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Question

William Commerce, owner of Commerce Commercials, has some questions for you as the office manager of his company.

For your initial post, draft a professional email to William Commerce to address the following questions:

Why do we as a company have to estimate and record anticipated uncollectible accounts? Can't we just record the revenues earned when the cash comes in? Why would we even extend credit to customers who don't pay their debts? What are these Generally Accepted Accounting Principles anyway, and which ones require this recording of revenues when earned and expenses when incurred, and the estimating of the bad debts?

Also, we don't currently have a standard policy for credit management in our company. Please formulate a policy for granting, managing, and collection of accounts receivable for Commerce Commercials. This policy will go into the company handbook and on credit applications given to new customers seeking the option to make purchases on credit.


The letter to William Commerce:

Good afternoon Mr. Commerce,

I see that you have some concerning questions about the business. I'll do the best to answer them for you. When you sell merchandise on credit you take a chance that the account may not be paid in full by the customer. You don't always know which customers aren't going to pay their debt so credit is extended so that we can increase sales. Because you don't know exactly which accounts receivable will be uncollectible you have to estimate what you think you will not be able to collect. In order to keep the company's records balanced you must record it as an allowance for uncollectible. 

As far as recording the revenue earned, that must be recorded when the revenue is earned and not necessarily when the cash comes in. It should be done this way because of the Revenue of recognition principle which is a Generally Accepted Accounting Principle (GAAP). The GAAP is a set of common accounting principles issued by the Financial Accounting Standards Board (FASB). They were created to keep things standardized when reporting finances. The GAAP gives three ways of estimating the bad debts. The percent of credit sales method, the aging of accounts receivable method, and the percentage of ending accounts receivable method.

I hope that this information was helpful to you. If you have any further questions, please let me know. Also, I'll start working on the policy for credit management.

 

Sincerely,

Bryan Rogers


Your response post should be in the form of a response to your classmate as William Commerce, asking for clarification and making any adjustments to their policy formulation you see appropriate.

Top Answer

Good Morning Mr. Rogers, I have been contemplating on your response regarding the revenue recognition principle. Does it mean... View the full answer

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