Think about it like the squirrel socking away nuts in good times, knowing that bad times are always around the corner. Now mash up this concept with one of the precepts of GAAP, which is to always be conservative when stating profits.
Companies often purposely overstate expenses to make profits look slightly less awesome in good times, so that when the baddies hit, the downside isn't so awful. Investors appreciate the relative stability of this exercise, and accountants have gotten creative through the years with myriad methods of overstating expenses, from pre-ordering inventory, to overstating the allowance for bed debts, to fully funding (and then some) the employee pension fund. There has almost never been an action against a company for being too conservative in their accounting.
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Finance: What are Aging Receivables/an A...70 Views
Finance a la shmoop what are aging receivables and an allowance for doubtful accounts
A lot of people don't realize this but that was the original title of Moby [Book title changes to Moby Dick]
Dick yeah all right My aching receivables that's your
balance sheet talking well wine is about the only thing that gets better with age [Wine poured into a glass]
and even it has its limits there yeah aliens go ahead and pour yourself a
glass all right when receivables a balance sheet item
that lives right here get old they - generally speaking get bad note how much
higher the probability of non collection called deadbeat-ism gets as the age of
the receivables increases well generally speaking bills that are gonna get paid
generally get paid fast or at least on time and those that don't have to be
tracked well best guesses matter in accounting so coming to an actual
predicted rational and reasonable number is a big deal and you can see that in [Man discussing receivables]
this case the spread between the legally owed money and the amount likely to be
collected is a pretty big spread well the decline hits the assets side of the
balance sheet in the form of accounts receivable here being lower and [Accounts receivable column highlighted]
eventually when a bad debt is finally recognized as a deadbeat bad debt never
to be collected and is dead dead dead well then it simply gets written off on
the income statement or well said another way it goes away as a sale that
never happened so that's aging receivables in a nutshell and yeah this [Aging receives inside a nut]
is the one time you don't need to respect the elderly [Man trips over elderly man and gives thumbs up]
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