hence CA is higherr than it should be. Then the CL (expenses) would also be higher? How does this in turn affect the I/S? More income? Any clarification would be appreciated.

BEC- PASS

[Missy]

If bad debts were understated, net A/R would be overstated. Make a real life scenario and see how it plays out.

If I owe you $100 you have A/R of $100. If you think I will only pay $80, your bad debt expense should be $20 ($100-$80) and your net A/R should be $80 ($100-$20)

Now if you understate your bad debt expense at only $10, your net A/R becomes $90 ($100-10) and your current assets are overstated by $10.

If your bad debt expense should be $20 but you only report $10, your I/S is overstated by $10.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Spartans92]

Thanks mla. That makes much more sense when you put it into a case scenario. I keep trying to make up Journal entries but I still had a hard time. I am just very weak with financial accounting LOL. I assume theres no impact on CL. And as for income it is overstated at well because overstating AR.

BEC- PASS

[Missy]

Yup, think about the dialogue behind each financial statement section. C/L = what do I expect to pay in the next operating cycle?

You expect to receive less but don't anticipate paying someone else because of this so no effect on C/L.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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