Question

What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off and allowance methods ?

Discuss the difference or similarity between these procedures and if there are any advantages using one over the other.

Answer 1

Bad Debts are the expense which the company does not expect to collect and shown it is an expense in the income statement. When bad debt is recovered the following accounting procedure has to be followed under direct write off method and allowance method.

Direct Write off Method	Allowance Method
Cash A/C ……………. Dr.             Bad Debts Recovered	Accounts Receivable A/C   …………Dr.         Allowance for Doubtful Accounts (To reinstate the debt)
	Cash A/C ……………..Dr.        Accounts Receivable (To record receipt of cash)

There is difference between procedure for handling the collection of accounts receivable previously written off using the direct write-off and allowance methods. Under Direct write off method one journal entry is required for collection of bad debts written off previously whereas under allowance method we will first cancel the original entry written off for bad debts and then pass the journal entry for collection of bad debts. Allowance method has the advantage over direct write off method because it follows the matching concept.