Position Versus Performance: Financial Accounting Trade Offs

In financial accounting class, we were discussing two methods of accounting for bad debt expense: percentage of sales versus aging AR accounts and both have pros and cons.

For instance, using the matching principle, the percentage of sales has the advantage of providing a more accurate picture of performance in the period, whereas aging accounts is more accurate when describing your current financial position because it describes probabilities of default for individual accounts based on age (a more accurate predictor of current position, but will skew financial performance). Sound familiar? These trade offs are common when discussing the advantages or disadvantages of different accounting methods. This was the same discussion for LIFO versus FIFO as well where LIFO is a more accurate description of performance (COGS is based on most recent info) whereas FIFO is a more accurate description of position (Inventory is based on more recent info).

Continuing my physics analogy, it's almost like the accounting equivalent of the Heisenberg uncertainty principle in thermodynamics and quantum mechanics: "The more accurately you measure position, the less certain you can be of speed". In the same way, the more accurately you assess financial position (balance sheet) the less certain you become of your financial performance (income statement).