Question

Class, we start our 2^nd discussion with 2 questions about bad debt –

1.What is the difference between the direct write-off method and the allowance method for receivables?

2.Give example journal entries for both.

Answer 1

Solution 1:

The difference in direct write off method and allowance method is:

Under direct write off method, bad debts expense is recognized when actual bad debts occurs and directly write off to the receivables. Direct write off method does not follow matching principal. Under allowance method, bad debts expense is recognized every year on the basis of estimates based on % of credit sales or ageing of accounts receivables etc. When actual bad debts occurs, accounts receivable write off through allowance account. This method follow the matching principal.

Solution 2:

Journal Entries - Direct Write off method
Event	Particulars
1	Bad debts expense Dr
	To Accounts receivables

Journal Entries - Allowance method
Event	Particulars
1	To record bad debts expense:
	Bad debts expense Dr
	To Allowance for doubtful accounts
2	To write off receivables:
	Allowance for doubtful accounts Dr
	To Accounts receivables