Matching Bad Debt Expenses with Revenues A general rule of accounting is that expenses should be associated with the revenues that they helped to produce. This is termed the matching principle. Consequently, bad debts should be recorded in the same accounting period in which the sales that caused the bad debts were recorded. This rule is difficult to apply for accounts receivable because the bad debt may not occur until a later accounting period. In fact, it may be a year or more before all possible methods of collecting a delinquent account receivable have been exhausted. A method for overcoming this problem is to estimate the amount of bad debt expense associated with credit sales in each accounting period. This amount is then recorded as the amount of bad debt expense for the accounting period. On the other hand, many small companies do not wish to incur the additional expense of estimating bad debts and use the direct writeoff method of accounting for bad debts. Recording Bad Debts A company using the direct write-off method of recording bad debts does not record a bad debt expense until it has been determined that an individual customer's account receivable is uncollectible. At that time, Bad Debt Expense is debited and Accounts Receivable is credited for the amount of the uncollectible account receivable. For example, assume that during 1993 the Franklyn Company determines that Reuben Amaro's $200 account receivable is uncollectible. Franklyn will record the following general journal entry: The direct write-off method is criticized by many accountants because it tends to match expenses from a prior period with current period revenues. That is, since it usually takes a substantial amount of time to determine that an account receivable is uncollectible, the write-off of the account frequently occurs one or two accounting periods after the original sale that created the account receivable. Companies that do not use the direct write-off method must estimate bad debt expense during each accounting period. For example, assume the Golden Company made $50,000 of credit sales during 1992, its first year of operation, and the balance in the Accounts Receivable account at the end of the year amounted to $10,000. It was estimated that approximately $1,000 of these accounts receivable were uncollecti-ble. The following adjusting general journal entry is made on December 31, 1992, to record bad debt expense: The Allowance for Uncollectible Accounts is a contra account that is deducted from the Accounts Receivable account on the balance sheet. For this reason the estimated bad debts are credited to the Allowance for Uncollectible Accounts until it is known which accounts are actually uncollectible. Bad Debt Expense appears on the income statement for the same accounting period in which the credit sales were recorded (matching principle). The Allowance for Uncollectible Accounts appears on the December 31, 1992, balance sheet as a contra account that is deducted from the Accounts Receivable account in the following manner: The difference between the balances contained in Accounts Receivable and Allowance for Uncollectible Accounts is the amount ultimately expected to be collected from the outstanding accounts receivable. This difference ($9,000 for the Golden Company) is termed the expected realizable value of the accounts receivable.