Question

Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense, discuss the reasons why one of the methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles.

Answer 1

X205TA Book 0123 500GB and to ante eelled allowance Allowance for evious experience this Uncolle uoid и estime Calculate Hement approach) (balance sheet balan ate ople Because customers do not always keep their promises to pay Companies must provide for these uncollectible accounty in their records. Companies use too methods o handling Uncollectible accounts. the Prect write- off method recognizes bad accounts as on expenses at the point when Judged to be uncollectible and is the required method for federal income tay purposes. The allowance method provides in advance for uncollectible accounts think of as setting aside money in a reserve oiccount the allowance method represents the accrual basis of accounting and is the accopted method to record uncollectible accounts for financial accounting purposes. Direct write off account gecenalle accounts reduces Eful As a co account accou Net rea to c make Know company expects Thus, and to set up a severne account call for Doubtful Accounts (also called Allowa incellectible Accounts based on previous with pax due accounts. We can calculat estimates based on sales (income statemen for the year or based on account receive balance of the time of the estimate ha obleach) As a contra asset account to the accounty occrent, the Allowance for Doubtful accounts ro account receivable to their net realizable value Net realizable value is the amount the company ex to collect from account recoivable . when the for makes the load deft adjusting entry, it does not know which specific accounts will become uncollectie hus, the Company cannot enter credits in either the account receivable control account or the customers. account receivable subsidiary ledger account. gb only one on the other were credited the Accounts Receinable control account balance would not agree with the total of the balonces in the account receinatle subsidiary ledger without crediting the Accounts Receivable Control accounto the allowance. account lets the Company flow that some of its accounts recoinable are probably uncollectible. Allowance method is the best method as it is in accordanie with GAAP matching prinuple. the acu one Rece the Direct wordte off method is used only when we decide a customer will not pay we donot record any estimates or use the allowance for Doubtful accounts under the direct write of method. We record Bad dekt expenses for the amount we determine will not be paid. This memods violates the GAAP matching principle of Revenue and Oppenses recorded in the same periodo. The entry would be Yoy. Bad debt expenses alc - Do to account receivable Alc Allo Allowance methed the Allowance method follow GAAP matching since we estimate un collectible accounts at ear, we use this estimate to record principle the end of bad debt epper penyes