Question

The balance of allowance for uncollectible accounts (AUA) is based on estimation. Do you think it gives managers opportunities to manage earnings on income statement?

Answer 1

Yes, the balance of allowance for uncollectible accounts gives managers opportunities to manage earnings on income statement. They can use various methods to show lower expenses and higher profits.

In direct write-off method it is assumed there is no bad debt reported on the income statement, only once account receivable is written off then only it will be reported in the income statement. Similarly, company can show AUA account in the balance sheet which shows company expectation of some portion not being collected. This way managers can manage earnings on income statement.