The allowance for uncollectible accounts is based on all of the following except:
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A. B. C. D.B
The allowance should be based on expectations both internal and external to the corporation. The effect on the bottom line should not be used as a method of determining the uncollectible amounts.
The allowance for uncollectible accounts, also known as the provision for doubtful debts or bad debt reserve, is an estimate made by a company to account for potential losses from customers who may not be able to pay their outstanding debts. It is a common practice in accounting to establish this allowance to ensure that financial statements accurately reflect the company's financial position and to comply with the principle of conservatism.
When determining the allowance for uncollectible accounts, several factors are typically considered to make a reasonable estimate. These factors include historical experience, profitability expectancy, customer fortunes, and industry expectations. However, the question asks for an exception, meaning it is looking for a factor that is not considered when determining the allowance.
A. Experience: Historical experience is an essential factor in estimating the allowance for uncollectible accounts. It involves analyzing past data on customer payment patterns, default rates, and collection efforts to determine the likelihood of non-payment. By considering the company's historical experience with collecting payments, an estimate can be made for potential losses.
B. Profitability expectancy: Profitability expectancy refers to the assessment of a customer's ability to generate profits for the company. While it may influence credit decisions and risk assessments, it is not directly relevant to estimating the allowance for uncollectible accounts. The allowance is primarily concerned with the risk of non-payment, rather than the profitability of individual customers.
C. Customer fortunes: Customer fortunes, or the financial condition of customers, is an important factor in estimating the allowance for uncollectible accounts. A company may assess the financial stability and creditworthiness of its customers to determine the likelihood of default. Customers facing financial difficulties may have a higher risk of non-payment, which should be considered when estimating the allowance.
D. Industry expectations: Industry expectations play a role in estimating the allowance for uncollectible accounts. Different industries may have varying payment patterns, default rates, or economic factors that affect the ability of customers to pay. By considering industry-specific information, a company can make a more accurate estimate of potential losses.
Therefore, the exception to the factors considered when determining the allowance for uncollectible accounts is B. Profitability expectancy. While profitability expectancy may influence credit decisions and risk assessments, it is not directly related to estimating the allowance for uncollectible accounts, which focuses on the risk of non-payment.