Question

Compare and contrast the balance sheet method and income statement method of accounting for uncollectible debt. In your response, include at least one advantage and disadvantage for each method, and discuss how each method affects the respective financial statement.

Answer 1

Balance Sheet Method:

Under this method, the uncollectible debts based on balance sheet figure of accounts receivable . The estimate of uncollectible may be as percentage of accounts receivable or through more rigorous analysis of ageing of accounts receivable.

Under this method existing balance in allowance is taken into account while making adjusting entry.

Bad debt expense= Estimate based on account receivable – Existing credit balance in allowance or + existing debit balance in allowance

Income statement Method:

Under this method, Income Statement figure of Sales is used to estimate uncollectible debt. The estimate ,based on past experience, will be as percentage of Sales. Under this method, existing balance in allowance is ignored while making adjusting entry. For example, if existing credit balance is $500, and estimated allowance is (say 2% of Sales of $100,000=$2000),the adjusting entry will be Dr bad debt $2,000

Cr Allowance for doubtful debt $2,000

Income Statement Method is simple to use .

Balance sheet method gives more accurate figure of bad debts